You Choose Where You Take Your Pain

Financial Planning: You Choose Where You Take Your Pain

There's a simple truth about building wealth that never makes it onto motivational posters: “you're going to suffer either way”. The only real choice you get is which flavour of pain you prefer.

As an investor, there are only three main levers you can pull to improve your financial future. You can spend less. You can earn more. Or you can tolerate the ups and downs of markets that, over time, tend to reward your patience. That's it. There's no secret fourth door.

The good news? One of these is significantly easier than the others if you understand what you're actually signing up for.

 

The McDonalds Test

My daughter recently asked me to reimburse her for a McDonald’s. She’d decided to skip dinner with the family and hang out with her friend instead—no great shock if you’ve ever lived with a teenager. The request came on Revolut for €10.

€10.  I nearly choked.

I could have sworn a medium McDonalds meal was about a fiver. When I queried her on it, she gave me the look that only a teenager can give a parent who is clearly wrong about everything and pulled up the menu on her phone. She was right. As it turns out a medium meal hasn’t been at the €5 level since about the year 2000.

That got me thinking.

If I had put €5 in a jar in 2000 and opened it today, I'd still have €5 (no big insights here). Except that €5 now buys me half a McDonald's meal. The €5 note is the same, but what it purchases has been quietly shrinking for twenty-five years.

If instead I'd invested that same €5 in a diversified global equity fund, it would be worth roughly €27 today *. Enough to buy almost three medium meals.

Same starting point. Two wildly different outcomes. One involved doing nothing and feeling safe. The other involved riding every crisis, crash, and correction of the past twenty-five years including the dotcom bust, the financial crisis, a pandemic and coming out the other side with nearly six times your money.

This is the real risk most people never think about. Not volatility. Purchasing power.

 

A Tale of Two Savers

Let's make this concrete with an example.

Meet Sarah. She's 45, earns €150,000 a year, and wants to retire at 65. She has twenty years. She decides to invest €1,500 a month, 12% of her gross salary, into a diversified global equity fund.

Based on the Dimensional World Equity Fund, which has delivered an annualised return of approximately 10.8% since inception, Sarah's pot after twenty years would grow to roughly €1.27m. She will have contributed €360,000 of her own money. The market did the rest with over €900,000 of growth.

Now meet David. Same age, same salary, same retirement date. But David doesn't like the sound of markets going up and down. He's seen the headlines. He'd rather keep his money somewhere ‘safe’, maybe a deposit account earning about 2% a year.

Here's the problem: if David wants to reach the same €1.27m by age 65, he needs to save approximately €4,321 per month. That's €51,852 a year, over a third of his gross salary. Over twenty years, David will contribute a staggering €1,037,095 of his own cash to end up in roughly the same place as Sarah, who contributed just €360,000.

The gap is €677,000. That's the price David pays for avoiding volatility.

Where does David find that extra €2,525 per month? He has exactly two options: earn more or spend less. Both are painful. Earning an extra €30,000 a year is not a trivial career move. Cutting €30,000 from your annual spending when you potentially have a family, a mortgage, and the general cost of living in Ireland; that's not a minor lifestyle adjustment. That's a fundamentally different life.

Sarah accepted the discomfort of watching her portfolio bounce around. David chose the discomfort of living on significantly less.

Both took pain. They just took it in different places.

 

Volatility is the Ticket Price

Here's how global equities looked over the last 10 years with some of the corresponding pain points.

 

 

Morgan Housel puts it well: volatility is not a fine for doing something wrong. It's a fee for getting something good. The market doesn't give you 10% a year because it's easy. It gives you 10% precisely because, every so often, it drops 30% and makes you question every financial decision you've ever made. That discomfort is the ‘reason’ the returns exist.

If markets never fell, everyone would invest, prices would be bid up until returns were no better than a savings account, and the whole advantage would disappear. The pain is the point.

The Risk You Don't See

Most people think they're reducing risk by staying in cash. In reality, they're just swapping one type of risk for another and arguably picking the worst one.

 

Market volatility is visible, noisy, and emotional. You can see it on your phone every morning. It triggers every loss-aversion instinct we have.

Inflation is invisible, silent, and relentless. You don't notice it until one day your teenager tells you a McDonald's meal costs twice what you thought, and you realise the cash you've been sitting on has been quietly losing a fight it was never going to win.  

 

Choosing Your Pain Wisely

Ben Carlson of Ritholtz Wealth Management often makes the point that personal finance is more personal than finance. The numbers above are straightforward. The emotional reality of living with them is not.

But here's the honest summary of your three options:

• Spend less. You need iron discipline and a willingness to live well below your means for decades. It works, but it demands sacrifice every single day, and life has a way of throwing expensive surprises at you.

• Earn more. Possible, but largely outside your control. Promotions, career changes, and second incomes all help. But relying on future earnings to fund your retirement is a bet on things that are hard to predict.
• Tolerate volatility. This option asks something different. It doesn't require you to change your daily life. It doesn't require a career breakthrough. It asks you to ‘do nothing’ when every instinct screams at you to act. To not check your portfolio in a downturn. To not sell when markets fall 30%. To trust a process that works over decades but feels broken in the moment. 

Of the three, volatility is almost certainly the easiest pain to take once you understand what it actually is. It's not a sign that something is going wrong. It's the admission fee to a theme park that, historically, has been very much worth the price of entry.

The question isn't whether you'll take pain on the path to a comfortable retirement. You will. The question is simply where do you choose to take it?

Also, before I get bombarded by emails I have of course been to McDonalds during the past 25 years!!

 

This article is for informational purposes only and does not constitute financial advice. Please consult a qualified financial advisor for personalised guidance

 

*Excludes an allowance for taxes