Individuals at Morningstar were asked by Ruth Saldanha of Morningstar Canada, what their #1 financial lesson has been. Here are the responses of four of them. It can all be summed up in one single sentence: Give your money time to reward you.
Susan Dziubinski, Director of Content, Morningstar.com
In my job interview at Morningstar in 1991, I was asked what a mutual fund was. I didn’t know—I’d been an English major!
Almost 30 years later, what’s the most important lesson I’ve learned about investing? That’s easy: Save Early and Save Often.
Even back in the early 1990s, Morningstar offered employees access to a retirement plan. Still wet behind my ears and decades from retirement, I diligently tucked away as many dollars as I could each paycheck – after all, my manager said that was the smart thing to do. She said that I should let compounding work for me.
Sure, I made some questionable allocation decisions back then. (A little too much enthusiasm for emerging markets, for instance.) Yet I was saving rather than spending – and I was doing so every two weeks, no matter what was going on in the markets. Saving became a habit; I didn’t even think about it. Nearly thirty years later, that habit has given my family some financial peace of mind. Our house is paid for. Our three kids will be able to go to college. And my husband and I can retire someday if we so choose.
Let compounding work for you, too.
Christine Benz, Director of Personal Finance, Morningstar
Not so long ago, a friend of a friend recently shared that his adviser had diagnosed his portfolio as being too light on small caps and in need of an annuity.
My recommendations were a lot more mundane: Step up his savings rate and build more of an emergency cash cushion. Of course, his adviser may have communicated some of those same ideas.
My friend tuned out the advice – after all, watching your money grow on its own is a lot more fun than reducing spending.
Investors are all too receptive to the notion that they can reach their goals without significant sacrifice; their investment portfolios can work their magic. Investment selection does matter, but luck invariably plays a crucial role in financial success, too, even though a lot of the lucky ones among us don't like to admit it. But don't underrate the mundane financial jobs--the no-fun, super-unsexy financial equivalents of eating lots of fruits and vegetables and logging 10,000 steps a day.
- Maintain appropriate saving and spending rates
- Nurture human capital and stay employed
- Maintain good credit scores
- Stick with a sane asset allocation mix, and
- Purchase appropriate insurance products
- Do a passingly decent job with them over many years and it's a near-certainty the rest of your financial life will fall into place.
Paul D. Kaplan, Director of Research, Morningstar Canada
I started my career in investment research in 1988 when I joined a small firm called Ibbotson Associates in Chicago. Ibbotson was best known for its annual publication, the Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook. The Yearbook presented the monthly performance of major U.S. asset classes with data going back to January 1926. The book contained a chart, which was also available as a poster, that showed how one dollar invested on December 31, 1925 in stocks, bonds, and cash would have grown if continually reinvested. The stock indices grew to many fold times the value of the bond and cash indices. But the chart also showed that along the way, there were market crashes and recoveries. Recently, I have created updated and extended growth charts for both the U.S. and Canadian stock markets. These charts show that the both the pain and rewards of equity investing have continued.
The lesson that I learned from that chart, is as important now (if not more important) than it was 32 years ago: successful investing is a long game. Over the long run, the equity markets have greatly rewarded those with patience and nerves of steel. (You may even want to buy in falling markets and sell in rising markets to maintain your level of risk as part of an asset allocation strategy that includes bonds and cash.) But you have to able to stomach the losses along way.
One caveat: there is no guarantee that markets will behave in the future as they’ve done in the past. But I think that it is still a good bet that they will.
Michael Pe, Product Manager, Morningstar CPMS
Start investing as early as possible. When started my career, it took me years before getting comfortable with investing the stock market. I wanted to educate myself before investing my hard-earned savings. However, I realized later that those few years costed me immensely. If I had started investing 5 years earlier, my predicted future portfolio value at retirement would be significantly higher than it is now.
For example, let’s take an example of Person A, 30 years of age starting to save and invest $300 a month until they are 60, at which time they will retire. Assuming an 8% annual return (the average return on the S&P/TSX Composite for the last 40 years), they would roughly have $447,000 in their portfolio at age 60.
Now let’s instead consider Person B, who did the same thing as Person A, but started investing 5 years earlier at age 25. At $300 a month, that would amount to an additional $18,000 being invested vs. Person A. However, Person B would have $688,000 at retirement instead of $447,000 like Person A. That is a difference of over $241,000 for investing 5 years earlier!
So, try to invest as early as possible as that can make a bigger difference than you realize!
