Springing ahead and yet falling behind

When I was a kid, I always remembered when the first day of Spring was because of that one “Seinfeld” episode where George was desperately trying to to figure out how to postpone his wedding to Susan.

His solution was thus:

“Have the wedding on March 21 – the first day of spring!”

I never gave it much thought as an adult until this year when my wife and I were talking and she’s like, “Today’s the first day of spring.”

And I responded, “Nay wife. The 21st is the first day of spring, so sayeth Seinfeld.”

But, alas. I was wrong and she was right (as she usually is).

Reminds me a lot of how so many investors get tripped up over this idea of systematic investing and what it does to their investment returns and thus… their retirement savings which… they will eventually need for things like, you know, food and stuff.

Here’s what I mean:

Let’s say you start saving $100 per month and… you start in January (to make this example easy). For the next 12 months, your $100 is earning the full return of whatever it’s invested in.

Then in February, you set aside another $100.

BUT, the gods do not smile favorably upon you because February is second in line and thus there are only 11 months remaining in the year.

Thusly, you only earn interest on your cashola for 11 more months…

And in March, the picture looks even more stark and so on until December when you are only earning interest for one month.

So, effectively, half your money, for half the year, has been earning no interest.

But your financial advisor told you the stock market has earned blah blah blah since 1929 so you would earn blah blah blah because you’re invested in the market and Q.E.D.

And to that I say Nay, Mortal.

He hath misled you, dear reader, ‘Lo these many years.

What actually happens is there is a natural mathematical drag on investment performance created by systematic investing, dollar cost averaging, etc…. basically, whenever you put money into an investment over time.

That drag is significant over time and usually causes a real reduction in performance… In the early years, it effectively chops your investment return in half and in later years… anywhere between 0.5% and maybe 1.5%. If you rebalance your portfolio, the effect is more pronounced.

Oh but then I hear the critics now… can’t you just nullify this effect by investing all your money on January 1 of each year?

And again I say, Nay, Mortal.

For if you try this, you will need to save up money throughout the year to make next year’s January 1 contribution, which creates the same exact effect as systematic investing.

This is but one of several reasons people rarely earn what they think they’re earning on their investments.

That doesn’t make investing bad, of course, but it does throw a monkey wrench into the conventional thinking about investing.

And… the conventional approach is not really how professionals invest anyway.

Moving right along.

One of the ways you can side-step this problem is by using a custom whole life insurance policy. The way premiums are collected and allocated, and the way cash value earns interest, is very different from an investment and thus it does not suffer from the same problem.

OK, that’s all for today. If you want more financial tips and advice delivered straight to your inbox, go join my email list, now.

David Lewis

This post brought to you by //The Rogue Agent//. David has been a life insurance agent, and worked with some of the oldest and most respected mutual life insurance companies in the U.S., since 2004. Learn more about him and his business, here.