A Lawn Mowing Millionaire

“I don’t really want to lose anything. That is a lot of money for me!” Henry Frank, 14, on thinking about investing his life savings from lawn mowing.

My family and I were eating dinner, still basking in the glow of the Colorado Buffaloes glorious victory over the Nebraska Cornhuskers, unwittingly optimistic about our poor Denver Broncos hopes against their rivals, the Raiders, which were dashed on Monday night. Henry asked what we did for a living, in greater detail and with more interest than he has ever shown before, and I told him a story, which I’ll share with you in a moment.

After dinner, I sat Henry down and we went through an online investment simulation that he enjoyed. I think you will too. It’s called What’s Your Risk Number? Henry took one look at the first result, after entering his life savings—or the portion of his life savings he will have left after he buys his skis—and said, loud and clear, with honest fear:

“I don’t really want to lose anything! That is a lot of money for me!”

Henry could have been any one of us investors, at that point, thinking about one possible scary future—a significant short-term loss. My son is just as conservative as many of my retiree clients. If he chooses to invest with fear, it will cost him, perhaps, a million dollars. Let’s look at the numbers.

If Henry’s parents invest $6,000 a year for eight years and he leaves it alone until he is 65, he’ll have $2,000,000 or so, depending upon whether the S&P500 Index returns its long-term average rate of return, call it 10%, or better, with the re-invested dividends, or worse, perhaps. A $48,000 investment becomes $2 million with the power of time. And, if we invest his money into a Roth IRA—he’ll Go Tax Free.

But I don’t have time to recover from my losses! You say, of course, and you are not a teenager. Yes, this is true, but your money will last that long, and longer. If you take half the risk, you may get half the returns—or worse! Today, because of incredibly low interest rates, you potentially pay an even greater opportunity cost when you choose conservative, fixed income investments. This is the immutable truth of investments—less risk, less return.

Less time does not mean you need to take less risk. If anything, less time means a larger safety bucket. Perhaps accidentally, Henry figured this out. He has a short-term expense he must make—new skis—and so he has created two buckets: a long-term investment bucket and a short-term expense bucket. You can do that too—and with the help of your wealth manager here at AIFS, you likely have a more customized version of the same good idea. You have your safe money, hopefully two years or more of income set aside to weather an equity market storm. You have your long-term investment money, hopefully mostly (if not all) in equities, to avoid paying unnecessary opportunity costs.

An investment mix that is 50% equity/fixed income pays a 50% long-term, opportunity cost penalty by potentially foregoing 50% of the long-term returns. As much as it is hard to take the short-term volatility of the equity markets, you may find it even more painful to likely give up so much money over the long haul.

And finally, several of our clients are the "lawn mower millionaires" next door. You made it this way by tucking away more than you spend, and creating a life full of loving relationships rather than loving a lavish lifestyle.

Thanks to you clients who keep giving me ideas for the Periscope!

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