I spent nearly two decades leading engineering and analytics teams before becoming a financial advisor. This shaped how I think about financial planning and investing in significant ways. One of those is the power of Systematic Optimization. Seemingly small improvements to individual components can have substantial impacts on an overall system when performed continuously over time.
This led me to developing our Systematic Optimization philosophy and approach to working with clients. This is a structured method of consistently identifying and applying individual optimizations and improvements so that the result of these enhancements over time is far greater than the sum of the individual parts.
Depending on the size of a client’s portfolio, each of our optimizations could save anywhere from a hundred dollars a year to thousands of dollars a quarter. But it’s not the size of any individual optimization that matters, it’s the combination of:
- The compounding impact of these optimizations over time
- The sheer volume of optimizations we methodically make with clients as we work with them which we estimate could easily number into the hundreds of individual adjustments
The Compounding Impact of Small Changes
Finding an opportunity to save an extra $100 today through a financial optimization is a nice, small win. It’s about the cost of a mid-week meal out with the family at the local pizza shop. But the real power comes when you take into consideration:
- Repeating Effects: If that $100 optimization is a yearly, recurring benefit then it’s not just the $100 you saved today but a benefit you’ll realize every year going forward. Tallied up over 40 years, that simple optimization today will save you at least $4,000.
- Compounding Effects: If you reinvest that yearly $100 at an 8.0% return, then the cumulative sum of that recurring $100 every year compounding over 40 years is $27,978.
Table 1: Value of $100 Compounded at 8.0% For X Years
| Years | Value | Years | Value | |
| 1 | $108 | 21 | $503 | |
| 2 | $117 | 22 | $544 | |
| 3 | $126 | 23 | $587 | |
| 4 | $136 | 24 | $634 | |
| 5 | $147 | 25 | $685 | |
| 6 | $159 | 26 | $740 | |
| 7 | $171 | 27 | $799 | |
| 8 | $185 | 28 | $863 | |
| 9 | $200 | 29 | $932 | |
| 10 | $216 | 30 | $1,006 | |
| 11 | $233 | 31 | $1,087 | |
| 12 | $252 | 32 | $1,174 | |
| 13 | $272 | 33 | $1,268 | |
| 14 | $294 | 34 | $1,369 | |
| 15 | $317 | 35 | $1,479 | |
| 16 | $343 | 36 | $1,597 | |
| 17 | $370 | 37 | $1,725 | |
| 18 | $400 | 38 | $1,863 | |
| 19 | $432 | 39 | $2,012 | |
| 20 | $466 | 40 | $2,172 |
The recurring and compounding effect of saving just $100 a year is why we care about making Systematic Optimizations to our clients’ financial lives. Of course, $100 a year is a fairly small improvement, imagine the impact that an optimization resulting in thousands of dollars a quarter could have for a HNW household.
Breadth, Not Depth of Complexity
Many of these Systematic Optimizations, such as moving to a lower fee 529 plan or using tax-efficient asset location strategies, are fairly straight-forward for a motivated DIY investor to implement themselves.
These aren’t part of some black-box codex to which only we the keys. In fact, we write openly and frequently about these optimizations to help educate the broader investor universe and show clients how we approach them.
The value we deliver to clients is often the sheer volume (the hundreds of optimizations that we do over time) and methodical implementation (making sure they are done correctly) of these improvements.
Email us if you’d like to discuss anything in more detail or learn more about applying Systematic Optimization to your own financial affairs.
email: [email protected]
Disclosures:
This content is for educational purposes only and is not an investment recommendation. Speak with a licensed financial advisor before making any changes to your investments. Past performance is no guarantee of future returns. Investing involves risk including the loss of capital.
Kangpan & Co. 