Lost time while driving
Have you ever gone on a long road trip? What happens when you run into bad traffic or stop for a meal? You lose time you can never make up.
For example, imagine you are traveling 750 miles, driving 75 MPH. Assuming you had a gigantic tank of gas, it would take you ten hours to make the trip.
But what happens when you run into some bad traffic situation? For about an hour, you are crawling along at 25 MPH. In that one hour of bad traffic, you essentially lost 50 miles of driving distance you originally planned. Assuming you get back going at your original speed, it will take an additional 40 minutes to complete your trip.
But you like to push things but driving a little faster, say 85 MPH. If the traffic slowdown had happened in the 10th hour of your trip, you can cut down the extra time to a hair less than 30 minutes. That extra speed only bought you an extra 10 minutes.
To get back on track, you would have to drive an equal amount of time at 125 MPH. Or twice as long as the slowdown at 100 MPH. Or triple the length at over 90 MPH. But that assumes you don’t run into other delays, like gas stops, food breaks, or other things.
Driving losses vs. investment losses
What does this have to do with money? It is more real world examples of the math of losses and gains. When we suffer losses in the market, we have to work harder to get back to our starting point. It illustrates why EIULs provide an amazing tool when it comes to building wealth thanks to their ability to avoid losses.
Investment advisors are all too eager to point out that given enough time, we can recover from the market losses that we hit, like in 2001 and 2008. While true, it leaves out consideration for when the losses happen. If our traffic slowdown had been during the first hour of our trip, we would have much more time to make up for it, but if it was towards the end, we are doomed to be late. This is simply another example of sequence-of-return risk.
Investment advisors rarely talk about this unfortunate aspect of financial growth. Instead, they focus on hand holding and reminding their clients that over time, their investments will grow at a nice 12% level. They tend to avoid mentioning things like how the Dalbar Report has shown that mutual fund investors usual get less than 4%.
Learning how to do the math yourself makes it possible to discriminate between financial facts and financial sales pitches. Farming out all investment planning to someone else leaves you prone to not tell the difference. But doing your own homework, learning the real growth of the S&P 500, and learning how big slowdowns towards the end of your trip to retirement can delay your arrival at retirement is key to real wealth building.