Investor's Alpha: $10 A Day

by: Adam Hoffman, CFA


In a low return environment, investor controlled inputs will be key to enhancing market returns.

The savings rate is more important than investment returns in generating wealth. In addition, the savings rate can offset low investment returns.

Wealth = Factors You Control + Investment Returns.

In the face of a low return environment, the challenge is how to increase returns without taking on undue risk in the market. The key to enhancing returns in the "new normal" is to focus on factors that the investor controls:

  • Savings Rate and Spending Rate
  • Systematic Portfolio Rebalancing
  • Proper Asset Allocation
  • Tax Management
  • Proper Asset Location
  • Investment Expenses

These inputs in a low return environment will help enhance returns and ultimately improve portfolio outcomes in meeting investors' investment objectives. To catch everyone up who might not have read our 2017 Economic Projections, Peak Capital expects that global equities and fixed income will, over the next five to ten years, return ~6% and ~2%, respectively. We expect that a 60/40 portfolio will return ~3%. Returning to our sophisticated wealth equation that was generated from a highly technical black box, low expected investment returns can be offset by investor actions.

Wealth = Factors You Control + Investment Return

In this part of our series Investor's Alpha, the focus will be on the importance of savings and spending rates in generating wealth. Everyone intuitively understands that the more you save, the more you have. We want to illustrate that time and amount of savings can transform pebbles into massifs. Peak Capital's goal in writing the Investor's Alpha Series and this segment is to illustrate the value of investor-controlled inputs to increasing portfolio returns and improving investor outcomes.

For this paper, we will explore the relationship between savings rate and investment returns and the subsequent wealth that can be generated. We will explore the effects of the most powerful force in the universe - compound interest - and how just a small amount of savings can grow into a large amount of wealth. In addition, this paper will explore how the savings rate can offset the inability to time and predict the markets. We will show that increasing savings is more important than the ability to pursue the futile effort of predicting the future. If you were an oracle or a soothsayer, you would have seen that sentence coming ten minutes ago.

It may come as a shock to some - hopefully not many - that wealth accumulation begins with saving and investing money on a regular basis. At Peak Capital, we do realize that for a lot of people, there is not a lot of money left at the end of the month after making student loan, car loan, and mortgage (or rent) payments. This is perfectly ok. It does not take a large sum of money to begin investing and to begin the accumulation of wealth. The best time to start saving is today, regardless of the amount. Small amounts do add up and compound greatly with time.

$10 a day. $300 a month. $3,600 a year.

Start the process of saving with finding a spare Alexander Hamilton a day. This small amount, over time, can grow into a large sum of money. Over a thirty-year period, saving $10 a day and getting an investment return of 3% would result in a value of ~$174,000. Even a miniscule amount of money, given modest returns and time, will grow to a large sum. The table below outlines the growth of saving various amounts over a thirty-year period. The table also illustrates the power of increasing the savings amount. A $2 increase from $10 a day to $12 is a difference of $34,964. An increase of $60 a month results in an increase of ~$35,000. Conversely, a decrease in savings from $10 to $6 a day results in a decrease of ~$70,000. $4 a day over a thirty-year period at a return of 3% compounds to ~$70,000. A little change, both figuratively and literally, makes a significant impact.

In the chart above, we assumed there was a static 3% return, which we derived from our 2017 Long-Term Economic Projections for a 60% Stock and 40% Bond portfolio. Returning back to our super-sophisticated wealth equation at the beginning of our paper, Wealth = Factors You Control + Investment Returns, it should come as no surprise that investment returns will factor into the future value of savings. In the table below, we outline how investment returns impact the potential future value of the accumulation of $10 a day.

Just like Captain Renault's shocking discovery that there was gambling in Rick's Café Americain, we too are shocked to find the correlation between higher returns and higher future value. The above table illustrates that even saving a small amount with returns half that of our forecasted returns for a 60% Stock and 40% Bond portfolio still results in the accumulation of ~$136,000. On the positive side, an increase in returns to 4.5% results in an increase of ~$53,000 from our baseline assumption of 3% return. Keep in mind, this is all from saving:

$10 a day. $300 a month. $3,600 a year.

