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I have been thinking about the several dozen families in my financial practice that are wealthy, and I have noticed some common themes.
Recently, I have been thinking about the several dozen families in my financial practice that are wealthy, and I have noticed some common themes regarding how they got wealthy, and how they stayed wealthy.
1. I realized that they (like my own family) built their wealth slowly and methodically. The wealth was built by spending less than they earned and investing the rest in world stock markets.
2. These families did not follow the "buy and hold" dictum when investing. They really followed the "buy and buy" method. The successful families were steady accumulators, buying when stocks were up and when they were down. They never did any market timing and in fact paid little attention to their monthly statements. Yet, after a couple of decades, they were wealthy.
3. The most successful families had an investment adviser that probably bought the "cheapest" asset class with their new purchases, and had the discipline to keep buying especially when markets were just awful (1974, 2000, and 2008 in particular). These terrible bear markets were not terrible for those families, but instead, were terrific opportunities to build long-term wealth even more quickly.
4. At the same time, I have never (never ever) met a single individual or family that built wealth by jumping in and out of the markets at just the right times. In fact, it is easy to find a legion of families that have done quite poorly with this behavior.
When considering these four factors, one lesson is clear to me: If you want to get wealthy and stay wealthy, be patient.
Spend less than you make (15 percent to twenty percent) if you are young, a higher percentage if you are older) and invest it in world equities.
Don't try to time the market, ever. As you keep buying and buying and buying, tilt your new investments toward large-asset classes that are doing just awful. You probably need help to do this, so get the help.
I’ll re-emphasize the need to control your spending. You really don’t have a chance to become wealthy if you spend too high a percentage of your income. It is the double whammy of inadequate savings as well as getting used to a high-lifestyle expense that is hard to overcome. The return on your investments won’t save you.