Building wealth over time.
Written by Matt Wegner Founder and Lead Counselor, Matt Wegner Financial Coaching, www.financialexcellence.net
I’ve heard a lot of complaints lately about retirement accounts performing poorly this year. There seems to be a lot of attention focused on the last 12 to 18 months of market returns. I find myself constantly reminding people not to look at just one year and make snap decisions with their investments. Investing is a long term deal. There is no investing microwave to instantly propel you into retirement. In fact, investing is much more like cooking with a crockpot than with a microwave.
Why is investing a crockpot approach? First, just like any cooking you can’t use just one ingredient. There’s a main ingredient (usually the meat in our house) but there are also several other ingredients that add flavor to the total meal over time. For instance, many people add onions, carrots, potatoes, water and other ingredients to a pot roast when cooking it in a crockpot. Any one ingredient by itself may be ok, but it’s the combination of all the ingredients over time that add to each other to make the meal what it is.
Secondly, when we cook with a crockpot we leave the food in the pot for a long period of time and intentionally don’t touch it. Not only is it important to start early in the day to maximize the time spent in the crockpot, but it’s equally important not to mess with the lid too much. We might “re-balance” the ingredients by stirring them occasionally but for the most part we leave it alone all day. That’s how good crockpot meals are made, and how good investment strategies work. If you lift the lid after just 20 minutes, the ingredients will be still be raw and certainly won’t taste good. The impatient cook may be tempted to quit at this point and start over with a different recipe, but the good cook knows that the best things come to those who wait.
How does the crockpot analogy apply in today’s market? The best investment portfolio consists of many ingredients (good diversification). Long term investments are meant for longer than 5 years, and they should be left alone except for the occasional stirring (re-balancing your asset mix). It’s important to start as early as possible to let the investments simmer and grow slowly over time (you can’t rush compounding interest and the time value of money). Those who stuck to their long term strategies of buying and holding well-diversified mutual funds during last year’s stock market crash have seen great returns this year and many have regained most (if not all) of their losses from last year. They have enjoyed great gains this year and set themselves up for continued portfolio growth in the future.
Those who panicked and sold while the market was dropping like a rock locked in their losses, and many of them are still waiting for the “right time” to get back in the market. Unfortunately for them, they missed out on the best opportunities to rebound. Their meal is only half cooked. For many investors, the roast was just starting to fill the room with that delicious aroma, but the ingredients were still raw. They pulled all the food out and turned off the crockpot because they were afraid the food was overcooked. The trouble is, the food was undercooked. Now, the markets certainly aren’t where they were two years ago but they are climbing, and sitting it out is not a good plan. If you want to build wealth, the best way to do it is slow and steady.
Matt Wegner is a personal finance, career, small business and leadership coach focused on teaching his clients the tools for L.I.F.E. (Living In Financial Excellence). Learn more about Matt at www.financialexcellence.net.