Why 1% Matters
Readers may notice a trend in my, and indeed in all, pfblog.com posts. That trend is the seemingly maniacal obsession with squeezing just one more point of interest or appreciation out of every single transaction. Clients often question my obsession with low mutual fund fees, extra points of interest, and portfolios balanced to get the absolute best return from each sector. Surely 1% isn't that big of a deal right?
WRONG.
I call this demonstration "The 1% Principle" and I believe it makes all the difference. In his teachings on leadership John C. Maxwell notes that great leaders aren't monumentally better at any one thing - but, they are incrementally better in all things they do. All those little incremental improvements and half-steps ahead add up in the long run. The 1% Principle is the same but applies to investing.
Consider this illustration:
What I'm showing here is an investor (call him "Bob") who starts investing $1,000 per year when he is 25. His goal is to maintain this plan until he is 65 so he can retire (obviously it's not enough to retire on, but $1,000 is an easy number).
The five columns (B-F) demonstrate Bob's savings plan under scenarios in which he manages 6% average annual returns, 7%, etc. all the way up to 10% average annual return.
The "Difference" row (47) indicates the total change in his savings between each percentage growth range. So, if Bob makes 6% returns he ends up with $165,048, but if he makes 7% returns he ends up with $214,610. That's a difference of $49,562, or 30.0%.
The trend continues, as you can see. 1% Matters because every 1% increase in average annual return comes back as a 30% (or more) increase in Bob's final savings tally. That's some serious money*.
Where can you get the 1%? - mutual fund expense ratios, better allocations across asset classes, less account management fees, no load funds, less transaction fees, automatic investments....
Just remember - 1% Matters in a BIG way. Plan today, reap tomorrow.
* I know someone, astute readers that you are, will point out purchasing power losses (inflation). I know, it's a simple model, but it's important to make it simple to address the immediate need to get started!
This is Part 2 of 2 on my Business Model Changes, prompted by a reader email. You can read Part 1 here. Read
Way back in November I received an email from a reader named Jason who wrote, "For a couple of years now I've been desiring to setup a small financial planning practice. I have no desire to pick stocks, insurance policies, etc. for people. However, what ... Read
For new readers I'd like to briefly go over the types of posts and the categories that I will use so everyone can browse right to the content that most interests them. Read
Many thanks to MM for his invitation to join the pfblog.com team. I'd like to take this time to introduce myself a bit and talk about the content readers can expect to see in my blog. [Update 1/14/06: My business model and direction has changed ... Read
Read all 8 articles in the same category.
, Read all 26 articles in the same category.
, Read all 9 articles in the same category.
, ,
