It seems that there is a short list for everything these days. Top 10 things to never say on a first date. The 5 best foods for your toddler. Top 20 places to travel to in your lifetime. And my personal favorite – any list that has the top 10 fails!
I would like to offer yet another list. But unlike providing just the entertainment value of my favorite “Fails” list, this list will serve you in a much more life-altering way. If followed, I am confident it will change your financial future.
This list did not come out of the pages of academia but rather from my last 2 decades working in Financial Services. I have spent 20+ years sitting kneecap to kneecap with real human beings helping them shape and plan for their financial futures. I have seen the whites of my clients’ eyes amidst the dotcom bubble burst in the late 1990s and again, with many of those same clients, in the financial crisis of 2008-2009.
It often seems that the financial industry in general wants to make investing and building wealth seem more complicated than it needs to be, so I hope to simplify what you really need to know. There are many things with investing that are out of our control – the economy and the stock market to be specific.
The great thing about this list is that all 4 things are areas of your life that YOU CAN CONTROL.
I hope that by boiling the millions and millions of google search results down to just these 4 key points that maybe, just maybe, a number of people reading this article will see their lives changed for the better.
So … drumroll please for the 4 Easy Keys to Building Wealth …
#1: Spend Less Than You Make (i.e. Save Money)
This is the one I am most passionate about. I have seen first-hand countless numbers of my clients retire with more than $1 million in their portfolios – and they never made even close to six figures in their careers. They didn’t inherit it. They didn’t sell a business for millions of dollars.
The one constant was that whatever they made, they spent less than that. Simply, if their monthly take-home pay was $4,000, they only spent $3,000. They most certainly didn’t maintain balances on a credit card. And when they had to borrow money (for a home or car), they worked to pay it off as soon as possible.
I put the “spend less” attribute #1 on the list because it is the most difficult for many people.
The next 3 are much easier to follow, but the act of spending less than you make is probably the single trait that will have the most impact on your financial life – both now and in the future. Very few people have the discipline to spend less than they make. It is main reason why few people in this country are financially secure.
#2: Get Your Allocation in the Ballpark of Being Right (Stocks vs. Bonds)
Too many investors spend an inordinate amount of time stressing over the selection of individual mutual funds while simultaneously neglecting what may be the single most important decision in investment selection an investor can make in their lifetime – the balance of stock funds vs. bond funds.
History has shown us that given a lengthy time horizon, stock funds have outperformed bond funds by a fairly significant margin. So one of the simplest ways to have an effect on your lifetime return really comes down to how much of your investments were allocated to stocks vs. bonds … and for how long. This is especially true in your long-term retirement savings.
In almost all aspects of our life we pay attention to the price of goods and services we purchase. Occasionally, paying a premium for a product will reward you with superior performance and quality (think Cadillac vs. Yugo).
But can you think of an example where paying more actually gave you less quality? Sadly and surprisingly, investments are one of the few things in life where paying extra has shown to deliver less value.
Unfortunately, very few investors understand or know the actual fees they are paying for their portfolio.
Take 401ks for example: A recent NerdWallet study has shown that more than 90% of Americans do not know what they are paying in hidden fees inside of their accounts.1
In general, traditional actively managed funds (or what I fondly like to call “actively guessed” funds) carry higher internal hidden fund expenses than their counterpart index funds. It is not uncommon for actively managed/guessed funds to cost the investor 10 times what a comparable index fund would charge. Here is the irony: Even though you might be paying 10 times more, it’s not unheard of to see actively managed/guessed funds UNDERPERFORM index funds!
Paying more for something of less value – not a good practice when it comes to your retirement savings.
#4: Control Your Behavior (ex. Don’t Sell AFTER the Market Drops)
This is the by far the hardest to convey, but without a doubt it is responsible for robbing investors of more wealth than any other singular force of nature.
It is widely known that most investors sell at terrible times (after the market declines) and many of those same investors are busy buying after the market has shot higher.
Warren Buffet, probably the single best investment guru of all-time, said it best when he said, “be fearful when others are greedy and greedy when others are fearful.”
For some reason, most humans had their wires crisscrossed at birth. We all know the value of searching for undervalued goods and services when we are in “consumer mode.” You don’t walk onto a car lot and tell the salesperson to show you the most expensive, overpriced car on the lot. Conversely, if you are a connoisseur of Fruity Pebbles cereal, you are likely to stock up on a few extra boxes if you see that the store is running a special 50% promotion on that breakfast delicacy (See: What Investing and Ice Cream Have in Common). But when most people are in “investing mode” they act in just the opposite manner.
For example, I vividly remember the dotcom bubble of the late 1990s. I had smart rational clients calling me and asking if they should be buying Yahoo stock. Back then, split adjusted Yahoo stock was trading above $400 per share. Then, just a year or two after the dotcom bubble burst, I recall that Yahoo had sunk all the way down to something around $20 per share and guess what – NO ONE called me to ask about buying it.
When it comes to your retirement savings, it kills me when I see or hear about young people bailing out of their investments inside of their retirement accounts or stopping their 401k contributions in the midst of a market decline. Those are the times when the market has effectively gone “on sale” and people should be using that as an opportunity to accumulate more of their investments at discounted prices.
The Skinny of the 4 Easy Keys to Building Wealth
Please don’t make investing and building wealth harder than it needs to be.
I am sure there are many Top Investing Tips lists out there, but I am supremely confident that following my 4 Easy Keys will put you on the path to building wealth in a way that most people will never come close to realizing.
The skinny is this: Don’t worry about what the pundits are saying, or what your neighbor Gary or Sheila over in the marketing department are doing. They’re probably focusing on the things you actually can’t control, like what the market is doing day to day. Instead, focus on the 4 simple things that ARE IN YOUR CONTROL.
You’ll soon realize that you already have all the tools you need to be successful.
The information is provided for discussion purposes only and should not be considered as investment advice. Diversification doesn’t guarantee a profit and can still result in losses in declining markets. Please consult an investment advisor before you invest.
1 Over 90% of Americans make this 401(k) mistake CNN Money. January 3, 2017, from http://money.cnn.com/2017/01/03/retirement/retirement-mistake/index.html