Financial Wisdom
Life advice
This article will be “stating the obvious”, which is something I’ve learned that we need to hear / read repeatedly. Reminders are good!
This morning I was reading some intriguing comments (about advice from some books) and thought I’d comment on them.
“Getting wealthy and staying wealthy are opposite skill sets“ – to a certain extent: yes! To get wealthy you need to take risks. To stay wealthy you need to manage risks.
“Staying rich requires... paranoia, frugality, humility, and the constant low-grade terror that what you’ve built can be taken from you” – this means considering possible unforeseen (by most) futures. One example is the typical person that spends an entire career paying social security taxes only to face the repeated claims that “social security is going to go bankrupt in the near future”.
Most doomsday predictions sound like hitting a brick wall suddenly. No, these things almost always play out slowly. In the case of social security, the retirement age continues to be pushed back, the SS tax rate continues to increase, and the maximum wage subject to SS tax has increased. More subtle is that the cost of living adjustments never keep up to the true rate of inflation, so once you start collecting, the value of what you are being paid slowly fades away.
This is a major reason I recommend not depending 100% on social security for your retirement!
“The single most important thing you can do as an investor is not die.” Absolutely! The longer you live, the more your investments can compound and grow. The subtle other angle of this is that you can’t put all of your wealth in one basket. Dying financially is losing everything such that you have nothing to rebuild with.
This gets into the concept of diversifying. Pretty much every financial advisor will advise you to diversify. However, too much diversity in your investments will mean mediocre gains. That is not a path to great wealth.
I’m all for lots of little investments for diversity. This can be educational! But the bulk of your wealth should be in just a few key investments which have a fair amount of risk and correspondingly great returns. Off the cuff, I’d suggest three to six main investments.
“Here’s the number that should change your life: $81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday.“ – this is a deceptive statement. First of all, this means that Warren was already absurdly wealthy at age 65 with $3 billion dollars! Second is that he is now 95 years old, so he has had 30 years to turn $3 billion into $84 billion. That is an annual rate of return of slightly over 20%. I’ve personally done far better than that over the past 17 years. Unfortunately I didn’t start with $3 billion dollars.
What is key about this statement is that compounding over a long span of time (thirty years) yields huge gains!
The rate of return you make is critical though! If you invest $1,000 for thirty years (no additional contributions), your wealth increases to:
$3,243 at a 4% rate of return
$17,449 at a 10% rate of return
$66,212 at a 15% rate of return
$237,376 at a 20% rate of return
$807,793 at a 25% rate of return
$2,619,995 at a 30% rate of return
Overall, it’s absurdly unlikely anyone can maintain greater than a 30% rate of return for thirty years! Unless of course you are investing in buying politicians. {grin}
My recommendation is to aim for 25% and be happy if you achieve 20%. If you aim for only a 15% rate of return then you are going to fall in what I consider typical or average. It’s unlikely you will become wealthy with only a 15% rate of return. But that doesn’t mean you can’t be completely happy! But it does mean that you need to contribute more than $1,000 over thirty years if you wish to accumulate any decently large amount of money.
“Your life is the sum of your experiences, money is stored life energy, and if you die with money unspent, you have wasted the hours of your life you exchanged for it.” – this nugget of wisdom leads us to some thoughts. First of all, you want money to work for you, not you working for money! This makes investing critically important, because if your only income is from working, then you will truly slave away to make all your income. If on the other hand, you invest a little money, that money can make you more money with virtually zero effort.
I’m okay with dying with a fair amount of money. It makes me happy to think my children and grandchildren will have a nice inheritance. This is also a reminder to actually spend some and enjoy your life! Giving up life in the endless quest for “more” money seems foolish to me.
“The trip you took at 35 pays dividends for forty years. The trip you planned for 75 pays dividends for five, if your knees cooperate.“
Yes, keep those knees in good shape! Health is your best investment! Aim to live (in good health) for over 100 years, not for 75 years!
Consider your “net worth peak”. Your aim shouldn’t be for your wealth to continually climb forever. A life well lived should have a peak in wealth, after which your wealth stays stable or declines slowly.
Let’s end this mostly philosophical discussion with a few suggestions.
Buy gold! Gold is currently at $4,677 per ounce. Many major sources have said gold will reach $6,500 per ounce by the end of the year. That’s a 40% rate of return on a very safe investment. Will it actually go up that much? Probably. Sure there is a chance it won’t go up that much, but there is also a large chance it will go up a lot more.
My recommendation to buy gold and silver five years ago has turned out to be excellent advice. Nothing has changed (in the big picture of the world). The USA is still massively in debt and going further into debt. The central banks continue to “print” money causing inflation so the price of any hard asset will increase along with at least the amount of inflation (ignoring the usual up and down bounces that constantly occur). Humans still haven’t learned how to get along with each other. War hasn’t gone out of style, the world is full of risk.
Don’t tell me you can’t afford gold. If you’ve got $20, you can open a CyberMetals online account and buy a little gold.
As for stocks, some of my primary recommendations now are:
Silver mines – these companies should continue to do extremely well in the near future.
Energy – specifically nuclear energy. Energy is the lifeblood of the economy, so any company that can provide energy has the potential for a great future, specifically new technologies such as “small module (nuclear) reactors”
Space & Robotics – ignore it if you wish but the wealthiest person on the planet (Elon Musk) is pushing forward very strongly in these areas. There are a lot of companies that have the potential for huge growth in the next three to five years.
If you want an entertaining read, consider reading Charlie Garcia’s “Capital Mischief” (much of this article was inspired by his latest post).