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10 ESSENTIAL WEALTH CREATION PRINCIPLES

Essential Wealth Creation Principles

There are many strategies, philosophies and ideas on investing. These are the essential fundamental principles of wealth creation. Every investment strategy has a unique hook which appeals to the investor. Some strategies have more merit than others. Then there are the ones that are unrealistic for the average investor.

 You can try as hard as you like you’ll never come close to the great man’s returns. Well not unless you own several insurance companies. He uses the premium income from his insurance companies to give interest free loans to his portfolio.  This boosts his returns and gives him a massage advantage over any of us. Everyone can learn from him even if we can’t invest like him. In fact these wealth creation principles are completely inline with his philosophies.

 We also question whether day trading any asset is practical for the average investor. We know many people who have been on currency, options, futures and share day trading courses. No one was trading 12 months after they had been on the respective courses, suggesting it wasn’t working.

 Anyway, enough of that, we’re not here do an assassination job on get rich quick schemes, that’s fuel for another post. What we do want to do is to look at fundamental principles for creating wealth.

 So, let’s start to look at the 10 essential wealth creation principles for everyone:

 Dump The Debt!

Generally debt isn’t good when it comes to wealth creation as a whole. It will cause wealth depletion if you’re not careful and makes investment pointless. So using your capital to clear as much debt as possible will yield benefits later.

 Though at this point we need to say that not all debt is equal. It would be crazy to say to someone that they shouldn’t be investing because they have a mortgage.

 Property investors very rarely factor in the cost of debt when working out their returns. There’s also a common adage that as long as you make more than it costs to borrow debt is fine. Unfortunately this is easier said than done. Investment growth isn’t uniform, in fact it is completely lumpy and comes in fits and starts. Interest on debt is very uniform and keeps coming regardless of market conditions. Also interest on debt never turns negative. Yet investment returns on any asset will at some point move into the red.

 You can try as hard as you like you’ll never come close to the great man’s returns. Well not unless you own several insurance companies. He uses the premium income from his insurance companies to give interest free loans to his portfolio.  This boosts his returns and gives him a massage advantage over any of us.

Everyone can learn from him even if we can’t invest like him. In fact these wealth creation principles are completely inline with his philosophies.

 Though it is sensible to say to advise someone to clear their credit card debt before they start to save. Interest rates vary as do rates of return, though our rule of thumb is this. If you’re paying upwards of 7% APR on a loan use spare capital to pay it off. Once you’ve done this start and invest.

 Property investors very rarely factor in the cost of debt when working out their returns. There’s also a common adage that as long as you make more than it costs to borrow debt is fine. Unfortunately this is easier said than done. Investment growth isn’t uniform, in fact it is completely lumpy and comes in fits and starts. Interest on debt is very uniform and keeps coming regardless of market conditions. Also interest on debt never turns negative. Yet investment returns on any asset will at some point move into the red.

 Though at this point we need to say that not all debt is equal. It would be crazy to say to someone that they shouldn’t be investing because they have a mortgage. Though it is sensible to say to advise someone to clear their credit card debt before they start to save. Interest rates vary as do rates of return, though our rule of thumb is this. If you’re paying upwards of 7% APR on a loan use spare capital to pay it off. Once you’ve done this start and invest.

 Put Something Away

So, here is the first of our investment wealth creation principles. This may sound obvious, you need to put money away. You need to invest on a regular basis, in a way that suites you best and keep doing it.

 You need to spend less than you make, as we said you can’t build wealth if you are servicing debt. Some people will disagree with this especially when it comes to property. We want to say let’s see how much wealth you’re creating when you’re stuck with negative equity.

 It is pretty surprising the number of people who want to build wealth yet never put anything away.  This leads us on to our next principle.

 The Sooner You Start The Better

If you start early in your 20’s as soon as you start work saving 12.5% of your pre-tax income will see you well on your way. If you start in your 30’s then you’re going to need to put away between 15-17.5% of your pre-tax income. Starting in your 40’s and you’ll be looking at +25% to get anywhere near where you would like to be.

I’ve met many a 55 year old who hopes to retire at 65. Yet they have no pension and very little savings, how it’s going to happen is a mystery. If they’ve paid off their mortgage so they’ll have somewhere to live which is a positive. Now it’s time to get serious, panic has set in and reality bitten we need to do some hardcore saving. This is what we make today and we’re going to need this when we retire. What do we need to do? They find out that with the time they have and the income they want, they have to save a lot right now. When we say a lot, we mean 60-70% what they earn, sometimes even more.

The general reaction is panic and they end up doing nothing. It’s called the ostrich approach to financial planning. The outcome is that they own a house (which they’ll have to sell) and have no money to live on.

