09 May 2013 The Second Most Important Thing in Investing

If you could use only one word to describe the most important thing in investing what would it be? If the question was real estate, you’d quickly say – LOCATION. If eating – healthy, maybe taste, or sport – winning, or sailing – wind, or mechanical motion – friction.

The most important thing in investing, is time; not risk, liquidity, or even return. Time, or the magic of compounding, is the investor’s best friend. But if you don’t have time, like many boomers nearing retirement age who have limited assets, time has become their nemesis. So for these folks, the second most important thing in investing is now their most important thing.

The second most important thing in investing is not risk, liquidity or return – it’s Efficiency.

Most would agree that efficiency is a good thing. When energy is scarce, an efficient thing can be propelled with less energy. When energy is plentiful an efficient thing goes farther. A car steered as straight as possible is more efficient than one that is over-steered. An aerodynamically designed car slices through the wind with less drag. And a car with properly inflated tires rolls further than one dragging inefficient tires. The more efficient a car, the further it goes on the same amount of energy.

For an investor, drag or friction is created by expenses, taxes, and over-steering which create inefficiency that further result in loss of effort, progress, and lifestyle. Stated another way, returns (energy) are drained meaning you have to push harder and drive longer to arrive at your destination.

As all systems have friction, all forms of investing carry some degree of expenses. It is highly important for investors to quantify all their expenses, and more importantly, to determine whether they are receiving comparable or greater value for their expenses that they can count on. In other words, investors should be sure they are getting an equal or greater return on their expenses, because those expenses are coming out of their lifestyle.

Efficiency in investing requires controlling those things that are controllable, just like with the steering, aerodynamics, and tire pressure of your car. Your assets tank will grow larger and go longer with fewer leaks from resulting from bad guesses, Wall Street, and the US Treasury. And you will find that you don’t have to fill up as often with savings and salary, freeing your time for more enjoyable pursuits. Efficiency is everything.