Investing vs. Retirement Savings
(Why I'm Not Saving for Retirement)

Part 1 of 3

Apparently last week was National Save for Retirement week or something.

In honor of this marketing-based holiday manufactured, no doubt, by the managed money industry, CNBC ran a number of retirement related segments, including this one from Sharon Epperson on the so-called Retirement Magic Number, or how much money you supposedly need in order to be able to actually retire one day.

The short version is this - according to financial "experts," you need to have saved up 8 to 12.5 times your final salary in order to retire without taking a major hit to your lifestyle.

These estimates assume that you will average 5.5% returns each year - which just goes to show how laughably low the managed money industry has set expectations . . . even as that industry struggles to meet those expectations.

I found the segment fascinating - both in terms of reminding me how predictably bad conventional wisdom is as well as a kind of vindication of my own decision to reject the entire concept or paradigm of saving for retirement in the first place.

What!?! I'm Not Saving for Retirement!?!

Before you dismiss me as reckless or irresponsible, let me assure you that I fully expect to spend my golden years in the best financial condition of my life.

That's because I'm not saving for retirement - I'm investing in the here and now.

The difference between these two approaches is much more than mere semantics.

There are actually a couple of very different but important components at work here. In this article I will discuss one of those distinctions - investing vs. saving.

Investing vs. Saving

The first crucial distinction I want to make is the difference between investing and saving.

One thing that actually impressed me in the CNBC video was that they called it what it was - retirement savings. They didn't use the word "investing" - either generically or as an attempt to persuade people that retirement accounts have much to do with actual investing.

Of course, that last part probably has more to do with the great skepticism that the middle class has toward the stock market these days - savings probably sounds a lot less risky to most passive market participants than investing does.

The problem with a savings mindset is that it's a scarcity-based hoarding mentality that says you need as big of a pile of money as you can accumulate - because at some point you're going to begin burning through it and you don't want it to run out before you die.

It's little wonder this mentality is so prevalent - it's the model that the managed money industry has been foisting on us for decades.

What Investing Really Is

In contrast, investing is, ultimately, about ownership.

You wouldn't ask the owner of a successful business if he or she had saved up enough for retirement.

When you own high quality income-producing assets, providing you own them in sufficient size or number, you don't worry about retirement. Just as you don't worry about employment.

What you're a true owner, what you own works for you, whether you're 35 or 85.

Why Buying Mutual Funds and ETFs Really Isn't Investing

If you "invest" via mutual funds or index exchange traded funds (ETFs), I would argue that you're not really investing.

Most actively managed mutual funds are actively churned - the average holding period for a stock in a mutual fund is less than one year.

Even if you personally have a conservative and long term perspective, outsourcing your investing funds to someone who overtrades on your behalf means you're going to miss out on one of the great benefits of long term investing - the power of compounding returns.

And ETFs aren't much better - their main selling point is their inherent diversification. But there's another word for diversification - it's called dilution.

If you own miniscule pieces of most everything, it's true that you own the best businesses in the world . . . along with the worst businesses in the world and everything else in between.

Hey - You Can't Say That About Diversification!

But diversification keeps us safe, right?

That's like saying it's safer to be a single gazelle in a large herd than it is to be one of the lions that eat the gazelles.

Thanks, but no thanks - I'll take my chances owning 5-10 of the highest quality businesses I can identify and let the crowd continue to do as it always has - buy into the managed money industry's self-serving message that what they offer (diversified mediocrity, fees regardless of performance, and overall low returns) is exactly what we need in order to secure a comfortable and rewarding retirement.

In Part 2 I discuss why I've chosen to build wealth in the here and now rather than save for retirement.

And be sure to check out Part 3 of this series - Investment Returns vs. Retirement Drawdowns.

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