 Doing nothing makes it worse. Instead of ignoring the situation address it and make changes. For example revise your income goals and delay your retirement age. Both options would improve the situation better.

 The sooner you start to save the more wealth you will accumulate. Time can be your friend or it can be a cruel enemy when it comes to wealth creation. As you can see above starting earlier makes a big difference and has less of an impact on your lifestyle.

Invest According To Your Time Frame

What do we mean by this? You should invest in something that for the period of time that is available before you need to use the money.

If you’re saving for a deposit on a house that you plan to buy in the next 24 months, you shouldn’t invest into capital assets. So, no shares, share based funds, hedge funds, REITS, property funds, bonds, bond funds and all forms of cryptocurrency. What you should be investing in are cash based assets. Find the best deposit account that meets your timeframe and use that.

 I hear you say, surely, I could have a little punt on cryptocurrency or some hot tech stock and get a bigger deposit. If you’re lucky yes, or you could . Or you could be explaining to your wife/husband/partner why you can’t buy the house of their dreams. All because your deposit is now worth half of what it should be.

The rule here is if you don’t have the time to wait for an asset to recover before you need to take money from it. Then don’t invest in it.

 If you do have time to wait. For example,  you have a 10+ year time horizon then you should go for it take some risk. Sticking your money into a bank account isn’t going to do little towards your retirement.

 You won’t build wealth with assets that pay interest only. All it does is keep your money safe for now or so you think. In reality when you come to need it will buy you a lot less as inflation will have devalued it.

Accept The Market For What It Is

 

This is the natural progression from our last wealth creation principle. Only if you’ve invested inline with your timeframe will this make any sense. You’ll have the time to allow markets to recover.

 All markets go up and down in the short term and some of these shifts look dramatic at the time. Over the longer term these movements flatten as markets recover and move on. This means that the shorter time you have in the markets the less chance you have of making money. Conversely the more time you have in the market the more chance you have of making money.

 If you accept that markets go up and down, don’t panic and stick to your strategy. You’ll be fine.

 A Word On Market Timing

 If you have the ability to predict the future, what, where and when then the world is your oyster my friend. Give us a call because we want to be along for the ride!

 If you’re looking to time the markets properly you should also be shorting them. For those unfamiliar with this term it is a way of making money when markets fall. The longer you have to do it the more expensive it gets. Making the call too early can lead to financial ruin.

Just pulling your money out of the market means that it isn’t doing anything. When exactly should you go back into the markets? By the time most investors want to invest again they’ve already missed a big chunk of the upside.

 So if you accept that markets move in both directions and you have the time to ride out the falls you’ll do well. Panic when the market is going against you and start selling down your portfolio you’ll lose money. That is something that we can guarantee. Remember growth isn’t uniform, usually it comes in chunks.

Invest Regularly Or When You Don't Want To

 One of the best ways to build wealth over the long term is to make some kind of regular investment. The reason being you invest across the whole market cycle and buy at the lows. Also, as with any kind of regular payment such as a mortgage or loan you adjust your life style around It. You end up so you don’t notice the money going out anymore.

Also you’re not committing big lumps of capital to the market at any one time, so you should be less anxious. With regular investments, market volatility is your friend in the long-run.

If you don’t want to make regular investments and prefer ad hoc contributions then the second part is for you.

So, you have a warm fuzzy feeling about the markets, everything is going well. New market highs every week and you want to invest. DON’T! Or, markets are awful. The thought of investing repulses you. You’d sooner see Donald Trump sitting on the toilet wolfing down a cheeseburger. Well you should jump in.

Our natural instinct is to invest when things are going well and to avoid markets when they’re not. What this means is we are self-saboteurs, a modus operandi of buy high and sell low.

 By the way whatever your reason for not making regular investments, it’s not a good one. Get over yourself and start making them you won’t regret it.

Rebalance

Out of all the wealth creation tips we see this is the most important and yet it is the most overlooked.

If you’re using a managed fund or discretionary manger then they should be doing this for you. If you’re not then make sure your portfolio gets reblanced. If your financial adviser runs your portfolio insist they rebalance every 12 months.

If you’re managing your own portfolio this is an important part of doing a proper job. Once a year is enough anymore than this is overkill any less could prove costly.

 What is rebalancing and why is it so important?

When your portfolio is set up there should be an allocation model that it meets. This model will defines how your money is split between each of the assets in it. Over a year these assets will grow at different rates. Some assets will have made and others will have lost money to varying degrees.

 This will mean that the portfolio doesn’t conform to the asset allocation model. It also means that the risk profile of the portfolio has changed making it muck more or less riskier than you want.

