How a Military Career Can Increase Expected Investment Returns

Jake - Author/Founder

Jake - Author/Founder

I'm Jake. I believe you can build a wealthy life through frugal living and index investing.

Joining the military at age 16 was the most beneficial event for my long-run investing returns. It has increased my ability and willingness to take on investment risk. By taking on more risk, I expect higher long run returns. 

In this post, I will cover the unique factors that can increase a military member’s ability and willingness to take risk. This post applies anyone employed in a job with income stability and a defined benefits pension. 

Table of Contents

Basics of Risk and Returns

Before going into this topic, you need to understand the baseline or investment risk and risk tolerance. You can learn more in this post on Investment Risk and Risk Tolerance: An Introduction.

Let’s start with a quick summary of concepts and definitions. 

Risk is defined as volatility in this post – the intensity of the ups and downs of the price of an investment

  • Volatility. Investments with more ups and downs (volatility) come with higher expected returns. 
  • Your ability to take risks is based on circumstances such as your age, earning power, time horizon, income stability, and mortgage debt. 
  • Your willingness to take risks. This is based on your emotional tolerance in the face of temporary loss.
  • Asset Allocation: How your portfolio is mixed between stocks and bonds. 

Most under 40 have a high ability to take risk Their willingness to take risk is the LIMFAC (limiting factor). Most of us, including myself, overestimate our willingness to take risk due to the overconfidence bias. This can result in many poor investment decisions such as panic selling. 

So, how does your risk tolerance translate into returns? You can alter the intensity of the ups/downs of your portfolio by changing the mix between stocks and bonds.

For example, a portfolio that is 60% stocks and 40% bonds will have more smoothness than a 100% stock portfolio. You can read more in this post on 

Want to make good money decisions, but never learned how? 

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How Military Service Affects Your Ability to Take Risk

Pension

A military pension will provide steady, inflation-adjusted cash flow during retirement. That’s pretty great. Due to this secure source of expected income, you have the ability to absorb greater investment loss without ruining your retirement. 

I treat future investment income as a nice to have, in addition to the military pension. 

Automated pension contributions are a form of forced savings. For example, Canadian Armed Forces members contribute ~10% of their pre-tax income to the pension plan. It is automatically removed from your paycheck. If you are a CAF member, check out this post on How to Read Your CAF Pay Statement. 

In addition, the military pension can be treated as a “bond-like” asset. So, a 100% stock portfolio is really like a 70% bond, 30% equity portfolio once the pension is accounted for. I also count the pension towards my net worth using the transfer value. 

Income Security

Your military income is stable and secure, improving your ability to take risk. You can predict next year’s income based on the CAF pay scales. Further, the probability of layoffs is near zero, and your salary is likely to combat inflation. 

These factors increase income certainty which allows you to plan better. It reduces the likelihood that you will be forced to sell your investments due to changes in income. It allows you to better ride out market turmoil that occurs during recessions when many are left unemployed.  

Low Expenses

A high savings rate – low expenses relative to your income – provides a buffer to absorb financial blows. The cushion helps you to stay invested during downturns. Even better, you can invest more aggressively during downturns when expected returns are highest.

I find the military set me up to keep expenses low. Examples include free gym access, dental benefits, free pharmaceuticals, nil need to purchase work outfits, and free lodging and rations on Temporary Duty. Military housing can also be great if you are lucky enough to secure it. Here are 5 Ways a Military Career Helps me Keep Expenses Low. 

But not everyone can keep expenses low. Your own expense management abilities are the most important.

How Military Service Can Increase Willingness to Take Risk

I wasn’t a disciplined kid. I may have gone down a bad path had I not joined the military at a young age. Service has shaped my character in a way that I believe increases my willingness to take on risk.  

A military career can increase your willingness to take on investment risk due to:

  1. Self-discipline;
  2. An ability to remain calm;
  3. Suppression of ego (humility); and
  4. An understanding of self (conscientiousness). 
Lets go into how each of these factors can influence our willingness to take risk. 

The Military Trains Self-Discipline

We all associate discipline with the military. But we rarely ask why? 

Discipline is needed to control the military’s monopoly on lethal force. It’s needed to safely maintain aircraft and to ensure safety during dangerous training or operations. 

Discipline is the regulation of natural short-term human tendencies that conflict with long-term goals. The need for regulation is higher in the military because consequences to human life are greater in the military. 

Therefore, the military imposes higher standards of discipline, to limit the likelihood of error.

Self-Discipline and Your Willingness to Take Risk

The technical aspects of investing are simple. Evidence tells us to consistently invest in low-cost diversified stock and bond index funds that align with our asset allocation. The reality is that investing is simple, but hard – just like fitness. 

The key to investing success is to control your human biases so that you can stick with the plan. Only by staying invested can you reap the rewards of compounded returns. 

This means avoiding “get rich quick” urges, and combating the feelings of panic and fear during downturns. That requires self-discipline and the development of good habits and systems. 

