To Reliably Build Wealth, Simplicity is Beautiful (Part 2)
In my blog post from last month, I introduced two major principles for building wealth. The first step rests upon establishing a healthy savings regimen. Today, I’ll tackle the second vital prerequisite to financial success, which is to demand productivity from your financial assets by investing them to achieve a sufficient rate of return to meet your future cashflow needs.
Just as a person seeks to thrive at their job by developing and building upon their technical, business development, and leadership skills, you should similarly seek to design a plan for enhancing the productivity of your assets. Your financial capital, after all, is simply a way to store the value of the income derived from your human capital. Without the second step of investing, your financial assets remain stagnant and may be easily consumed before your death if they don’t produce sufficient growth to offset the future “paychecks” you’ll draw in retirement from this pile of money.
Having a plan is critical because if we know three variables – your initial investment balance, your annual savings level and the time horizon leading up to your ideal retirement date – we can confidently apply the precise amount of productivity or “heat” (i.e., investment rate of return) to your portfolio to generate the cash flows you need to sustain your lifestyle when you decide work has become optional.
The productivity of your portfolio will be determined by the mix of stocks and bonds you own, and while there’s no assurance that any portfolio can avoid losses, a solid plan prepared by a professional with full perspective of your specific goals can help remove emotion from your decision-making process. This will give you the confidence to move forward by focusing on the future possibilities of a well-executed blueprint.
Furthermore, in determining the proper mix of stocks and bonds, we rely on decades of financial data and empirical evidence to guide us, which informs us that by having the bulk of your money invested productively, you’ll be able to outpace inflation and experience capital appreciation over time. Most investors worry about what to do right. Instead you should focus on what you can control (our 4/12 post) and recognize that having any plan (especially one to be productive with your savings) is 100% correlated with achieving success at anything that’s complicated in life.
Importantly, a good plan will be built around the necessity of investing your hard-earned savings to achieve a greater level of productivity and will be built to weather both good times and unsettled conditions. It will also incorporate these timeless traits, which will work in your best interest and serve as the core of a long-term strategic approach to investing (our 12/21 post):
(a good plan will diversify, because the future is uncertain)
(our portfolios have expense ratios of 1/10th of one percent…yes, that’s right!)
(compounding of wealth is enhanced when you share less with the tax man/link)
Keep in mind that the primary design principle behind the construction of your portfolio is to deliver the returns and cash flow you need to fulfill your objectives; trying to match the benchmark in any given period, without regard to your unique situation, would be less than ideal if we were in your shoes. Fortunately, we’re confident that by using low-cost index funds that closely track the market, you’ll experience and retain as much of the market upside as possible, while our diversification will reduce the volatility of the portfolio in difficult markets!
If you were without a job, you couldn’t afford to procrastinate and avoid getting the productivity from your human capital, and your financial capital deserves just as much attention because that effectively will function as your human capital when you’re no longer able to work or want to pursue different passions – so take action now, not because its urgent but because it’s important to you being happy in the future and having options!
Plans will never play out perfectly, but without one you are basically rowing in the ocean. A plan will motivate you, and that’s critical. A plan will also give you the confidence to stay the course. And having a pre-commitment to invest for loved ones or cherished goals will help you remember WHY you’re investing in the first place.