Alpha- The percentage by which an investment is outperforming the market, measured by comparing its return to a benchmark index.
I talk a lot about folks who haven’t made sufficient progress on their retirement savings goals- they can get desperate and make mistakes, which puts them even further behind.
I’m referring specifically to making riskier and riskier investment decisions as a “get rich quick” mentality takes hold.
In most cases that means attempting to outperform the average stock market returns by stock picking and market timing. When has this ever reliably worked for the average investor?
There is a better way to make progress on your savings goals when markets aren’t cooperating.
Remember- savings + timealways does the heavy lifting on our road to retirement.
Folks who mix that up and expect to see investment miracles happen to their meager savings will be disappointed.
Morgan Housel, the author of The Psychology of Money, describes "Savings Alpha" as an advantage that comes from saving more money rather than chasing higher investment returns. The concept highlights the power of high savings rates over the pursuit of higher-risk investment strategies. From the interwebs:
Key Ideas Behind Savings Alpha:
- More Savings > Higher Returns
Instead of obsessing over maximizing investment returns (which is uncertain and risky), simply saving more can give you a financial advantage. - Less Dependence on Market Performance
Many investors try to beat the market, but market movements are unpredictable. A high savings rate can enhance financial security regardless of short-term market volatility. - Avoiding Risky Investment Behavior
Many investors chase high returns and take on unnecessary risks. By prioritizing saving, you should not need to rely on risky or speculative investments to achieve financial goals.
Simply put, someone saving 15% of their income and earning 5% could have a better outcome than someone saving 5% of their income and trying to earn more than 10%.
I can hear you- Rachel, how can I possibly save more with the high cost of living? I’m doing my best!
I get that. It can be hard, but there are people out there prioritizing their financial security and making tough decisions every day in order to reach their retirement savings goals. It can be done!
Bottom Line: Folks that prioritize saving for retirement, and never stop saving and investing, have much better outcomes.
Savings alpha is about focusing on what you can control—your savings rate—rather than chasing unreasonable market gains. It is a simple yet powerful strategy for building long-term financial independence.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Securities and Retirement Plan Consulting Program services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. Investment Advice offered through Western Wealth Management LLC, a Registered Investment Advisor. Kennebec Wealth Management LLC and Westen Wealth Management LLA are separate entities from LPL Financial.