Plan Your Prosperity

1. Start Planning Immediately: The Power of Compounding

the sooner you start saving and investing, the more money you likely have down the road.

Compounding is magic. The most crucial step in planning your prosperity is simply starting, and starting now. The power of compounding interest means that money saved and invested early has significantly more time to grow exponentially. Even small amounts saved consistently over decades can accumulate into substantial wealth.

Early start benefits. Delaying saving, even by just a few years, can dramatically reduce your potential future wealth because you lose valuable compounding time. For example, maxing out an IRA from age 25 to 65 at a 10% return could yield over $2 million, without even considering a 401(k) or future contribution limit increases. Adding just $2,000 more annually could push that past $3 million.

Increase savings over time. If you can't save much now, start small but commit to increasing your savings rate each year as your income grows. The key is to get the "compounding-interest snowball rolling" as early as possible. Don't wait until retirement feels close; investing for your whole life begins with the first dollar saved.

2. Define Your Simple Investing Goals

for the vast majority of individual investors, they typically have one of the following four goals:

Goals guide planning. Before making any investment decisions or even thinking about specific securities, you must clearly define your investing goals. These goals should be simple and easy to articulate, forming the foundation of your entire retirement investing plan.

Four core goals. Most individual investors' high-level goals fall into one of these categories:

• Growth: Increasing the value of your assets over time.
• Cash Flow: Generating regular income from your portfolio, either now or in the future.
• Combination: Seeking both growth and cash flow to varying degrees.
• Capital Preservation: Protecting the nominal value of your assets (often misunderstood and rarely appropriate long-term).

Avoid complexity. While achieving these goals may be complex, the goals themselves should be straightforward. Avoid seeing financial planning and retirement planning as distinct phases; for most, it's a continuous process of investing for your entire life, with goals potentially shifting based on circumstances, not just age or retirement date.

3. Your Benchmark is Your Long-Term Plan

my view is the benchmark effectively is your long-term asset allocation decision.

Benchmark is essential. A benchmark is a well-constructed index (like the S&P 500 or MSCI World) that serves as your portfolio's road map and measuring stick. It guides your long-term asset allocation (the mix of stocks, bonds, cash, etc.) and helps you assess performance and manage risk.

Road map and measure. Your benchmark tells you what your portfolio should generally look like (e.g., 100% global stocks, 60% stocks/40% bonds). It provides a framework for setting reasonable return expectations based on its historical performance. It also allows you to measure how well your portfolio is performing relative to your plan.

Discipline aid. Crucially, an appropriate benchmark helps you stay disciplined. By choosing a benchmark aligned with your long-term goals, you have a reference point during volatile times. Deviating significantly from your benchmark without a material change in your goals is often driven by emotion (fear or greed) and can lead to poor long-term results.

4. Your Time Horizon is Likely Longer Than You Think

One of the bigger mistakes investors can make is underestimating time horizon—or having a fuzzy or ill-defined one.

Time horizon definition. Your time horizon is not just the time until you retire or start taking cash flow; it's how long you need your assets to work for you, typically your entire life and potentially that of your spouse. Underestimating this can lead to major errors, particularly insufficient exposure to growth assets.

Life expectancy matters. Consider average life expectancy, but also factor in your family history of longevity and your own health. Life expectancies have consistently increased over time due to innovation and are likely to continue doing so. It's prudent to err on the side of a longer time horizon.

Opportunity cost risk. Focusing too much on short-term volatility risk can lead investors to adopt overly conservative strategies inappropriate for a long time horizon. This exposes them to opportunity cost – the risk of missing out on the higher returns typically offered by growth assets over longer periods. Over decades, equity volatility tends to resolve into consistent upward movement, making stocks less volatile than bonds over very long periods.

5. Understand Growth, Volatility, and Realistic Returns

To get market-like returns on average, you must accept market-like volatility on average.

Growth requires volatility. If your goals require growth (which most long-term goals do, even cash flow goals considering inflation), you must include assets like stocks in your benchmark. Higher expected growth comes with higher expected shorter-term volatility – both up and down. Volatility is normal and expected, not a sign of long-term trouble.

