How Much You Save Matters More Than Returns

Instead of obsessing over asset allocation, invest more money.

What’s the “best” portfolio? Is it 100% VTSAX? How about throwing in some international? Maybe you’re a value investor and tilt toward companies that are overlooked and undervalued. Or maybe you like growth stocks — overweighting the tech sector has worked out well the past few years.

You can do all the backtesting you want, but you still don’t know what will outperform a simple market-cap-weighted portfolio. But if you do get it right, you could be looking at an extra 1% or 2% return. 1% can make a huge difference for a portfolio.

Imagine you invest $10,000 a year for 40 years and earn a 7% average annual return. Your final portfolio balance over that period would be $2 million. But what about an 8% return? Your portfolio would increase to $2.6 million. Not bad. A 9% return would result in $3.4 million, and a 10% return in $4.4 million.

It’s pretty fun to imagine how seemingly small changes in return can seriously increase your wealth over decades. There is, of course, one big problem: You have no real control over your return.

Sure, you can take on more risk, but this doesn’t guarantee higher returns. Taking on too much risk more likely means lower returns than the market can deliver. Too many investors spend their energy tweaking their portfolios, obsessing over backtests, jumping into strategies at the top and jumping out of strategies at the bottom. This is why for most people, investing in broad-market index funds is the right move.

If you really want to grow your wealth, there’s one factor that has an even bigger impact than asset allocation: your savings rate. How much you save and invest is what ultimately matters. Not outperformance. Not endless optimizing and tinkering. Just adding more money to your growing pile of money.

To illustrate this, let’s return to our example. Investing $10,000 every year for 40 years earning a 7% return results in $2 million. But what if you’re stuck with that return? How much extra money would you have to invest to reach $2.6 million? The answer is only $3,000. That’s all it takes to replicate 8%. How about 9%? An extra $7,000. And 10%? $12,000.

Investing an additional $12,000 when you’re already investing $10,000 isn’t insurmountable, especially since we’re not accounting for inflation and wage increases over time. But more to the point, growing your portfolio by investing more money is a more reliable way than hoping for the perfect asset allocation to get you there.

This principle is particularly important at the beginning. Let’s say you front-load your savings at the start of your career. You invest $15,000 for the first 10 years, then let off the gas and only invest $10,000 for the remaining 30 years. You would end up with $2.5 million. These numbers don’t need to be realistic for you to understand the broader principle. You will grow your portfolio faster by saving more money earlier.

Spending too much time worried about your precise asset allocation is probably pointless. There is no perfect portfolio that’s guaranteed to deliver high returns. But another important point here is that saving more money can make up for poor returns. If you make poor investment choices or stock returns going forward are less than they were in the past, investing more of your money will help you reach your goal all the same. And putting in more than you think you need can provide a nice buffer for a wide range of outcomes.

There are only two ways you can increase your savings rate:

1. Spend Less Money: Spending less money frees up money to be invested.

2. Make More Money: Asking for a raise, seeking promotions, changing jobs, changing industries or finding ways to earn money on the side can all increase the income you have to save.

Another strategy for making saving easier is by slowly increasing the amount you save each year. This can be much easier to manage if you struggle to cut spending or you won’t see dramatic shifts in income from year to year.

If you want to grow your money, you need to invest more of it. Don’t think too hard about your asset allocation, especially when you first start investing. Putting everything in a total stock market fund or a target-date fund is a fine choice while you learn more about what portfolio you want to settle on. How much you invest will have much larger long-term implications for your goals than the contents of your portfolio.

The “perfect” portfolio will not save you. A higher savings rate will. Getting into the habit of saving more and more of your income each year is within your power. Picking winners isn’t.

Endlessly optimizing your portfolio can only make you so much more money. Stop chasing returns and focus on the one factor within your control.