Building Wealth by Avoiding Emotional Errors
Published on Proactive Advisor Magazine June 23, 2021
Emotional investing errors are a significant impediment to building wealth over the long term. What are two of the most debilitating errors, and how can financial advisors help their clients avoid them?
Regular contributions drive wealth
Many investors wait until they have “enough” money or for when it’s “a good time” to invest in the market. Making regular contributions regardless of these concerns is one of the most powerful ways to build wealth.
Figure 1 highlights the value to individuals of making regular contributions compared to periodic contributions over 10-, 20- and 30-year periods. Even though the same principal amount is invested, the result is dramatically different—with nearly twice the wealth creation.
FIGURE 1: RESULTING VALUES OF PERIODIC VERSUS ANNUAL CONTRIBUTIONS (S&P 500 TR INDEX JAN 1991–DEC 2020
Note: 10-year return is 1991–2000, 20-year return is 1991–2010, and 30-year return is 1991–2020. Periodic = investing $100,000 every 10 years. Annual = investing $10,000 annually.
Sources: AthenaInvest Inc. and S&P Dow Jones Indices LLC
Figure 1 highlights two investors over a 30-year period: annual investor A (who invests $10,000 every year) and periodic investor B (who invests $100,000 at the end of every 10 years). Regular contributions benefit from investing earlier and the subsequent compounding. Over longer periods, the results are dramatic with roughly twice the wealth creation for 10-, 20- and 30-year periods.
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The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of AthenaInvest.
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