Here’s what construction jobs and compounding have in common with retirement planning.
This summer, we moved into a new home. It was a new development project. The developers are still building out some additional townhomes a few blocks east of where we live. Each night we take a stroll around with the kids in tow and catch up on the day.
Construction always amazes me. We’ve seen foundations being poured, framing going up, dry wall, stucco and finishes being put in.
But each night that we walk by the spot they’re working on, I glance over the fence to see what they’ve done today. Honestly, I can’t tell you if they even worked. The day to day periods don’t seem like much of anything gets done. Fast forward 3 months and wow, there’s a 3-story building all done and ready to go!
Compounding for Retirement Planning
The point being. You don’t need to see tremendous action in a day to see tremendous results. The secret is time.
In one of my favorite new books, The Psychology of Money, Morgan Housel writes that $81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday. While no one is going to argue that Buffett isn’t a great investor, the best thing that Buffett has going for him isn’t what business he’s going to buy next, it’s that he’s been an investor for three-quarters of a century!
People spend a lot of money (and I mean billions) trying to find better trades, better strategies in order to give them the greatest edge with their investments. While I’ll be the first to advocate maximizing any proven strategy (especially one that saves you money in taxes), there’s a much better and easier way to go about building wealth.
It just happens in a way that makes it very hard for our brains to grasp, compounding that is, so we pay more attention to trying to earn the highest investment returns for every single day out of every single year, rather than focus on earning good returns for a long period of time.
You don’t have to earn the highest returns every year to do fabulously well with your money. In fact, if you try to earn these high returns, you’ll most likely fail and miss out on the returns earned by just sticking with a market index.
Having your money compound over time is very, very boring – but then things explode. Too much time and effort are given to strategies that will tend to disappoint. We hope that the power of compounding takes more of centerstage. It deserves the limelight.