What's the Delta?
Bradley Nelson, CFP?, P.E.
Optimizing investing for Point Loma residents | PointLomaAdvisors.com | Fee-only financial planning
For many people, the focus of financial planning is Return on Investment (ROI). Returns are important, but once you’ve invested intelligently in a diversified portfolio, there’s not much more to do; returns are what they are. More important, and more within your sphere of control, is how much you invest.
m = your money. Delta-m is the difference between money coming in and money going out, Delta-m is how much you invest. What's your delta-m?
Let’s say your expected return from investments is 4%. Over 20 years, $500/month at 4% is $183,378. If you increase the expected return to 5%, over 20 years, that same $500/month grows to $205,517, a significant $22,000 increase. But, if you already have an intelligent diversified portfolio calibrated to your personal risk tolerance and risk capacity, it’s extremely unlikely that all the effort and all the research in world would enable you to increase your return by 1% from 4% to 5%.
Again, let’s say again your expected return from your investments is 4%. Over 20 years, $500/month at 4% is still $183,378. If you increase the monthly investment by $100 to $600/month, over 20 years, that monthly investment grows to $220,065, a more significant $36,000 increase. It’s quite possible that with a little bit of effort, at least half the households in America could find another $100/month to invest.
Where? More efficient use of utilities? A new tax strategy for charitable giving? 200 miles less driving per month? Two fewer restaurant meals per month? More free matching money from your employer to your retirement account? Start with your budget and see where your money’s going now. Look at the biggest expenditures first.
Don’t have a budget? Go make one.
Yes, it’s important to have an evidence-based, empirically-driven portfolio with low fees, but once you’ve hacked that, it’s almost automatic. All the research in the world isn’t going to change it much. Significant new investing ideas come out only once, maybe twice, per decade. On the other hand, for almost all of us, spending decisions are constantly on the horizon, waste could be less every month, and your constant efforts massaging your budget and researching your expenditures are likely to be well rewarded.
Spend more time researching your delta than researching your ROI; that's where you can make the biggest impact.