History as a guide. While the past doesn't guarantee future results, history provides a useful guide for setting reasonable return expectations. Broad stock markets have historically averaged around 10% annualized returns over very long periods and have been positive in nearly all rolling 10-year periods and every rolling 20-year period. This suggests long-term equity growth is probable, not just possible.

Beware unrealistic expectations. Unrealistic return expectations are dangerous. Promises of consistently high returns with little volatility are a major red flag for potential fraud. Con artists often prey on those seeking returns that are "too good to be true." Understand that achieving market-like returns means experiencing market-like swings.

6. Plan for Future Cash Flow Needs

The goal should be to plan for a cash flow goal that’s no more variable than you can handle that also allows you to achieve the totality of your goals.

Cash flow vs. income. Don't confuse "income" (like dividends or bond interest) with "cash flow" (the money you need to spend). Finance theory suggests you should be agnostic about the source of cash flow; selling securities is a perfectly valid way to generate cash. Relying solely on dividends or bond interest can lead to an inappropriate asset allocation that hinders overall portfolio performance.

Estimate your needs. Project your likely future expenses and subtract other income sources (like pensions or Social Security) to determine the cash flow gap your portfolio needs to fill. Remember to adjust this amount for future inflation to maintain purchasing power.

Assess feasibility. Use tools like Monte Carlo simulations (preferably bootstrap simulations using historical data) to assess the probability that your desired cash flow level is sustainable over your time horizon given different asset allocations. This helps you understand the trade-offs between cash flow levels, portfolio growth, and the risk of depletion.

7. Know Where You Are and How Much to Save

It’s hard to make good projections about the future if you don’t even know your starting point.

Assess current wealth. To plan effectively, you must know your starting point. Create a personal balance sheet listing all your assets (liquid and non-liquid) and liabilities to determine your current net worth. This also helps you understand your current asset allocation across all accounts.

Project future needs. Based on your desired future cash flow (adjusted for inflation) and a comfortable withdrawal rate (e.g., 4% of the portfolio value annually), calculate the target portfolio size you'll need by your retirement date.

Calculate savings rate. Using your current savings, the target portfolio size, your time horizon, and a reasonable assumed average annual return (e.g., 9-10% for a growth-oriented portfolio), calculate the annual savings rate required to reach your goal. Tools like Excel's FV and PMT functions can help with these calculations.

8. Discipline is Key: Stick to Your Plan

Perhaps the biggest benefit of an appropriate benchmark is it can aid you in remaining disciplined.

Behavioral challenge. Investing is hard, not primarily because the tactics are complex, but because our human brains are wired for survival, not rational long-term investing. Emotions like fear and greed constantly tempt investors to deviate from their plan, often leading to buying high and selling low.

Benchmark as anchor. An appropriate benchmark, chosen deliberately based on your goals and circumstances, serves as a crucial anchor. It reminds you why you chose a particular strategy and helps you resist the urge to make impulsive changes based on short-term market movements or emotional reactions.

Avoid frequent changes. Resist the temptation to change your benchmark or make significant tactical shifts purely based on recent performance or market noise. Leadership rotates between different asset classes and sectors irregularly. Frequent changes driven by chasing past performance or panicking during downturns are a primary reason many investors underperform their own benchmarks over time.

9. Beware of Common Pitfalls and Fraud

returns that seem too good to be true very often are.

Age is not allocation. A common pitfall is using simplistic rules of thumb, like subtracting your age from 100 (or 120) to determine your stock allocation. This ignores crucial factors like your actual time horizon (which includes your spouse and potential longevity), specific goals, cash flow needs, and risk tolerance.

Capital preservation myth. Be wary of strategies promising both "capital preservation and growth." These are conflicting goals. True capital preservation avoids volatility but sacrifices growth, while growth requires accepting volatility. Anyone promising both simultaneously is likely misrepresenting the strategy or trying to deceive you.

Spotting fraud. Unrealistic return promises (especially consistent, smooth returns with little volatility) are a major sign of potential financial fraud. Insist on separation of asset custody from the investment manager. Do your own due diligence and don't rely solely on an intermediary's recommendation. Understanding reasonable expectations based on history is your best defense against scams.

Last updated: June 13, 2025