Keep It Simple To Succeed
Advising people on their finances for over 35 years, I have seen individuals try the craziest investment schemes to build wealth quickly. Success in wealth building is a slow, methodical process. “Rome wasn’t built in a day, neither was Syracuse, New York”.
My philosophy has always been, is now, and always will be…Discipline or regret. That is true in wealth building, keeping healthy, a spiritual outlook, raising a family, in fact, with everything in life. I watch how young people, just starting off in their work career, do not have the discipline to save and invest. Consequently, in their late 50s they get into exotic, wild, get rich schemes and betting the lottery trying to make a “big kill”. In all cases these hair brained ideas turn out to be losers and the people are penniless as they approach retirement. Side bar: In a similar way I watch on TV as they advertise… “Lose 30 pounds in 2 weeks”. That action requires some drastic lifestyle changes. Sure, you may lose the weight, but, once you are down “30” pounds you return to your old lifestyle and put it back on. If you follow a slow, disciplined change in your eating and exercise habits to a correct lifestyle you will slowly lose and keep the weight off. Funny, it took you 3, 5, or 7 years to slowly put on the weight, so, why not take the same time to take it off. “Paul what are you crazy” you ask. I’m an American and it’s my “right” to demand:
- A headache to go away in 5 minutes by popping a few pills
- My hunger to go away in 10 seconds by eating fast food
- I lose the equivalent of 2 large dogs in 2 weeks
[I could go on and on…]
Like losing weight, if you follow a slow, disciplined approach in investing, you will win.
Let’s look at a few strategies to build your wealth. After many years in the financial advisory profession, I have found a few simple steps to reach the “top level”.
- (Obvious but ignored) You must spend less than you earn. (I can hear your heart rate go up and you are going to shut down this blog article. Right?) I have seen people who earn $40,000 a year save $5,000 of that for the future. I’ve seen others that earn $200,000 a year and spend $220,000. Why? The more people earn…the more they spend. I have seen individuals worth over $50 million spend more than they earn and systematically destroy their fortune. Thus, Rule #1- spend less than you earn.
- Our second step is to commit to and follow a sound, long term investment strategy (I know for most Americans long term is the time it takes to switch TV channels on their remote control).
Too many people invest a little here and a little there. They bail out of the stock market, after it tanks, and get in after is peaks. Or, they buy real estate after it has a great run up. Worse, they invest in all the “get rich” schemes on late night TV.
The “follow the newsletter trend” is a recent doozie. Many investors place their money into those investments that were last year’s winner. [Evidence shows, over the long term, that the “hot” investment last year is this year’s “cold” one, and, vice versa.] This seems on the surface like a great idea, as you follow the advice of a proven winner…wrong! Plus, following a winner makes you feel good- wrong again. This is not about feeling…it is about making money.
The problem is most “feel good” decisions, in the investment world, do not work out. According to the “Hulbert Financial Digest” if you had taken $1 million, in 1985 and, followed the brilliant newsletter investment strategy for the next 21 years, you would have a grand total of (drum roll, please) $365 today. This is an average loss of 31.4 % per year.
In conclusion, that which may be emotionally and intellectually appealing, like the newsletter strategy, simply does not work.
What are the keys to a sound strategy to build wealth? Well, a successful investment strategy must:
- Work over different time frames
- Provide effective diversification
- Work in both up and down markets
- Be disciplined yet flexible
- Reduce risk and provide down side protection
- Have a good long term track record
The rest is to have patience, self control, patience, and more patience (Ah, patients, said the doctor to the nurse. Ooh, bad pun!)
So, spend less than you earn, commit and follow a strategy, be disciplined and have patience.
Ah, discipline or regret?
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Interesting Tidbit
MORE THAN HALF
Although only 1 in every 38 tax payers (3%) reports an adjusted gross income of $200,000 or more, that group pays for 51% of all federal income taxes.
So, 3% pays 50% of taxes. Is that a fair tax?
(Source: IRS)