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Top 3 Wealth Building Mistakes

Author: Lyle Wilkinson

Top 3 Wealth Building Mistakes - Do You Make Any of Them?
Copyright © 2005 Lyle Wilkinson
DIY Portfolio Management
http://www.diyportfoliomanagement.com

Do you procrastinate? Investing mistake #1 is waiting too long to
begin. The wealth building formula needs time to work.

Do you invest too little? Investing mistake #2 is putting too
little money into your investments. Living beneath your means
is not easy, but it is essential to building wealth.

Do you accept too low a compound interest rate? Investing mistake
#3 is accepting too low a return on your investment. Rate of
return, compound interest rate, is a key determinant for growing
wealth. Compound interest is powerful in both directions.
Positive compound interest builds wealth. Negative compound
interest shrinks wealth.  Bank savings accounts may eliminate
negative compounding, but are not a good place for investing
because of low returns.

These 3 mistakes link in the wealth formula:

   Wealth = ($ invested)*(1+(compound interest rate))(time $
               invested)

Wealth is a function of the amount of money invested, the
interest rate it grows at, and the amount of time it is left
to grow.

Okay the wealth formula is really just the compound interest
formula with new labels.  You know the compound interest formula
and how it works.  You know what to do to increase your wealth.
Save more, defer consumption longer and get a better return on
your investment.

It is one thing to know the wealth formula; it is another to live
it.  

What are you going to do to increase the amount you are saving
and the time you are letting your investment work?  Saving is
synonymous with amount of money going into investments, not
amount going into a bank savings account.  Get rich slow gurus
pitch tips like: “save 10% of your income” or “pay yourself
first.”  There are books aimed at helping you save, about
changing your lifestyle.  I recommend:

 * How To Live Without A Salary is by Charles Long, he promotes
   what he calls a Conserver Lifestyle

 * The Tightwad Gazette is by Amy Dacyczyn, she promotes thrift
   as a viable alternative lifestyle

Both books, give tips about saving money and pitch living
frugally as a superior, or at least acceptable, lifestyle.  Amy
Dacyczyn points out there is a difference between being wealthy
and looking wealthy.  In the short term, an affluent lifestyle
can be financed by debt.  What are you about substance or image?

What are you doing to improve your rate of return?  How are you
balancing return and risk?  Generally to improve your rate of
return you will have to accept more risk.  The textbooks
calculate risk as variability.  A bank savings account has low
calculated risk because it grows but never shrinks below the
starting point.  However, if inflation is 2% and your bank is
paying .5% your buying power is falling.  The inflation adjusted
return is -1.5%.  The probability that you will lose buying power
is 100%.  Equity investments have variability, calculated risk.
Their prices go up and down.  Given an S&P 500 return of 7%,
standard deviation of 10%, and inflation of 2% there is 31%
chance that buying power will go down.  This 31% compares to 100%
chance that buying power of bank savings will go down.  Think
about risk.

There are lots of books about increasing your rate of return.
Please, stay away from strategies that “sound too good to be
true.”  Read up on some of the strategies that promise a
conservative get rich slow approach.  I recommend High-Return
Low-Risk Investment by Thomas J. Herzfeld and Robert F. Drach or
DIY Portfolio Management.  I’ve read other books, but my money is
in Drach strategies and Trend Regression Portfolio Strategies
now.  These are the only ones that made it thru back-testing and
paper-trading to funded accounts.

Individuals can and should manage their own stock portfolios.
They gain more control over their investment results by doing it
themselves.  They reduce investing expense by eliminating
management fees and reducing commissions. Recent mutual fund
scandals and other Wall Street news is making it harder to accept
that pros treat small clients fairly.  Besides, there is no
empirical evidence that professionals deliver better returns than
individuals can attain for themselves.

Remember to grow wealth save more, defer consumption longer and
get a better return on your investment.  It sounds easy, but many
can’t live the wealth formula.  It takes desire and discipline to
defer consumption and embrace risk.

---------------------------------------------------------------------
Lyle Wilkinson, investor, trader, author, MBA
Helps individuals learn to self direct their stock portfolios.
Book, e-book, PowerPoint "DIY Portfolio Management”
http://www.diyportfoliomanagement.com

See Also: Financial Planning , Financial Software , Financial Advice



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