Do not be deterred from starting to save and invest because you have a little amount of money to put away every month. Every little bit helps. Time has the ability to offset small savings. A simple brainteaser illustrates the importance of compound returns: Would you rather have a million dollars or a penny that doubled every day for a month? Hopefully, you picked the doubling penny. Even in February, it would be worth more than a million.

Returning to the "Future Value With Changing Rates of Returns" table, it is also important beyond outlining the simplistic link between higher returns and higher values. This table also illustrates the importance of savings in offsetting below expected market returns or not being able to select the best-performing mutual fund. In the table below, scenarios from the two previous tables are combined to illustrate that investor input - the savings rate - is more important than market returns in accumulating wealth.

The last two columns of the "Investment Returns vs Savings Rate" table re-illustrates the importance of investor-controlled inputs into the wealth equation. Increasing daily savings from $10 to $14 results in a higher future value, even with a lower rate of return. Higher savings rates can compensate for low investment returns, which we expect to see over the next five to ten years, compared to previous historical returns for stocks and bonds. Savings rate can increase portfolio values and compensate for the inability to time and predict the markets. In examining the final outcomes for the first three columns, an investor who saved $10 a day with returns that were half that of an investor who saved $8 a day were nearly identical. There is only a ~$3,600 difference between the two scenarios, even with returns that were half of our baseline assumption of 3%. Effectively, higher savings rates are able to offset low investment returns. Viewing this from a differing vantage point, an investor (column I) who saved half as much but got double the returns had about $48,800 less than the investor (column II) who saved twice as much but had half the returns.

Returning to our magical doubling penny brainteaser: Would you rather have in thirty years a portfolio that has double the returns with half the savings or half the returns with twice as much savings? Hopefully, everyone picked the portfolio with twice the savings. Examining the importance of savings from a different framework, how much additional money would an investor have to save to compensate for not being able to predict the future.

For our examination on how savings can offset the fact that investors are not soothsayers and oracles, we studied two scenarios. The first scenario assumes that an investor is able to select the best-performing asset class from three broad-based Vanguard mutual funds: US Total Stock Market, Total International Stock Market, and Total Bond Market. The investor starts investing in 2001 with $10,000, no additional monies are added to the portfolio, and moves all of their monies into the mutual fund with the best performance for that year. The second scenario has the same premise, except that the available funds are increased to fourteen Vanguard funds, with sector funds included in the available investment selections. These two scenarios are then compared to investing $10,000 into Vanguard's Balanced Index Fund (60% Stock and 40% Bond) with additional annual investments, to determine how much additional savings would be required to make the two outcomes equal.

The table below outlines the performance of the three broad asset classes that were included in scenario 1 with the information provided by Highlighted in blue is the best-performing asset class for each calendar year. Presented in the last column is the performance of the simplistic 60% Stock / 40% Bond portfolio. Performance data for the multi-sector scenario can be viewed at the end or on our website.

The table below outlines the performance of being able to select the best asset class from our simple three asset class model, the fourteen sector funds, and investing in the basic 60% Stock / 40% Bond portfolio.

There is a substantial return difference between these three scenarios. Peak Capital would like to reiterate that it is nearly impossible to be able to successfully time the markets, and utilizes these two extreme scenarios to highlight how savings can help offset the inability to time and predict the markets. In these scenarios, after being able to select the best-performing asset class, an investor would have a final portfolio value of ~$121,800 and ~$1,088,400 for the "3 Broad Indices" and "Multiple Sector Funds" scenarios, respectively. The additional annual savings to the Balanced 60 / 40 portfolio to match the portfolio value of timing just "3 Broad Indices" is only ~$3,800 a year. The figure to match the "Multiple Sector Funds" is higher, requiring additional annual investments of ~$41,800.

