On Monday I spoke at a pretty large gathering of 401k investors at a company whose plan we manage. During that seminar there was one question that brought me back to a point I've made once or twice before but that is crucial to understanding the importance of portfolio returns.
The importance of saving money comes up here often and although I don't bring it up often enough, for many people the manner in which they save will be more important than investment results (here the assumption is that investment results are not super human or freakishly bad).
This can matter on several different levels, you figure out for yourself whether it pertains to you or not. One way this is relevant is for people just starting out. I'll use the example of a Health Savings Account because if you have one, you've probably not had it very long. A few years ago when they first became available I believe the maximum contribution was $5000, now it is $6150. In year one if you deposited the full $5000 and had a very good year how much would you have made on the $5000? I think a real good year (not super human) might be $1000 which is obviously 20%.
At the start of the second year if you put in another $5000 the account goes from $6000 to $11,000 which is an increase of 83%--obviously not an investment gain but after the second deposit the account is much larger than the investment result and I would say the discipline to make that second deposit is more important than the investment result. If the investment result in the second year was again 20% or $2200 I would say that would still be less important than the third deposit which by now might able to be $6150 (this has been the max for three years now I believe). You can carry this out as far as you want and decide at what point you think the return is more important than the deposit but it would probably be after quite a few years as getting 20% repeatedly would drift into super human.
Someone who is 50-60 years old probably has something specific in mind about when they want to retire or what their retirement will look like (or at least an aspiration of what it will look like). If this is you, how much money do you have right now? How many more years of accumulation to you plan to have? How much per year can you save while you are still accumulating?
If you planning on 12 more years of accumulation and can put away $20,000 per year (this presumes you are at your peak earnings which we know is not the case for everyone) then we are talking about $240,000. In this example where does $240,000 stand? For some 50 year olds it will be a lot of money and for some it will be very little.