Wise Investing: No Substitute for Saving

Here's a depressing statistic. In a recent Harris survey, 3,866 Americans were asked which things were "extremely important to achieving financial security in your retirement". 39% said that "investing wisely" was extremely important, while just 34% said that saving money during one's working years was.

The problem is that while the financial-services industry is very good at marketing and selling investment products, it's very bad at marketing and selling thrift, and living within one's means. After all, the only thing which is marketed more aggressively than investments is credit products.

But if you want a financially comfortable retirement, the first best and pretty much only thing you need to do is save a lot of money while you're working. Thanks to the magic of compound interest, everything else is likely to follow. If you save a lot it's quite easy to eventually amass a seven-figure sum; if you're permanently in debt, then it's impossible. How you invest your savings is a secondary or even tertiary consideration.

The dream of anybody who invests in the stock market is that by being lucky or smart they'll get such enormous returns that they'll end up with the same amount of money as people who started with a much larger initial investment. It's a nice dream, but it's not very realistic.

There are good ways to unnecessarily lose money in the stock market: trading frequently, paying high fund-management fees, that sort of thing. "Investing wisely" is basically just the art of avoiding those pitfalls. It's not the art of getting abnormally high returns from your initial investment.