2021 Decisions Are Irrevocable
Less Finance, More Architecture & Engineering
Part I: 2021 Decisions Are Irrevocable
Money decisions that were made, or not made, were both decisions made.
We can weigh them, and stir about them, and bicker with ourselves (or our significant others) about them...but these decisions weren't made in pencil. We made them in pen.
Inked and irrevocable.
As the great advice columnist Ann Landers used to say, don't let these decisions live rent-free in your head. They didn't lease the space.
Part II: Good Enough
If past financial decisions can't be edited, we should use our time focused on more productive efforts. Editing, even just the ability to edit, can be consuming.
Jillian Lucas wrote a fabulous piece in The New Yorker last month on the trend of distraction-free devices. Many authors, from novelists to bloggers, are now longing to have typewriter-like experiences, and it's not solely because of the distraction of email and internet browsing.
It's because of the editing. It's the gnawing ability to constantly, endlessly, meticulously refine, redo, and edit.
There was a friction to editing when writers used typewriters, and it typically included whiteout, or letters-of-error superimposed over by letters-of-intention, or simply x'ing things out. The output wasn't as pretty as a non-edited version, but retyping an entire page wasn't alluring either.
Frictions. Back then, it was easier to just consider things...good enough. Editing costed something.
Word processing revolutionized our ability to create content, and the old costs of editing don't exist anymore. But there is a new cost: it's so damn easy to edit.
And so Microsoft Word and Google Docs make it near-frictionless to never be done: words are inked, yet easily revocable (and if we simply replace old productivity frictions with new implementation frictions, do we not still have frictions?).
When it comes to last year's investment outcomes, we're done AND we're done editing. Investing is nothing like modern-day word processing. Last year's efforts are good enough because we don't have another choice, and so we reallocate any consternation, ruing, frustration, disappointment, etc...toward better efforts in 2022.
Let's frame how we want to do that.
Part III: Less Finance, More Architecture & Engineering
If I asked, what's a great 2022 investment experience look like for you?
Most folks would have some version of:
I want my money to prudently grow by the end of the year.
Here are the four factors worth considering:
We eliminate $ PAST because those are inked. All $ PAST is invariably a part of $ NOW, now.
Intuitively, we have some idea what to do here:
$ NOW will increase at a
GROWTH RATE, over
TIME, and become
Here's the great news: investment success doesn't rely on understanding the equation of how all this fits together.*
In fact, while the underlying math that drives our outcome is related to finance, success in assembling these factors together is more related to architecture and engineering.
We need the right investment accounts, and a well-defined risk tolerance. We need to reduce taxes and fees, and seek to prudently capture as much of the market return as possible. We need to fight complex behavioral biases, and avoid shooting ourselves in the foot, amongst dozens of other components of a successful investment experience.
But we don't need to know or understand the equation; we just need to thoughtfully design and implement the processes that drive the equation.
As such, let's focus on how returns come, through the GROWTH RATE factor:
The market gives %'s, not $'s.
Equally-important implications of this statement are related to the other three factors:
The market doesn't know about, or care about, your $ NOW.
It doesn't know about, or care about, your $ FUTURE.
It doesn't know about, or care about, your TIME.
The market doesn't give a shit who you are.
Yet it will give anyone the long-term growth rate if they can stay disciplined and invested. Of the factors being discussed, GROWTH RATE is the only one that the market is involved in, everything else is personal.
Your money now. Your money in the future. Your time.
The GROWTH RATE matters so much because if we are thinking about money in dollars, as our brains easily do, we are missing the underlying engine of wealth creation through compound returns.
10% is 10% is 10%. The market doesn't offer a flat $-return to everyone. It offers a flat %-return to everyone, and the $-return is based on each investor's personal $ NOW.
A 10% increase is agnostic to whether you started with $50 or $5,000,000. It's sobering as the numbers get large.
The purple line is what happens if you add money, but don't invest it.
The orange line is the equation. It's money invested, compounding over time.
A flat $ growth rate is linear, but a flat % growth rate is a force multiplier.
Let's start with $100,000, today, and wrap up by bringing it to life in the table below:
Make a flat $10,000 each year
Make a flat 10% each year
It gets stranger as you look further into the future.
In 2022, where the numbers are identical, 10% is $10,000 on the starting amount.
But in 2023, the extra $1,000 comes from making 10% on $110,000, instead of just adding $10,000. You make a return on your previous returns.
The same math that delivers $1,000 of additional wealth in 2023, delivers $1,200,000 of additional wealth by 2050. The flat GROWTH RATE has just had more time to bake, to gain on gains.
Notice that 2021 doesn't have a seat at the table.
Can't edit backward, but can architect and engineer forward.
Happy New Year.
*If you are interested in the finance, the equation is this:
$ NOW * (1+GROWTH RATE %) ^ TIME = $ FUTURE
It's critical, if wanting to understanding the nature of compounding, to grasp that TIME is in the exponent. This is how to account for gains on previous gains.
**These answers follow the equation above, where each year is a unit of TIME.
2022=1 (because you get 1-year of 10%).