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We Don't Want to Say It, and You Don't Want to Hear It

To create and grow your wealth, rather than just obsessing over funds and strategies, raise your savings rate.

To create and grow your wealth, rather than just obsessing over funds and strategies, raise your savings rate.

Sounds simple doesn’t it? Let’s go back to investing basics briefly. We invest money now, especially retirement funds, to potentially grow the amount available for distribution later. We expect our invested money to provide a return because we’re letting someone else use that money for a period of time. For example, if we siphon off a percentage of our income to invest, we hope the value of those contributed funds along with investment growth over a long period of time creates a big number.

Ever since corporate pensions have given way to individual investors creating and growing their own retirement funds, we’ve relied on potentially big returns in our investment selection to truly grow our money. Yes, we know that in the end our account balance gets a boost by starting our contributions sooner. And of course socking away more rather than less results in a bigger balance.

But, too often we tell ourselves we “can’t” start investing as early as we want in our life. On top of that, we struggle to carve out as much money as we know we need on a yearly basis to put away. The result? We scratch, claw, fight and stress over our investment return. Bluntly, we want “the market” to make up for our lower than needed savings rate.

That’s where investment professionals donned research hats and started talking about investing strategies such as  “asset allocation,” “tactical allocation,“ “efficient frontier,” “modern portfolio theory,” “beta” and “alpha.” Or as an investor we may try super low-cost, general market-based investment vehicles so we’re not “swimming upstream.” But these may not be the only answer. Carl Richards, Author of The Behavior Gap, recently stated, “You hire an advisor, not because they know how to use a calculator, but because they know how to use a compass.”

Here’s what a recent study regarding 401K/403B type plans by the Putnam Institute found: “Our analysis suggests that putting fund performance front and center in terms of the plan sponsor’s priorities is an error with far-reaching implications. That is not to say that fund performance does not matter, but our analysis suggests it is a much less powerful variable compared with asset allocation and, most of all, higher deferral rates.”

Your advisor should still employ the investing strategies that make sense for your situation, AND they should be pointing to the importance of saving early, often and enough.

Have you optimized your financial decisions (insuranceemergency funddebt, etc...) in order to participate in the most powerful investment principle?

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

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