Each of us is unique but there are fundamental principles that can be woven into your financial future. These principles are building blocks for wealth over the long term, and are valuable to keep them in mind, always.
1. Avoid Get-Rich-Quick Schemes
I’ve been around the block many times. If any investment seems too good to be true, it probably is. After reading this you may think “I know that. Why lead off with something this simple?” I’ve seen many smart folks, including yours truly, fall for the promise of high returns only to be disappointed.
The best con artist’s pitch is steeped in sincerity. A flashy presentation and flattery easily cloud one’s judgment.
If you ever come across something you believe might lead to quick riches, run it by a family member, friend or even better, a financial professional like your CPA or financial advisor.
If you have even a hint of doubt, walk away.
2. Avoid Timing the Market
It sounds so simple. Buy low and sell high.
You have probably heard the expression: “Buy when there’s blood in the streets.” The saying is credited to Baron Rothschild, an 18th Century British nobleman and member of the Rothschild banking family. What sounds like a great idea but, in reality, is very hard to pull off.
In reality, most people feel more comfortable buying when markets are heading higher. Euphoria creates more euphoria, often leading to feelings of invincibility. Think back to the safety of being in a crowd when Homo Sapiens were still roaming the Savannah. What enabled man to survive eons ago is the not the best strategy for investing today. A “follow the crowd” mentality is a good way to get massacred in financial markets.
Avoid watching Jim Cramer and trying to pick a few winners and refrain from attempting to predict the future. Embracing diversification and discipline will remove the emotional component from your investment plan and is a more likely path to success.
Longer term, stocks have been an excellent vehicle to accumulate wealth but trying to time the market is a fool’s errand.
Crestmont Research produces a chart each year reviewing the annual 10-year total returns for the S&P 500 Index going back to 1909. These are rolling, 10-year periods; i.e., reviewing over one hundred 10-year time frames.
Since 1909, there have been only four 10-year time frames that generated negative returns. Those rolling negative returns occurred during and after the Great Depression more recently the Great Recession. It should come as no surprise given extreme valuations in the late 1920s and late 1990s and early 2000s.
Returns vary considerably from year to year, but major averages have delivered around a 10% return over many decades.
3. Start Now
Don’t try to climb Mt. Everest overnight. If you have a 401(k) at work begin withholding 2% of your paycheck now and increase it over time to 4%, 6%, and eventually get to 10%. As you bump up in small increments, you will not miss the current income but you will begin amassing wealth.
Compounding and time are your friends. Start early and never stop.
Mark Twain said, “Put all your eggs in one basket, and watch that basket closely.” Twain didn’t live in an age where the dissemination of information is almost instantaneous. In today’s world, both good and bad news travel quickly.
Your goal is to deploy the right mix of assets to control risk and make solid returns over the long haul. A good financial advisor can help and so can many on line advisory services.
Don’t stop at the U.S. border and embrace the benefits of global diversification. Over longer time frames, diversification can reduce risk and enhance returns.
A fixed income or bond component is critical for most of us. Investing your entire portfolio in a diversified stock portfolio will leave you exposed to sharp and painful market declines. Bonds and cash are not earning high returns at the moment. However, they are likely to can anchor your portfolio by adding income and a bit of stability.
When stocks decline, as they eventually will, bonds often experience less volatility and may even provide a helpful tool for rebalancing your portfolio. You may miss some upside but you’ll sleep better at night knowing that a sudden dip in the market is less likely to take a big bite out of your investments.
5. Have a goal
Ask yourself this simple question: why am I saving?
Having clear intentions and committing them to writing increase your odds of success.
Written goals help motivate you to contribute to your savings on a consistent basis. Over the last three decades, I’ve watched many clients articulate goals like a second home; travel or a fully funded retirement, only to wake up one day with the satisfaction of having arrived.
Dream big, never stop and one day you will have no regrets.
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