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Why Don't People Just Invest Steadily In The S&P 500

The prevailing wisdom in some of today's financial press seems to be that a long term buy and hold strategy of investing in the S&P500 doesn't (or didn't) work out. In looking at my own personal financial story, nothing could be further from the truth.

One look at my 25 year historical tracking spreadsheet from 1989 to 2014 shows a very different story.

I don't want to focus on my performance because everyone's story will be different. We all earn different wages and savings rate vary. However, if I model average salaries with modest raises and a 10% savings rate, it is strikingly clear that the average person should have several hundred of thousands of dollars in their retirement account. If, you are a working couple, dare I say, you should probably have seven figures in your account.

Anyone who follows financial news knows that about once a year a story comes out showing the estimated savings of the average American. It shows abysmal retirement account performance and the financial savvy shake their head and I suspect the average Joe probably says, "see it's just not us", and goes away feeling better about their dire situation.

Why is it that we have such a hard time with retirement planning and subsequent follow through? Well, because it is hard! I'm not talking about the recipe for good retirement planning. I think you could spend about an hour or two on the web with no previous knowledge and figure out the overwhelming advice would be to put away 8-12% of your wages and put it into a low cost SP500 fund.

The recipe is easy. It's the execution that is hard. There is an inherent mistrust with people and their money for good reason. The saying "a fool and his money will soon part", comes to mind.

So, when it comes to life, using the operating mode of "just follow the recipe", tends to greatly increase the likelihood of you becoming a fool.

So, to execute a really good retirement plan takes knowledge and wisdom, and that is plain hard to achieve. If I had to list the top three things needed to execute a good retirement plan, it would go something like this:

1) Understanding exponential returns - This takes a pretty good background and understanding in mathematics. Thinking linearly will frustrate and cause bad decisions, especially in downturns. (30% of population have this ability - my guess)

2) Ability to delay gratification for future rewards - examples include a college graduate, a truly fit person or a migrant worker providing for his children to go to college. (30%)

3) A basic understanding of business/capitalism in America. Historical returns just aren't good enough. You will fall prey to the this time is different argument. If you truly understand the factors behind why corporate executives have the power and ability to execute a business plan that will return somewhere between 9-11% on average across all the businesses in this country then you will be undeterred. You can point to 100 years of data that support your argument. If you truly understood this and were under the age of 40, why in the world would you ever buy a US gov't bond that currently yields somewhere between 0-4% depending on maturity? Because you don't understand and you're scared, that's why. (10%)

So, if you have all three of these attributes you are about 1 in 100. If you have two of three, roughly 1 in 10. If you only have one or don't have any of these attributes, well you are part of the 90% and you probably don't have a big retirement account. And there you go.

This explanation makes sense to me. What does it mean? I don't know. I'm not sure we can control the public's ability to obtain these attributes. The best I can do from here is to say that many will work later in their lives or rely on Social Security. The loss of the traditional pensions in this country has been good for business but bad for workers. Remember my argument above about corporate power to execute a plan to get 11%? This all seems to be very deflationary to me and not all that good for this country going forward.