How to create wealth? Here are 7 tips:
1. Safety grows wealth, not risk!
Take advantage of safer bets and avoid the risky ones. Smart financial decisions are cautious decisions. If you have to take a risk, put loss limits in place. Never lose more than is comfortable losing.
2. The most important factor in wealth building is not ROI!
More important is the amount of money you’re able to devote to investing (after you’ve paid for all your regular expenses). The real wealth builder devotes the lion’s share of his wealth-building time to increasing his income and setting realistic goals for his stock and bond portfolios.
3. Diversification is key!
The typical portfolio of stocks, bonds and cash should also include other assets, such as income-producing real estate, tangible assets, alternative fixed income investments and direct investments in cash-generating private businesses.
4. Buying bigger isn’t better!
Find the least expensive house you can “love long term” and keep it. The longer you keep it, the more net investable income you will have to invest in income-producing assets that will eventually make you rich.
5. Manage risk!
Risk management has three parts: asset allocation, position sizing and loss limitation. The intelligent investor pays equal attention to all three.
6. Don’t give up your active income!
The biggest mistake retirees make is giving up their active income. To keep your wealth for a lifetime, you need multiple streams of passive income. Your goal should be to build each stream of income to a level where you can live on that and that alone.
7. Incorporate investments that generate income and increase in value or do both!
Asset classes are inherently structured to increase value, preserve value or do both. Investments that provide both, income and appreciation, are generally superior to investments that provide only one or the other. But in developing an overall strategy of wealth building, the prudent investor will incorporate them all.
Sven Franssen