Hi, I'm Zak. I am the Co-Founder and CIO for Denver Wealth Management and am passionate about helping individuals and families achieve their financial goals. As a podcaster writer, and public speaker, I share my expertise and insights with audiences around the world.
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Updated: Sep 18
Advisors and co-hosts Zachary Bouck, CIMA®, CFP®, and Austyn Garcia, recap our February portfolio meeting, discussing what happened in the markets over the last month, our approach to traditional asset allocation (cash, fixed-income, equities, and alternatives), and our general outlook for the next 6-12 months in the markets. This week's action items include consolidating personal finances and rebalancing retirement plans.
Updated: Sep 18
Advisors Austyn Garcia and David Frum share a high-level overview of some changes investors can expect in SECURE Act 2.0, including the emphasis on Roth contributions and changes to the retirement landscape.
Updated: Sep 18
By: Zachary Bouck, CFP®
I am an impatient person. I hate waiting for water to boil, traffic to get moving, and stocks to pay me a dividend. I want it now! I’ve even gone so far as to tell people that ‘impatience is a virtue’, and that lazily waiting around on someone else’s schedule is a guarantee of frustration and discontent. The impatient person living inside of me says “Things don’t progress on their own – you must push them!”
These feeling are reasonable and perhaps even required if you are a person who is determined to get more out of life. Sometimes pressure must be applied to expedite an outcome! However, a mistake many people make in their journey towards financial independence is taking the same feelings of impatience that can serve you well elsewhere, into the necessarily slow process of financial compounding.
Look – I get it. I grew up in a small house with a large family, seven kids in a three bedroom house in a small North Dakota town. My clothes were hand me downs, and my shoes had holes. I had a paper route from 4th grade until I got a job at McDonald’s when I turned 17. Being low on money sucks. It stands to reason that the faster you can go from broke McDonald’s employee to financial independent fully actualized person the better!
This desire to expedite the process from broke to financial independence is rife with traps that catch many ambitious people in their snares. Risky amounts of debt, high interest rates, crypto schemes, penny stocks, and sports gambling all have trapped and consumed billions of dollars from ambitious young men and women and transferred their fast paced money into the pockets of the patient.
In this chapter, I will explain what compounding is and why compounding patiently with lower consistent returns will in most scenarios yield you better results than getting higher inconsistent returns. Let’s start out with a few definitions, build our case, and end with you taking a luxurious vacation to Europe where you can drive exotic cars and drink fancy drinks.
What is compounding?
Simply put, It is the process by which an assets earnings (whether those earnings are capital gains, dividends, rents, or interest) are reinvested to generate additional earnings over time.
Look at this sexy chart:
In Year 1 you invest $1000. It grows by $50. If you reinvest the money, in year 2 your original $1000 and your reinvested $50 grow at 5%. In year 2 you earn $52.50. You’re doing it!!! Compounding is working for you.
By year ten, your accounts have grown to $1628, and you are earning $80 per year easy as can be! Hooray! Compound interest is working for you! On a consistent and uninterrupted scale compounding works magic over long periods of time. Imagine your $1,000,000 becoming $1,628,000 and you’re starting to see how this can affect your real life.
But ten years is slow, and who really cares about $80 / year when that won’t even buy a new pair of Nikes after TEN YEARS of investing. Jay-Z once said, If you grew up with holes in your zapatos, you were celebrating the moment you were having dough. And ten years is too long to wait for dough. Ok Jay-Z didn’t say that second part, but he implied it.
In the minds of many investors, 5% is just too slow, so they try to get 20% returns! Look at what happens when you compound $1000 at 20% over 10 years. You have $7268!!! That’s enough to buy lots of shoes.
20% is not hard to get in a given year. In fact between 2010-2020 the Nasdaq returned over 20% 4 times, and a pesky 19% one time! The problem is 20% is nearly impossible to get consistently. The price of all those beautiful 20% returns was a drop of 32.97% in 2022. Ouch!
I don’t mean to turn this into numbers soup, so let me step back and look at the bigger picture. What would an investor rather have? 7% return every single year or a 20% return with a 30% drawdown every 5 years?
7% Guy would have $386,968
20% guy would have $258,000
Additionally, it’s HARD to get 20% because there are a lot of ambitious people aspiring to it. Think of a 20% return like trying to get a Flat Screen TV from Best Buy at 5AM the day after Christmas. A lot of people are lined up for it, but not everyone is going to get it. If you do get it, you probably got your foot stepped on and someone else’s body fluids on your neck.
A 7% return is attainable with much less risk than a 20% return. The problem is that it's just not fast enough for some people. Although it’s not very fast it reminds me of a readers digest-style story which I will paraphrase from memory. (Despite my best Google skills I couldn’t find the original)
36 year old person “I want to go to college, but if I do I won’t graduate until I’m 40!”
Wise friend “How old will you be in 4 years if you don’t go?”
Cue Laughter.
The same can be said for compounding.
Impatient friend “At only 7% per year, I won’t be a millionaire until I’m 62!?!?!”
Financial Advisor guy “How old will you be if you don’t make 7% per year?”
Or another question may be, “How much will you have if you make 20% per year than lose 30% every couple years?”
Lastly, I often recall a conversation I had with my brother when he was getting out of college and I was going on and on about the benefits of savings and investing. After arguing with him and rejecting his counter-arguments like only a family member can, he finally blurted out “What good is having all this money if I never get to spend it?” I didn’t have a good answer for him then and I mumbled some canned answer about compound interest, but 20 years later I have THE answer.
Money gives you options. It gives you flexibility. It gives you freedom. Money that is not spent but stored up gives you total control of your life. It allows you to quit a job that you don’t like. It let’s you take a month off to travel to Europe. It allows you to move out of a neighborhood that has a sudden spike in crime. It let’s you pay for a medical emergency for a loved one. It allows you to support causes that you care about. It supports your loved ones and it lets you drive in a 4 wheel drive car with new tires when you live in Colorado.
Money stored up and compounding gives you what everybody wants; to be themselves full time. To say what you think, act how you’d like, and not fear the financial repercussions. The way our society is arranged, it is virtually impossible to accomplish this with your work alone. It is done by educating yourself about financial concepts and putting them into action. The first concept required to understand is compounding.
Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risks including possible loss of principal. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Denver Wealth Management, a registered investment advisor and separate entity from LPL Financial.