The charts outlining the performance of the three scenarios above and in the addendum are used to illustrate the futility of trying to predict and time the markets. There is no year-over-year trend to be able to ascertain which asset class would perform the best. In addition, if an investor was trying to capture the best-performing asset class, they would be exposed to a substantial amount of risk, i.e., moving from 100% bonds to 100% US equities. These risks increase substantially if an investor was trying to time the markets for the more narrowly focused sector funds. The Precious Metals fund was often the best- or worst-performing asset in a given year.

In addition, these charts help verify Peak Capital's conclusion that a simple, basic portfolio can perform equally as well as a portfolio run by all-seeing, all-knowing oracles, if additional contributions are made. In the case of matching the ending value of the "3 Broad Indices", this would only require an additional annual contribution of ~$3,800, or $10.55 a day. The other benefit of not trying to aggressively rotate a portfolio between sectors is that the overall portfolio risk is reduced by maintaining a diversified asset allocation.

Returning to Peak Capital's wealth equation:

Wealth = Factors You Control + Investment Return

Savings rate is a crucial input into the wealth equation. The savings rate is more important than investment returns when building wealth; investment returns alone are not sufficient to overcome a low savings rate. Increasing savings can help an investor compensate for both low investment returns as well as the inability to time the market or select the best-performing mutual fund or ETF. Examining our two extreme scenarios, a relatively small amount of additional savings was required to match the performance of being able to successfully time switching between three broad-based asset classes.

Peak Capital does not want to completely downplay the role of investment returns in generating wealth. The important part is selecting good ETFs and mutual funds to construct a well-diversified portfolio. We emphasized the word good, since it is impossible to select the greatest or best investment for each asset class in a portfolio: Past performance is not an indication of future performance, and there is very little persistence in performance ranking from year to year. A study published by S&P Dow Jones, "Does Past Performance Matter?: The Persistence Scorecard"1, highlights the fact that actively managed mutual funds typically do not remain in the top quartile of performance rankings. The S&P Dow Jones' study found from September of 2014 to September of 2016 that only 2.85% of all domestic funds remained in the top quartile. The study illustrates that even a top-performing fund's success is not very likely to continue. Another key input into selecting good investments that are likely to perform well over the long term is costs. Morningstar's Active/Passive Barometer2 study concludes that higher-cost funds are more likely to underperform, and that fees "are the only reliable predictors of success". This is why Peak Capital primarily utilizes low-cost index funds and actively managed funds that have low expense ratios in our portfolios.

The simple fact is that investors cannot control or predict what the market will do or the future performance of ETFs or mutual funds. Our firm prefers to focus on investor- and advisor-controlled inputs that can complement investment returns:

  • Savings Rate and Spending Rate
  • Systematic Portfolio Rebalancing
  • Proper Asset Allocation
  • Tax Management
  • Proper Asset Location
  • Investment Expense

Do not be deterred from starting to save and invest because you have a little amount of money to put away every month. Every little bit helps. Time has the ability to offset small savings. For those who have yet to start to save, Peak Capital urges you to begin that process today. For those who have already started to save and invest, we urge you to increase your savings rates to offset the low returns we expect over the next five to ten years.

We hope our Investor's Alpha series is helpful to you, the investor, or to advisors in communicating with your clients. Any questions or feedback is always appreciated.

Adam Hoffman, CFA, CAIA


  1. S&P Dow Jones Indices. (2016, January). "Does Past Performance Matter? The Persistence Scorecard". Retrieved from
  2. Morningstar. (2016, April). "Morningstar's Active/Passive Barometer: A New Yardstick For An Old Debate". Retrieved from

Disclosure: I am/we are long VTI, VXUS, VCSH, VCIT, VMBS, VFIIX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Peak Capital Research & Management's clients are long the following positions in either Vanguard ETFs or Mutual Funds or utilizing a similar iShares ETF. Broad US Index, Broad International Index, short-term corporate bonds, intermediate-term corporate bonds, and GNMAs.