The Power of Long Term Investment Returns

Shelly and I went sailing for the first time in many years this weekend. I was a little rusty. As we dodged and weaved our way through the 200 or so moored boats out into Narragansett Bay, I was reminded of the importance and power of lift.

boatSails work much like airplane wings. The opposing forces of water against the keel and wind across sails allows for air pressure differentials just like those around an airplane wing. This creates lift that moves the sailboat forward with surprising power and speed.

Picking our way to open water became a series of short turns for our little 22 foot sailing vessel. In one instance, we had just come out of a maneuver and I needed to head further upwind to avoid the bow of a moored sailboat. As I turned more into the wind to avoid the boat, we lost lift and therefore speed and maneuverability. Soon, the wind was pushing us directly into the very obstacle we were trying to avoid.

That’s when, fortunately, I remembered some of my sailing basics. Quickly, I pulled the tiller and steadied on a course directly towards the moored sailboat. We were now headed straight for it on purpose! Sails immediately began to hum, and the tiller became lively as our speed picked up dramatically. With our new found speed and momentum, I was able to deftly maneuver back up and easily around the moored vessel.

Lift is a force we can manage to our benefit in a sailboat to avoid hazards and head where we need to go. Investment return can be seen as a similar force. For instance in retirement, we are sometimes fearful of running out of money. Instinctively, we point the bow of our sailboat in a safe direction, meaning we reduce portfolio risk by going to cash or selling stock positions. These efforts can inadvertently cause us to drift into the very hazard we were trying to avoid. Instead, if we point our portfolio more towards the volatility we fear, our result can be the real return over inflation we need to sustain our portfolios for the long term.

It’s counter-intuitive to point the bow of a sailboat directly towards the hazard we wish to avoid, unless we understand the power of lift. The same is true for investing. When we understand the power of long term investment returns, we can more easily face the volatility that so often we find directly in our path.

Contact me if you have comments or would like to discuss ways we can help you can manage your investment return.

Rob