The Most Important Investment Decision Isn’t Your Investment

When people talk about investing, the conversation often starts with returns

“Should I invest in stocks or bonds?” “What fund has performed the best?” “Can I earn 8% instead of 7%?” “Should I change my portfolio because the market is moving?”

These are reasonable questions. But they can distract from the more a more important one:

Am I saving enough to reach my goal?

Start with the goal

Vanguard addresses this idea in its research article, “Vanguard’s Principles for Investing Success.” The research outlines four fundamental principles for investors: goals, balance, cost, and discipline.

The first principle is goals, and that starting point matters. Investing isn’t about maximizing a portfolio. It’s about using your portfolio to accomplish something that matters to you.

Whether the goal is retirement, buying a home, funding a child’s education, or simply having greater financial flexibility, your investment strategy should ultimately serve that goal.

And that leads to a point that is easily overlooked:

How much you save can matter more than the return you earn.

Saving matters more that chasing returns

Imagine two investors who both want to accumulate $1 million for retirement.

Investor A saves $20,000 a year and earns an average return of 6%.

Investor B saves $10,000 a year and earns 8%.

Despite earning higher return, Investor B may still fall short of Investor A over a long enough period because the amount being contributed each year is so much lower.

The lesson isn’t that investment returns don’t matter. They do. Over decades, compounding can have tremendous impact on wealth.

But returns are also something we have limited control over.

You can control how much you save, how consistently you save, and when you start.

You can’t control what the market will return next year.

Focus on What You Can Control

Investors often spend a lot of energy trying to improve their returns.

But consider the difference between trying to earn an additional 1% on your portfolio and increasing your annual savings by $10,000.

The first requires the market to cooperate.

The second requires a decision.

That’s why a successful investment strategy isn’t necessarily about finding the investment with the highest potential return. It’s about creating a plan that gives you a reasonable path toward your specific goals.

Don’t Let Investing Become a Distraction From Saving

Markets are interesting. New investments are interesting. Economic forecasts are interesting.

Saving money every month? Not quite exciting.

But it can be much more consequential.

If you’re saving $1,500 a month, earning an extra percentage point matters. But increasing your savings to $2,000 a month matters too, and that’s a decision you can make.

Over time, consistent contributions give compounding the opportunity to work. 

The goal isn’t simply to maximize investment returns. It’s to build a plan that helps you reach your final goals.

Start With the Goal, Then Build the Portfolio

Instead of starting with, “What should I invest in?”, start with:

“What am I trying to accomplish, and how much do I need to save to get there?”

From there, you can build an investment strategy around your goal, including the appropriate level of risk, diversification, time horizon, and expected return.

The market will determine your actual returns. You don’t get to choose them.

But you do get to choose how much you save.

And for most investors, that’s a pretty good place to start. 

Want to take a closer look at how your savings strategy fits into your long-term goals? Reach out to start a conversation about your financial plan.