I was 25 years old in 1984 and had finally saved enough to start thinking about the future and starting an Individual Retirement Account (IRA). Intuition told me that an investment with hopefully a time horizon of at least 40 years was somehow unrelated to the day-to-day stories of “the market.” My intuition has been proven correct, and hopefully today’s Millennials and Gen Z will take these simple lessons to heart as they too begin to seriously consider the future.
Lesson #1: Income vs. Hype
In a book I wrote more than 20 years ago, I asked the question: Building wealth isn’t difficult, so why don’t people do it?
The book pointed out there are some simple wealth-building concepts everyone should use, but a litany of supposedly newer, better, more exciting investments lure investors away from the time-tested strategies. As in Greek mythology, there is always a Siren’s Song of exciting opportunities coaxing investors to take significant yet unseen risks.
Compounding dividend income is one of the simplest methods of building wealth, but seems much too boring to many investors. No one brags about compounding dividends to friends relative to the exciting growth opportunity one invested in that is a sure “get-rich-quick.”
Chart 1 shows the compound returns of the NASDAQ Composite and the Dow Jones Utility Index since NASDAQ’s inception in February 1971 (i.e., 52 years). NASDAQ surpassed the returns of the Utility Index only during frothy periods like the 1999/2000 Technology Bubble and the current speculative post-pandemic surge.