Two roads diverged in a wood, and I –
I took the one less traveled by,
And that has made all the difference.
-Robert Frost “The Road Not Taken”
I had a conversation with a friend recently regarding the merits and joys of running. My friend told me about a run one early, weekend morning. He watched a perfect Portland sunrise, with just the right amount of crispness in the air—the kind that keeps you getting up at that time of day. He felt energized, alert, fit, and happy.
Imagine this habitual morning run contrasted against a morning routine consisting of waiting in line for donuts, faced buried in your cell phone, while smoking a cigarette.
Now, compare these two morning routines and consider exponential effects on health, mental state, and physical well-being.
What is Incremental Change?
This conversation got me thinking about incremental change. Wide gaps in behavior and outcomes typically don’t happen in an instant. Incremental improvements or degradations—while singlehandedly not significant—do add up to tremendous results. Running consistently wasn’t likely to have an immediate effect on my friend’s health, but making that incremental adjustment had a remarkable impact over time.
Another recent example of this phenomenon is the widening wealth gap. This issue has been debated a lot recently—and while this post will not comment on the issue specifically, I think it does highlight an important point. Changes like this do not happen overnight. Often times a wide gap, in any area, is the result of constant change over time. Incremental change.
The Cordant View
If you’re familiar with Cordant, you know that our work focuses on Intel employees. And as a technology company, Intel engineers are often unimpressed with incremental change. If an adjustment doesn’t make a product exponentially better, who cares? An improvement of 2-3%—you’re joking, right?
I guess 40 years of keeping up with Moore’s law will do this to your thinking. However, while this “orders of magnitude” mindset thrives in technology, it is not always applicable to other areas of life—namely, with investing.
At Cordant, we’re incrementalists. We take a long-term view, and believe in the value of executing strategies that focus on incremental, continuous improvement over time—ultimately moving our clients closer to their financial goals.
We help our clients employ several wealth management tactics toward this end. We’ve written about a few of them on the Cordant blog—most notably, being intentional about cost, minimizing taxes and rebalancing. While these may seem lacking in a certain excitement today, they add up to big differences over time. To use a baseball analogy, this is not a strategy of always swinging for the fences (the downside of which is a lot of strike outs), but a strategy of getting on base efficiently. If you’ve read the book “Moneyball” or seen the movie by the same name, you know that it’s getting on base consistently that leads to wins and ultimately success over the course of a full season.
Incremental Change in Action
Take two 25-year-old engineers, just starting out in their career. The first (we’ll call him Fred) starts out saving 3% of his salary and increases this by 1% every other year. The other (we’ll call her Sarah) saves 6% annually, and increases this by 1% every year.¹ This initial 3% difference makes a minimal change to today’s standard of living.
In addition, Fred decides he doesn’t want to bother himself with such trivial considerations as minimizing costs, rebalancing, tax-loss harvesting and managing his behavior—he earns 5.5% annually. Sarah, on the other hand, does feel that these incremental measures warrant attention. She realizes a net return of 7.5% annually.
25 years later, at age 50, Fred will have around $500K saved… versus almost $1M for Sarah. For those unconvinced of the power of incremental change, there is your order of magnitude difference: An adjustment of 3%, as well as the attention paid to small, incremental wealth management efforts, resulted in a 2x gap after 25 years. By age 65, it widens further: $2.1M vs. $4.3M—a $2.2M difference!
This concept is not unique to wealth management. Our relationships, health, and career success all depend heavily on the seemly miniscule choices we make each day. It isn’t the noticeable short-term harm or benefit—but the compounded weight of these decisions—that matter. Albert Einstein once called compound interest the “eighth wonder of the world”—an observation that can be applied to the incremental change of all decisions in life.
Consider the chart below. It depicts the impact of a seemingly small, 3% change per year. Apply this to any decision you make on a daily basis. In any given day, the impact between making a decision that leaves you 3% better off (say, exercising) versus a decision that leaves your 3% worse off (say, a double cheeseburger with bacon) will be largely unnoticeable to an observer. However, over time the compound impact of these decisions leave a wide gap in the final outcome—in this case, your health.
Twenty years may seem like a long time, but with increasing life expectancies no matter where you are in life—late career or already retired—chances are, you have several decades of living ahead of you. In fact, a 55 year old couple has a 69% likelihood that at least one of them will live for another 30 years… and a 17% chance of living for another 40 years.
This is why at Cordant, we focus on some of these seemingly small decisions. Rebalancing, tax-loss harvesting, minimizing vehicle expenses and minimizing behavioral biases can add up to significant incremental returns.
Because it’s the constant, grinding process of maximizing these benefits and continually improving that have a meaningful impact over time. It’s the importance of being intentional with every decision you make.
The process of incremental change. Boring? Maybe.
The results of incremental change. Important? Absolutely.
¹Both cap out saving 20% of their salary. Assumes a $60,000 starting salary and a 5% annual increase in wages.
To learn more about How cordant helps its clients leverage incremental changes to contribute to their financial returns, send us an email or call (503) 621 – 9207.
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