When we rebalance, we bring the portfolio and the risk profile back in line with the original model. We do this by selling assets that had strong performance and buying those that have lost money

Crazy Talk

“Are you ******* mad, we should be selling those dogs and buying more of the good stuff” I hear you say and if you were you’d be wrong. This is exactly why most people had nothing left after the tech boom of the late 90’s. It’s also why most investors will lose their gains in the crypto currency boom.

First of all, all the assets in your portfolio shouldn’t grow at the same time. If they do it will normally mean that they all go down at the same time as well.

As long  you’re good with that then (you have our total respect) you’ll be fine. Though you should still rebalance.

Most people aren’t which good with that though. This means they need to have some diversity in their portfolios. Different asset classes doing different things. This helps to reduce the overall risk and volatility of a portfolio.

The likelihood is that the assets that performed well this year may not be as strong next year. The assets that were weak this year will probably be stronger over the coming 12-24 months. Rebalancing helps us lock in the gains from those winners and make sure that we buy the losers at a reduced price. This also means that the losers don’t have to recover completely before we make money and if they do we make more money. Rebalancing will also mean that you take your portfolio back to the original risk profile that you were comfortable with.t

Have Multidimensional Investments

 What we mean by this is that you shouldn’t just have assets that only make money when the price goes up. Commodities, art, wine you get the picture (pardon the pun). If these assets fall in value you can only wait for them to recover or sell at a loss.

The stupidest investment that anyone can make is to buy a property and then leave it empty. You have to have more money than sense, it doesn’t matter how wealthy you are. You can do something way better. One of the most attractive parts of property investment is the rental income. This is because as it supercharges returns and offsets any lending costs.

This holds true for any investment dividends on shares and the coupon on bonds. They are essential as they boost your annualised returns.

 As we already mentioned any market has good and bad spells, even property. When we get an income from our investments it makes those bad spells better. Even though valuations may have fallen it makes the situation more palatable. It also means that the investment is making you money even when it isn’t growing. If you reinvest the income it averages out your position and makes the most of any market falls. In the long run your investment will be much more efficient.

It’s OK to have some commodities or other similar assets (never empty property). It will diversify your portfolio and in turn make the portfolio more resilient. This is because you have more unrelated assets doing different things. Too much though isn’t good as you start to forego that lovely income.

Minimise Investment Costs The Best You Can

Investments cost money and no one does anything for free. Nor should you expect them to even those nice people at Vanguard have charges. If you want your portfolio managing for you then you will pay more. If you are happy to manage it for yourself then you are going to pay less though you’ll have more work. Though this isn’t for everyone. Whatever you decide it’s important to keep investment costs as low as possible.

 Get good value, because if costs are too high then your portfolio won’t grow.

 Any investment strategy has layers of costs though some more than others. If you go direct to the fund manager then your cost structure will be simpler, which is great. The downside though is the manager may not have a full range funds. They certainly won’t be strong in every market sector. As a result, you may lose more in growth than you’re saving in fees.

We’re not going to get embroiled in investment strategy today, it isn’t what this article is about. What we will say is whatever your preferences, an investment platform makes sense.

Not all platforms are equal so it is important to make sure that you get the right one for you. Firstly you should be able to buy the assets that you want through it cost effectively. If you are a passive investor then it wouldn’t do to use a platform that has strict minimum trading criteria. If you don’t want to manage your own portfolio then avoid platforms that don’t use managed funds or third party managers.

Expats Be Warned

A note of caution to expats past, present and future. The complete opposite of keeping costs down is an offshore life assurance product. Today things have moved on and there are much better options.

Become A Gardener Or Hire One You Like

Investing is a lot like gardening. You need to have a plan if you don’t then you could get into an awful mess. First you need to do the research, what goes where and works well in which conditions. Then you have to see what you do and don’t like. What are you going to be using it for? Determining this this has a significant impact on what you’ll do. Making sure that you have the right plants in the first place will save you time and money later.

 Once you’ve got your plan together then you need to start planting. It may not look great at first because things need time to settle, bed in before they start to grow. This point you need to be patient, leave things alone and give them the time they need. Keep digging things up because they’re not growing fast enough and they never will.

Sometimes the weather will take its toll, there’s no need to dig everything up and start again. Tidy up add some more plants to the areas that got damaged the most and carry on. Otherwise just keep things tidy and do the maintenance that’s needed when its needed.

Gardening may not be your thing and yet you’ve got a garden. You may or may not know what you want from it. If you don’t want to do all this yourself then find someone to do it for you and pay them. Make sure that you can work with them and get going.

Apply these wealth creation principles to your investment strategy and you’ll do well. Financial freedom will be close at hand.

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