Throwing Away Dollars to Pick Up Quarters

Throwing Away Dollars to Pick Up Quarters

July 06, 2023

“It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.

-Mark Twain

Why would someone do that?  Why would someone – this is the average person looking to retire and never (hopefully) outlive their income – go through life throwing away dollars to pick up quarters?  Again, why would someone do this?  Human Nature.  More to the point – Human Nature being a failed investor.  Yes, I am giving those “quarter-gatherers” an out – you are hard-wired for long-term investment failure, and you don’t even realize you have been mentally programmed for it.

Before getting upset about being spotlighted (and tweeting, chirping, squawking, yelping or whatever), let me further explain the relevance of the quote from Mark Twain, and how it relates to long-term wealth accumulation for families.

As history as a guide – which is the only thing we can use, factually speaking and void of emotions distorting our thought process – those who have weighted their long-term portfolio toward the ownership of businesses (S&P 500 index) verses lending to governments (bonds and bills) have gained as much as two times greater in return. To be exact – after inflation (which is what everyone is understanding much better these days) the ownership of businesses has provided a real return of 6.9% per year from 1802 – 2021.  In the same time frame, lending to governments - long-term bonds - is 3.6% and US Treasury Bills have been 2.5%.  For those who are utterly driven by their emotions and have purchased gold – those figures are 0.6% per year. 

Inasmuch, the quote from Jeremy Seigel, Professor of Finance at the Wharton School and Author of the Book – Stocks for the Long Run, 6th Edition - The market has the power to turn a single dollar into millions by the forbearance of generations – but few will have the patience to wait.  Hence, throwing away dollars to pick up quarters.

Again, why? These are not hidden facts, just about anyone with an adult memory can see the historical data of the different asset class returns.  Revisiting the Mark Twain quote – It’s what you know for sure that just ain’t so. The average investor — “knows for sure” that owning all bonds in their portfolio provides a higher comfort level of certainty, in their mind, from the interest payments they will receive.  And the original investment will be returned and not lost, as the bond matures. 

Unfortunately, this is where Human Nature lays its final trap in longer-term investment failure, when it comes to purchasing power. Although the interest received on the bonds continues to provide income, they do not do one thing – continue to rise as the cost of living continues to rise throughout retirement. 

Conversely, then what asset class provides a rising income level, you may ask?  The dividends by the ownership of businesses. Retracing our physiological history and understanding that the human brain has been hard wired to fear what is believed to be a threat (like the rustling of weeds in prehistoric days), any hint of an uncertainty becomes a risk.  And in the short term, the markets’ daily volatility can be extremely uncertain.

What is fascinating about the contradiction is that the average investor - who is worried about not having enough money to live on throughout retirement – wishes away the required asset class that will provide him or her with the highest probability of not running out of money -- primarily due to its triggering effects on the prehistoric brain’s interpretation of short-term movements (volatility).

This is as ironic as it gets. Unfortunately, the average investor cannot have it both ways (although the media or some snake oil salesperson may tell you otherwise) – it is an inverse relationship that human nature does not comprehend.  Meaning - to preserve and protect (from inflation) those dollars for your long-term retirement, you need to stop picking up those quarters that allow your mind to feel better in the short run.  Said another way, if you want a higher certainty of not running out of money over a 30-year retirement, you must embrace the shorter-term uncertainty today.  Because, as we have now learned, in reality – it just ain’t so.



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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

Past performance is not indicative of future returns.

All investments include a risk of loss that clients should be prepared to bear. The principal risks of Melone Private Wealth strategies are disclosed in the publicly available Form ADV Part 2A.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Although bonds generally present less short-term risk and volatility risk than stocks, bonds contain interest rate risks; the risk of issuer default; issuer credit risk; liquidity risk; and inflation risk.

Risk associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions.

Source: Stocks for the Long Run, 6th Edition.  Jeremy Siegel.