Top 3 Wealth Building Mistakes - Do You Make Any of Them?
by Lyle Wilkinson
Published on this site: May 20th, 2005 - See
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Do you procrastinate? Investing mistake1 is waiting too long to
begin. The wealth building formula needs time to work.
Do you invest too little? Investing mistake 2 is putting too little
money into your investments. Living beneath your means is not easy,
but it is essential to building wealth.
Do you accept too low a compound interest rate? Investing
mistake 3 is accepting too low a return on your investment.
Rate of return, compound interest rate, is a key determinant
for growing wealth. Compound interest is powerful in both
directions. Positive compound interest builds wealth. Negative
compound interest shrinks wealth. Bank savings accounts may
eliminate negative compounding, but are not a good place for
investing because of low returns.
These 3 mistakes link in the wealth formula:
Wealth = ($ invested)*(1+(compound interest rate))(time $ invested)
Wealth is a function of the amount of money invested, the interest
rate it grows at, and the amount of time it is left to grow.
Okay the wealth formula is really just the compound interest formula
with new labels. You know the compound interest formula and how
it works. You know what to do to increase your wealth. Save more,
defer consumption longer and get a better return on your investment.
It is one thing to know the wealth formula; it is another to live
it.
What are you going to do to increase the amount you are saving
and the time you are letting your investment work? Saving is synonymous
with amount of money going into investments, not amount going into
a bank savings account. Get rich slow gurus pitch tips like: “save
10% of your income” or “pay yourself first.” There
are books aimed at helping you save, about changing your lifestyle.
I recommend:
- How To Live Without A Salary is by Charles Long, he promotes
what he calls a Conserver Lifestyle
- The Tightwad Gazette is by Amy Dacyczyn, she promotes
thrift as a viable alternative lifestyle
Both books, give tips about saving money and pitch living frugally
as a superior, or at least acceptable, lifestyle. Amy Dacyczyn points
out there is a difference between being wealthy and looking wealthy.
In the short term, an affluent lifestyle can be financed by debt.
What are you about substance or image?
What are you doing to improve your rate of return? How are
you balancing return and risk? Generally to improve your rate
of return you will have to accept more risk. The textbooks
calculate risk as variability. A bank savings account has
low calculated risk because it grows but never shrinks below
the starting point. However, if inflation is 2% and your bank
is paying .5% your buying power is falling. The inflation
adjusted return is -1.5%. The probability that you will lose
buying power is 100%. Equity investments have variability,
calculated risk. Their prices go up and down. Given an S&P
500 return of 7%, standard deviation of 10%, and inflation
of 2% there is 31% chance that buying power will go down.
This 31% compares to 100% chance that buying power of bank
savings will go down. Think about risk.
There are lots of books about increasing your rate of return. Please,
stay away from strategies that “sound too good to be true.”
Read up on some of the strategies that promise a conservative get
rich slow approach. I recommend High-Return Low-Risk Investment
by Thomas J. Herzfeld and Robert F. Drach or DIY Portfolio Management.
I’ve read other books, but my money is in Drach strategies
and Trend Regression Portfolio Strategies now. These are the only
ones that made it thru back-testing and paper-trading to funded
accounts.
Individuals can and should manage their own stock portfolios. They
gain more control over their investment results by doing it themselves.
They reduce investing expense by eliminating management fees and
reducing commissions. Recent mutual fund scandals and other Wall
Street news is making it harder to accept that pros treat small
clients fairly. Besides, there is no empirical evidence that professionals
deliver better returns than individuals can attain for themselves.
Remember to grow wealth save more, defer consumption longer and
get a better return on your investment. It sounds easy, but
many can’t live the wealth formula. It takes desire and
discipline to defer consumption and embrace risk.
Lyle Wilkinson, investor, trader, author, MBA Helps individuals
learn to self direct their stock portfolios. Book, e-book, PowerPoint
"DIY Portfolio Management” http://www.diyportfoliomanagement.com
mailto:[email protected]
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