Founder of Vanguard Says “Where Costs Are Concerned, Time Is Your Enemy” And What This Means For Your Personal Development

By Lorenz Duremdes, Polymath

S&P 500 Index, Wikipedia
https://en.wikipedia.org/wiki/S%26P_500_Index — S&P 500 Index, Wikipedia
  1. Trying to beat the market average is a loser’s game;
  2. Long-term market average → positive;
  3. The negatives compound over time;
  4. 3% difference produces a 229.30% difference over 30 years;
  5. 0.5% difference produces a 143.97% difference over 80 years;
  6. Examples of “costs” in personal development → stress, bad sleep, unhealthy diet, etc.;
  7. Removing your “costs” → less is more.

I t is a nice thing to know that the positive things like habits can compound over time, but how about negative habits? What if I told you that you don’t need to do more, but you need to do less i.e. less of the negative? Let’s take a look at how this is similar to the principles behind S&P 500 and Vanguard.

What is the main underlying principle behind Vanguard?

I actually didn’t know about the importance and underlying principles of Vanguard and S&P 500 until I read this book: The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle. So I recommend anyone to read that book if you want to understand why S&P 500 is superior to buying a single stock.

Anyways, the book teaches you, in short, that trying to beat the market average is a loser’s game. How do people try to “beat the market”? By buying individual stocks and hoping they will outperform the market average. The problem is, you can’t really predict the future of a stock.

The thing is, however, that the combined market average happens to be positive on the long-term. Solution? Buy the complete market. Out of this index funds such as S&P 500 are born.

Why are index funds superior to individual stocks, or worse a brokerage?

It has to do with the costs. Let’s repeat that important sentence again:

Trying to beat the market average is a loser’s game.

But really, what does that mean? Well, it means that it is very unlikely that you will, in the long-term, get a higher return on investment (ROI) than the average market’s ROI.

So let’s say you are “buying the combined market” in order to get that market average, are we done now? Nope, because we still have to try to keep our costs as low as possible.

Let’s say I buy S&P 500, which has virtually almost no costs, while you go to a brokerage. The average ROI of the market is around 10% without inflation. Let’s say that I get to keep that 10%, how about you? Well, since you went to a brokerage, and no matter how “professional” they are, they neither will beat the market average i.e. 10%, you now also have to pay that brokerage, which is let’s say 3% of whatever they make out of your money. That leaves you with 7% ROI to keep for yourself.

Let’s calculate the differences in ROI over 30 years:

ROI without costs:

1.1³⁰ ≈ 17.45, in other words, every dollar I invested now becomes $17.45 (without inflation).

ROI with costs from brokerage:

1.07³⁰ ≈ 7.61, i.e. every dollar is now $7.61.

That’s a huge difference for just 3%! In fact, if we calculate the difference in percentages, we get 17.45 / 7.61 ≈ 229.30% difference!

In other words, not only does the positives compound over time, the negatives also compound over time, which makes a “small” difference of 3% have a huge effect later on.

So what does this all mean for your personal development?

These numbers mean that, instead of trying to chase for more, work harder, study harder, etc., if you don’t keep your “costs” low, they will also compound over time.

Now, I do believe anyone reading articles like this will beat the “personal development average” (i.e. reworded from “market average”), but that still doesn’t remove the rule “negatives, too, will compound over time”.

What are some examples of “costs” in terms of personal development?

Examples of costs in personal development

So let’s grab some random numbers, and I want you to imagine a duplicate of yourself that doesn’t have these “costs” i.e. your duplicate has good sleep quality, low levels of stress, etc.

Let’s say the “personal development average” is 10% in first world countries. Now, let’s say, because of all these costs like high levels of stress, your personal development average will become 9.5% a year. The average life expectancy in first world countries is around 80 years, which gets us these numbers:

Without “costs”:

1.1⁸⁰ ≈ 2048.40

With “costs”:

1.095⁸⁰ ≈ 1422.75

Difference in percentages:

2048.40 / 1422.75 ≈ 143.97%

These are the numbers with just a 0.5% difference, and I am pretty sure all these costs I just named will produce a much bigger difference than that.

What does this mean for your personal development?

It means that you should be very wary about negative habits such as not managing your stress. Developing positive habits is a good thing, but as you develop them more and more, you will experience diminishing returns in the long-term. So at some point, you need to reduce your costs which, in the beginning, don’t experience any diminishing returns yet (if you have never worked on them) i.e. less is more.

Regression toward the mean

Lastly, there’s this thing called regression toward the mean, which says that the chance for you to end up further from average is lower than the chance for you to end up closer to average. This means that you or I probably won’t become the next Bill Gates or anything, but we can definitely try to outcompete others, who don’t lower their costs, by lowering our costs. Again, because you are reading articles like this, you probably will beat the average, but it won’t be that far up (in all likelihood).

Practice questions

  1. What is / are the underlying principles of Vanguard and S&P 500?
  2. Why is going to a brokerage a bad thing?
  3. What are some examples of “costs” in your personal development?
  4. How does the underlying principles of Vanguard relate to the topic of personal development?

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