Opinion – Grain in Grain: What I’m going to tell you can save your retirement

There is a cognitive issue that hinders an investor’s journey to financial independence or retirement. It is related to our inability to think non-linearly. I imagine that just the mention of this term can drive half of the readers away from finishing the text and understanding how awareness of the path brings it closer and increases the chances of you reaching it.

Anyone who has traveled with a child knows that, at a certain point in the trip, they get bored and start to question the time left to arrive.

With investment, something similar occurs, but perhaps even worse.

We think linearly. So, we look to the past and project the future based on what happened. Here’s the error.

I present below, again, the two tables that I showed in yesterday’s article.

Evaluate the two tables below. In the first, I present how long it would take you to accumulate R$ 1 billion and, in the second, R$ 5 million.

I will illustrate the reasoning with an example. In the second table, I show that it would take you 20 years for, by investing R$ 5 thousand per month with interest of 1% per month, you would accumulate R$ 5 million.

Now comes the question that illustrates the problem we suffer.

If you keep saving in the same way, how much will you have 20 years after reaching the goal above, that is, after 40 years of accumulation?
a) BRL 10 million;
b) R$ 19 million;
c) R$39 million;
d) R$59 million.

Some will quickly think that it would be double, that is, R$ 10 million.

Others may reason that the starting point is higher, so it would make sense that it would be a little more than double, that is, R$ 19 million. Does it seem to make sense?

However, the correct answer is the last alternative, that is, R$ 59 million.

More impressively, if you continue for another 24 years after this last step, you will reach R$1 billion.

The result of the mathematics of compound interest is not natural to us. So, after a few years of saving, most give up, because they think they won’t get anywhere.

The investor begins to save, for example, the R$ 5 thousand per month. After five years of great effort, he realizes that he has only managed to save just over R$400,000.

This is one of the most critical moments of the investor’s journey. He is tired of giving up the pleasures of consumption. He looks to the past and wrongly projects that he will never reach his goal. Then he spends part or all of the amount saved as a “reward” for past effort.

We usually imagine equity growth following a sloping straight line. Compound interest causes evolution to follow a curve that becomes very steep as time passes. The evolution of investments is non-linear as shown in the chart above.

Realize in it that it would take you 307 months, that is, more than 25 years to reach R$ 10 million. However, if you continue for just over half that time, you accumulate an additional R$49 million, reaching R$59 million.

Renowned investor Warren Buffett is well aware of this. Of his total wealth of USD$117 billion, 99% was accumulated after his 50th birthday. Only 1% of his wealth was accumulated over the first 30 years of his career. He is 91 years old and has about seventy years of experience as an investor. Soon, he amassed around 99% of his net worth in the second half of his career.

So never give up on your investment plan. If you don’t have an investment plan yet, create one so that you understand where you will be at each moment of your journey.

It’s just a matter of time, patience and discipline for you to achieve your financial independence.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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