Top 3 Wealth Building Mistakes - Do You Make Any of Them?
Lyle Wilkinson
Do you procrastinate? Investing mistake 1 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.
About the author:
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.commailto:joe@diyportfoliomanagement.com
