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On the plateau

This article on the plateau on the road to financial freedom comes courtesy of Budgets and Beverages from Team Monevator. Check back every Monday for more fresh perspectives from the Team.

The Oxford English Dictionary defines ‘plateauing’ as:

‘A time of little or no change after a period of growth or progress.’

It’s the worst, isn’t it?

Starting something new brings a feeling of excitement. Seeing progress in ability and knowledge brings a sense of euphoria. But then your ascending race to the top suddenly halts and is accompanied by exhaustion. Ending all too easily with you losing interest and letting your hard work go to waste.

I didn’t expect to experience this in investing. But the plateau has arrived and it’s making itself known to me.

Not a time to be negative

‘To plateau’ is a phrase that carries negative connotations. Understandably so. As the dictionary states, it suggests a lack of progression and a failure to keep moving forward.

We’ve all experienced a plateau at some point – whether in school, at work, or on that never-ending journey to get in shape. (And there were plenty of people making me feel guilty about that last one in Tokyo this summer…)

But last weekend, with a cup of tea in my hand (and a biscuit alongside it – when is there going to be an Olympic event for the most bourbons eaten in a minute?) I sat and wondered whether plateauing in investing might actually be a good thing?

And I’ve concluded that it most definitely is.

I only discovered the concept of financial independence [1] last September. And as I alluded to in my previous [2] Monevator post I’ve consumed as much information as I can since then.

I’ve changed my habits and curbed my spending. I’m now fully invested – financially and metaphorically – into this world.

So it’s not really a surprise I saw change and I saw it quickly.

But as my first year comes to a close, the rate of change has slowed.

Sometimes, it feels like it’s stopped altogether.

Automatic accumulation

It would be easy to panic, to wonder where I was going wrong, and to question if I should be making changes.

Thankfully I haven’t done that. Instead, I boiled the kettle again (obviously!) and reflected.

Given how much I’ve learnt and changed in the last 11 months, it was inevitable that the momentum would slow down at some point.

Now I think it’s a compliment to myself that things are happening at a slower pace.

My accounts are set-up, my transactions are automated [3], and my index funds have been chosen. As I understand it, that’s me done for the next 10-20 years.

Time to become a plateauing perfectionist. (It’s not the sexiest of superhero names, I grant you.)

A plateauing stock market?

It’s not just me that faces a plateau. There’s the stock market, too.

Now I can feel you all screaming at your screens: “The stock market doesn’t plateau! It’s exactly the opposite! It’s volatile!”

And you’d be right.

But I’m not talking hour to hour, or even day to day. I’m thinking about longer periods.

Because when you start to look at returns over months or even years, then there’s plenty of plateauing in the stock market, especially in index funds.

To save you from scrolling, here’s that dictionary definition again:

‘A time of little or no change after a period of growth or progress.’

Well here are examples of plateauing in action in three popular index funds over a 12-month (or longer) period.

S&P 500
30th June 2000: 1454.60
29th June 2007: 1503.35

In these seven years, the S&P 500 only increased by 48.75. That was definitely a time of little or no change!

FTSE Global All Cap
June 2018: 10,000.00
May 2019: 9945.25

In the space of a year in the FTSE Global All Cap, there was a small decrease of 54.75. Pfft.

Vanguard LifeStrategy 100
May 2015: 14,537.97
May 2016: 14,298.10

In these 12 months in the LS 100 fund, there was a small change of 239.87.

Think too about the UK’s index of 100 largest companies – the FTSE 100 – which famously went nowhere [4] for most of the past two decades.

Investors in the FTSE 100 got dividends, so the return they received was far better than nowt. And there were certainly ups and downs along the way.

But all told, anyone looking for excitement from the UK’s benchmark index would been better off heading to Wickes for a pot of paint to watch dry.

Flatter to deceive

Obviously, I cherry picked those numbers to support my argument. And I wouldn’t blame you for finding numbers that go against it.

Also, it’s true that when you expand the view out from a year to two years, or five, or ten, then plateauing is less seldom seen – in your portfolio or in the markets.

So given enough time your index funds *should* rise, barring an ill-timed crash or a global pandemic.

And at that point you’ll thank yourself for being a plateauing perfectionist.

Your portfolio should be up, too – from the rise in the markets, and from your slow, steady, and consistent investing habits.

Compound interest [5] is on your side, after all. But compounding does not happen overnight.

Outside of the Olympics, slow and steady wins the race

We’re so often encouraged to go at 100 miles an hour, to chase that next milestone, and to beat our competitors.

But I’m enjoying taking things at an apparently boring pace.

I won’t be chosen for Team GB any time soon. But I have got my eye on winning gold in the art of plateauing, at least when it comes to my finances.

Let’s be proud to be boring in the world of investing. Be proud to slow down. And be proud to plateau.

I’m sure we’ll all thank ourselves in the years to come.

See more posts from Budgets and Beverages [6] in his personal archive.