Think of investing as one long road trip

I was driving up to Northern Michigan recently for a nice vacation with family, and like any long road trip, before I left, I turned on my GPS on my iPhone to see how many hours it would take to get there.

There’s an initial excitement to get on the road, looking forward to how enjoyable your upcoming vacation will be.

However, once you hit the highway, road trips can become long, boring drives. The wife is sleeping, the kids demand you play their favorite CD, and the endless billboards fail to provide any entertainment.

You can’t wait for the drive to be over, and you want to get to your destination as quickly as you possibly can.

You might be tempted to drive a little bit faster, but one well-placed police car can set you back a half-hour and $150 in fines (plus the safe driving course you’ll need to take to wipe those points off your record).

Even if you’re able to go 5 mph faster than usual, you still probably won’t get to your destination significantly faster.

That’s because I’ve found that the biggest determinant in how long a road trip takes is not how fast you drive (it’s hard to drive much faster than normal for a long period of time), but rather how many breaks you take and how long those breaks are.

Rest areas = lost time

I know people who can drive 8 hours or more in a car without stopping. I am not one of those people. I used to stop every hour on a long road trip for a quick stretch break. Most people who don’t stop that frequently are still going to want to stop every four hours or so to get lunch or dinner.

I feel like I always underestimate how long my rest stop breaks will be. A quick bathroom break can turn into changing your child’s diaper, waiting in line at the food court, enjoying your meal, shopping at the gift store, etc. A 15-minute break can quickly turn into an hour. There’s no way you can make up that time when you’re actually driving.

I’m convinced that the length of your breaks, not how fast you are driving, dictates how long it will take to get to your destination.

Investing as one long road trip

What does this have to do with investing?

I see investing as one long road trip. Accumulating retirement dollars is just like driving for miles on the open road. Everyone wants to get to their destination as soon as possible, whether it is to their dream vacation destination or their retirement number.

The speed at which you accumulate investment dollars is your investment return.

Your rest stop breaks are the times when your money is sitting on the sidelines, out of the market.

You can’t significantly control your investment return, and trying to super-charge your investment returns is very difficult and often counter-productive. You have to just accept your speed and not let the extra weight of fees in your investment car slow you down.

But the biggest drag when trying to reach your final destination as quickly as possible is the breaks you take in investing.

Why people take investing breaks

Investors choose to periodically be out of the market for various reasons.

  1. They may think that the stock market is overvalued.
  2. They may want to keep their powder dry for better opportunities.
  3. They may be lazy to reinvest their dividends as quickly as possible.
  4. They may let their paychecks accumulate in their checking accounts for months before investing it.
  5. They may choose to dollar cost average over time instead of lump sum investing a windfall.

Regardless of the reason, letting your money take a rest stop slows you down on the road to retirement. Any time money is spent on the sidelines instead of working for you in the market is a lost opportunity.

Quantifying the lost opportunities

Sure, the stock market may drop while you have cash on the sidelines, but it can just as easily go up. The long-term trend in the stock market is up, and it is very difficult to predict when the stock market will rise and when it will fall.

As much as people try to glean patterns from randomness, the stock market moves essentially as a random walk. Therefore, how much you, on average, will lose waiting on the sidelines is directly proportional to the time spent out of the market.

If the stock market is expected to rise 8% per year, then spending 3 months out of the market means your expected return will go down by roughly 2%. Spend 6 months out of the market, and it is roughly 4%. You can precisely quantify, on average, how much you’re losing when you leave cash on the sidelines.

Conclusion

If you want to reach your retirement goals as soon as possible, you need to keep your pedal on the gas at all times. It’s hard to take long breaks out of the market and expect to get to your financial destination on time. Minimize the time you spend with unnecessary cash on the sidelines. Don’t try to go faster than the market speed limit by picking stocks or timing the market. Take what the market gives you through index funds, and you may get to your retirement destination faster than you might imagine.

“Wall Street Physician,” a former Wall Street derivatives trader , is a physician who blogs at his self-titled site, the Wall Street Physician.

Image credit: Shutterstock.com

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