I've been a financial advisor for over 20 years, so I've had a front row seat and get to see from the institutional side how the investment industry works.

And oftentimes products are made to be sold.

They're not made to be bought.

And what I mean by that is the industry only tells you the good stuff and not the bad stuff.

And I think we all need to know both sides, the pros and the cons on everything.

So there's plenty that the investment industry doesn't tell us about.

But this is one where I think it's an oversight and I think the intentions are not nefarious.

They're not trying to keep the bad news from us.

And so the big secret, the big lie has to do with compounding and the power of compounding.

I don't think the power of compounding is as strong as most people think.

And here's why.

Let's start with the basics.

If we save $10,000 a month, as this chart shows, I'm sorry, $10,000 a year and we get 7% a year on that money.

Now, you're not going to get that in a bank account.

You're going to have to have that invested in stocks and bonds.

And if we get that 7% a year, over 30 years, we're going to have ended up saving actually a little over a million dollars, which sounds great.

So what's the problem with that?

Well, compounding doesn't work so simply.

There's some things that we all need to know.

And the first one is just like compounding starts growing more quickly in our favor.

You know what?

Inflation is a headwind pushing against this.

And unfortunately, the impact of inflation is enormous over a 30 year period.

Let's take that million dollars.

Let's put it into an inflation calculator.

So a million dollars with an inflation rate of 3% over 30 years.

Guess how much money it is in today's dollars.

Yes, the good news is you have a million dollars, but it's only going to feel like about $412,000. $411,986.76.

OK, so inflation is really you really have less than half the money.

You have about 40% of the money that we all think we have when we say we have a million dollars.

OK, so that's that's the first one.

The second one is the impact of fees on all of this.

So the first calculation I said you'd have a little over a million dollars, you'd actually have a million and $23,000.

And that's if over 30 years you save $10,000 a year at 7%.

It compounds daily.

You can see what that ends up being.

But what if we put fees on this and what if we just put a small fee like one tenth of 1%?

So instead of getting 7%, you get 6.9%.

Well, you can see there now you're really close to a million dollars.

Now you're just a tad over a million dollars.

And unfortunately, this gets worse.

If you put a half a percent fee on it, it takes more and more money away from you.

So the first thing is inflation.

The second one is fees.

And the third one, believe it or not, the biggest risk to all of us is our own behavior.

You know, it'd be one thing if we could put money into an account and leave it in the account and never have to worry about up years and down years.

But there's going to be over a 30 year period.

There's there's no guarantees in the stock market.

But one that I'm highly confident in is over a 30 year period, there's going to be at least one, probably multiple years that are going to be challenging.

The market's going to be you've saved up $500,000.

In this in this account.

So now you're halfway to your goal of a million dollars.

And now all of a sudden the stock market reaches a rough patch, something as recently as like 2022, where the stock market and the bond portfolios were down about 20 percent, a portfolio of 50 percent stocks, 50 percent bonds, depending on how they're invested.

It wasn't unusual to see that portfolio down 20 percent.

Well, that's $100,000.

It took you 10 years saving $10,000 a year to save up $100,000, actually just eight years because of the power of compounding.

So human behavior and are we going to be able to stay the course?

So that's that's another challenge that I want you to be aware of.

And then the other one is taxes.

You know, what's what's the tax rate?

I mean, even if all you do is stick this in an index fund and let it grow on its own, there's still likely going to be some embedded trades that take place just to balance out that index and to keep it the right percentages.

So are you going to have to pay tax on that?

And capital gains tax in the United States for many people, believe it or not, for many folks is going to be zero percent for for others.

It's going to be closer to 15 or 20 percent.

So what about the taxes?

And when you include all of this in into the compounding, the story of compounding is just not as compelling as what people said.

Now, I want to go back to that main chart and I want to talk about another really big risk that is very, very seldom talked about.

So let's go back to the chart where we're saving money.

And this is what I want to talk about now is some called sequence of return risk.

And what that means is, you know, let's say in this 30 year period, we're going to have two years where the market's going to be up.

I'm just making up a number.

The market's going to be up 30 percent in a 12 month period.

Would you rather have those two years towards the end?

Or would you rather get those two years of 30 percent returns in the first two years?

It's it actually makes a big difference if we get it towards the end after we've saved up money, after it's had a chance to grow.

Let's say we have $800,000 and we get a year where the stock market's up 30 percent.

And now maybe instead of a 7 percent return, maybe we get a 25 percent return.

I'm assuming you've got some bonds in the portfolio.

It's not just all stocks.

Well, an $800,000, a 25 percent return.

Boom, you're there.

So how long does it take you to get to $800,000?

It's towards the end.

But you've you've shortcutted that last, let's call it three years, that last four years that normally would have taken you to get from $800,000 to a million.

So you want those good returns when the value is the highest.

Conversely, let's say there's going to be two year period, two separate years where each year there's a negative 30 percent return.

What do you think?

Do you want those negative returns towards the end or do you want them towards the beginning?

In this case, you don't want them at the end, because if you got a return like that, when you had $800,000, well, you're going to give up almost $250,000, $240,000.

Or let's just say it's a negative 25 percent return.

So we keep the numbers the same.

You're going to give up $200,000.

You're going to lose $200,000.

And remember, that first $100,000 took almost eight years to get.

So it's just human nature to think, you know, that's 12, 15, 16 years of my work that was wiped out in a 12 month period.

So we want those negative returns early.

But here's the bad news.

We don't get to control when we get the good returns and when we get the negative returns.

It just just kind of happens.

And we'd love to be able to predict that and say, well, you know, as I record this, the stock market overall over the last nine, 12 months has done well.

It was just recently it was posting all time highs.

It's hit some speed bumps here recently.

But it was up over a nine month period about 30 percent.

That's a big, big move.

And the stock prices were already by historical norms relatively expensive.

So it's it's let's just say it's impossible to determine when we're going to have a pullback from that.

So there is a luck component.

If you're lucky and you get those negative years early on, as long as they don't derail your plans.

Now, you know, it doesn't work this way.

You don't know until hindsight.

But in what I've laid out, now you've got those bad years out of the way and you've got some nice growth years in front of you.

But we don't know that there could be another 30 percent drop in there.

So it's the sequence of return risk.

Are you lucky when you get the negative, the bad negative return days?

Again, there are no guarantees, but I'm very confident that over a 30 year period, there will be years that are challenging from a return standpoint.

So it has to do with the sequence of return.

So so those are the problems.

That's kind of the big secret.

The lie that the industry has given us and the other the other thing, I don't want you to have a secret from yourself.

And so just thinking about what's the right time for you personally to retire, which is why I made this video up here.

Big mistake.

Retiring at 65.

Maybe you should retire before 65.