For many Americans, building true wealth might seem elusive, even illusory considering that many people can experience drastic changes in their 401k plans and home equity values over time, often leaving us feeling unprepared for retirement. The lessons learned from stock market crashes is that wealth can be fleeting. However, wealth creation always has been and still is a process grounded in sound principles and practices that, when applied with discipline and patience, is possible for most people who can understand and embrace the keys to building wealth.
1 - Clearly Define Your Wealth Ambition
If you give a thousand dollars to a person who has no clear purpose in life, no ambition in how to live a good life today or in the future, what do you suppose he will do with that money? You are correct if you said he is most likely to spend it. For the majority of Americans who have yet to clearly define their destination of a “good life” in retirement, it is of no consequence to them which path they take. Without a clear destination, people will more likely focus on the here and now, which favors consumption over savings. Absent of a clear, personal ambition based on what true wealth means to them, people are more likely to take their cues from the actions of those around them, mindlessly checking the opt-in box on their 401k plan or ruminating endlessly over their “plans” to make more and save more sometime in the future.
Wealth building begins with a clear vision of what a good life looks and feels like when you achieve it. Then you can put the math to it, develop a plan, and create strategies to help you build, enhance and preserve your wealth for a good life, the rest of your life.
2 - Develop and Stick with a Long-Term Investment Strategy
In a 10-year study conducted by Dalbar called, “Quantitative Analysis of Investor Behavior,”1 it was found that investors, through their own behavioral missteps as dictated by human nature, consistently failed to capture as much as 60 percent of the returns generated by the stock market. Whether it be through chasing returns, succumbing to the euphoria of market highs, or fleeing with the herd at market bottoms, too many investors allow their behavioral tendencies to guide their investment decisions. This almost always guarantees their under performance.
Academic studies conducted over decades have clearly shown that investors who adhere to a long-term investment strategy based on well-defined objectives, will outperform investors who don’t. With a well-conceived long-term investment strategy, investors are more likely to stay true to their own personal benchmarks rather than concern themselves with the returns of the market indexes; they will also be more likely to maintain the discipline necessary to avoid the herd mentality of panicked buyers and sellers. Working with the right investment advisor in developing and executing a long-term strategy can help you maintain the optimum asset allocation for your portfolio while minimizing the fees that can eat into your returns over time.
3 - Be the Tortoise, not the Hare
During the early 2000’s, stock prices and home values swelled, creating a “wealth effect” which made people “feel” as if they were wealthy. So, many Americans didn’t feel the need to save. According to the U.S. Department of Commerce, the personal savings rate declined steadily, from a high of nearly 12 percent in the mid-1980s to a negative 1.8 percent in 2007. Since the crash of equities and home prices in 2008, the savings rate has rebounded, somewhat, to 5 percent; but now, many in the Baby Boomer generation, arguably the most prolific income earners of any generation, feel unprepared for retirement.
The lesson learned from stock market crashes is that wealth can be fleeting. True wealth is built over time utilizing a disciplined saving and spending approach. The amount of wealth you build is not just a function of how much you can save and invest strategically; it’s also a function of how much you spend. Living under your means will almost always result in a higher savings rate.
Having a clear definition of what having wealth means to you will ensure that the additional dollars you realize from moderate spending or increases in income will be properly applied to achieving your vision. By applying the same level of discipline and patience to a long-term investment strategy based on sound principles such as diversification and dollar cost averaging, you have a much greater likelihood of keeping your wealth on an upward trajectory.
1 Dalbar, Inc. “Quantitative Analysis of Investor Behavior 2012”