As we sit down to consider investing for this RRSP season we have been conditioned to look to rates of returns and seek investments that have had better returns than others. For example all of us would say choose the investment that averages 8% versus 7% you’ll be better off.
However can we control returns or use past returns as predictors of the future? No!
But yet as investors we spend an inordinate amount of time trying to pick investments by whatever measure you wish that will produce better returns than another.
The moral here is if we cannot control returns why focus on it. People need to focus on what they can control, how much they save.
So let’s do some math.
The first two scenarios shows the dollars gained if one averages 8% versus 7%.
The third and most important scenario is where an investor has found the ability to invest $100 more a month and the return is 7%.
- Scenario 1: 25 years to save, return is 7%, savings of $400 per month and you will have this: $314,988
- Scenario 2 is the same, except return is 8%, value accumulated is: $365,936
- Scenario 3: Saving $100 a month more and the return is 7%, the value is: $393,735
Obviously the winner is scenario 3.
The ability to find more savings which is in your control is more important than trying to find an investment that will return more than another. To repeat this isn’t in your control.
Work with a skilled advisor who can help you identify ways to improve your cash-flow to help achieve more wealth.