Self-Discipline is More Important Than Ever

Barriers to trading have recently declined through zero commission trading. This is great, however, zero-commission trading amplifies our natural urges towards short-term gratification. 

In addition, gamification of investing with apps like Robinhood further increases the role of human bias. For example, this study shows that Robinhood facilitates intense herding episodes, and investor behavior on the platform hurts returns. 

Infographic: Human Bias and Commission Free Trading

Good Investing is Boring

Good investing is boring. It’s characterized by slow and consistent compounding returns. Given time, compounding will make you wealthy. You need to be patient and stick with the plan for a long time – decades. 

Because good investing is boring, it should not be a source of excitement in your life.  Excitement should come from elsewhere. A military career can provide this excitement, depending on the trade. For me, I  find excitement through work and mountain biking.

Remaining Calm: An Asset

Military service teaches you to remain calm under stress. This is an asset to long-term investors because the market can be an emotional roller-coaster. And these demands on your emotional strength only increase as your portfolio grows in value. 

For example, a big portfolio can fluctuate daily by an amount that exceeds your annual salary. This triggers loss aversion and other emotional biases that hurt returns.

Infographic: Volatility is the Price You Pay for Higher Returns

For example, over 90% of my portfolio is in equities (stocks). So, I’m down to ride out a 50% loss in portfolio value over 2-5 years, or a decade of zero real returns. If either scenario happens, I will continue to buy index funds and will stick with my plan. It’s useful to run through an exercise like this to determine your willingness to take on risk. 

Leadership and Investing: Similarities

Good investors and good leaders have one thing in common – humility. They are both capable of suppressing their overconfident ego.  In addition, good investors and good leaders both understand their own character. 

We naturally want to take more credit than we deserve when things go well, and we naturally like to shift the blame on external factors when things go wrong. Good leaders must suppress ego. 

For example, good leaders push praise and credit for positive events to their team, even when they played a role in the success. And they absorb responsibility for the mistakes of their subordinates. Both examples require humility and ego suppression.

The Role of Ego When Investing

Say you have a friend making crazy gains on crypto or a penny stock, and you are invested in index funds. While watching your friend make gains, you will feel FOMO, a form of loss aversion. Your ego will pull you to buy the asset and deviate from your plan. You need to suppress this urge, and stick with your plan. 

When you have a lucky investment outcome – like TSLA increasing by 700% in one year – it can breed overconfidence. The difference between luck and skill becomes important here. If you attribute lucky outcomes to skill, you will become overconfident, and your ego will grow. 

Then, as your portfolio gets larger, you’ll be more likely to take on too much risk, which can cost your portfolio. I talk more about the difference between a good decision and a good outcome in this post: Decisions vs. Outcomes: The Dark Side of Lucky Investment Outcomes.

Know Yourself, and Your Human Biases

A tenant of leadership is that you understand your own strengths and weaknesses. You need to be humble and find others who augment your weaknesses.  So how does this relate to investing?

Your human biases reduce our willingness to take on risk. We are more susceptible to actions that leach returns such as panic selling, return chasing, herding and over-trading

Once you have confirmed your ability to take on risk, your mission becomes controlling your human biases. This is the most important factor to your willingness to take on risk. Plus, these biases are strongest for young men – the primary demographic in the military. 

First, let’s dig into these common human biases: 

  • Loss Aversion – Losses hurt more than gains feel good. We chase high returns due to the Fear of Missing Out (FOMO). This urges us to chase returns, causing us to buy high and sell low.
  • Herding – Following the trending hype on social media, news, or Reddit. Similar to FOMO, herding causes us to buy high and sell low.
  • Overconfidence – We underestimate the role of uncertainty, and overestimate our skills and abilities. Overconfidence causes us to trade more frequently and limit diversification.

I write more about these three common emotional biases in this post, and here is another great article regarding emotional bias and investing.

It’s important to accept our weak areas and build systems to fortify these areas. Accepting these weak areas is hard. It requires an understanding of self, which requires ego suppression and self-discipline.

Conclusion

A military career has increased my ability and willingness to take on risk. The more risk you can bear, the greater your expected long-term returns.

Military members have a higher ability to take investment risk due to stable income and pension. Teachers, health care workers or public service workers fall in the same boat as they have income stability and a defined benefits pension. 

Your willingness to take risk depends on your ability to regulate human biases in the face of volatility. I believe military service can shape self-discipline and calmness, thereby increasing your willingness to take risk.

Finally, leadership training and experience can improve self-understanding and ego regulation. This, in turn, improves understanding and control of our human biases, further increasing willingness to take risk.

A military career is not the only thing affecting your ability and willingness to take on investment risk. It is only one factor.

A variety of factors are unique to you. These include the way you value money (based on childhood), whether you have kids, your understanding of the sources of investment returns, and unique upcoming expenses that constrain your time horizon.