Compounding your Money Requires Compounding Good Decisions

I ran across an interesting article last week written by Larry Swedroe. Mr. Swedroe is a prolific writer having written eight books and numerous articles explaining, in layman’s terms, how to be a successful investor. The article is titled, “The Importance of Diversification in Achieving Long-Term Goals.” The beginning of the article describes a hypothetical investor who inherited $1 million in 1993 and subsequently made some unfortunate timing decisions in choosing investments over the subsequent 27 years that ended up costing him $8 million dollars. Both the investments the investor utilized actually returned about the same over the period, but, because he switched between them based on recent performance (he bought the investment that had done well recently and sold the one that had done poorly), he devastated the long term returns of his portfolio. As Mr. Swedroe states, ” . . . sticking with one’s asset allocation is far more important than choosing the “right” one.”

Mr. Swedroe goes on to describe several other important investment concepts and common errors investors make. My favorite quotation in the article is a quotation from the author John Stepek in his book, “The Sceptical Investor.” Mr. Stepek wrote, “To avoid such mistakes, you must accept that you can neither know the future, nor control it. Thus, the key to investing well is to make good decisions in the face of uncertainty, based on a strong understanding of your goals and a strong understanding of the tools available to help you achieve those goals. A single good decision can lead to a bad outcome. And a single bad decision may lead to a good outcome. But the making of many good decisions, over time, should compound into a better outcome than making a series of bad decisions. Making good decisions is mostly about putting distance between your gut and your investment choices.”

Successful investing requires compounding a series of good decisions, even if they don’t always individually lead to a good outcome. Or stated another way, bad individual decisions may occasionally lead to good outcomes, but, over time, will likely doom your portfolio. The article is long but worth the read for anyone interested in better understanding how to develop a successful investment strategy and philosophy. Click here to read the article.

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