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Finding Ways to Generate Wealth
Young investors are a bit egocentric, but in reality, they are not alone when it comes to worrying about their portfolios. The reality is that most of us want to accumulate enough resources to provide for our families. Many of us also want to generate enough wealth to provide for ample discretionary consumption.
A report by E-Trade found that younger investors are more concerned about their portfolios than they are about their health. If there was not a global health emergency in place, that may make perfect sense.
So the question becomes: How does one generate those resources with their portfolios? Think, “Decide. Plan. Commit.”
Decide
What is important to you? What are your expectations for your life?
Expressing a desire is the first step in achieving a goal. It will help create a decision tree that can clarify your priorities.
Those decisions can become the target for a portfolio. Generating wealth may allow one to purchase a home, retire at the desired age, cover education costs, or pay for another desired expense such as a vacation.
Plan
When investing, the best way to plan is to leverage time. Time can be your best friend with investments. The following illustration, which may be suitable for retirement planning, looks to show how important time can be.
- Investor A makes annual contributions of $5,000, earns 8% annually for 20 years.
- Investor B makes annual contributions of $5,000, earns 8% annually for 40 years.
Investor B will not only have saved over $1,000,000, but they will have saved over $1,000,000 more than Investor A. That’s the impact of compounding interest with investments over time.
This of course is a hypothetical illustration that does not account for taxes, commissions, fees, or any change in risk-tolerance levels during one’s lifetime. But it does try to illustrate how time can be used to your benefit when investing.
You should be comfortable with the amount of risk you take, as it should align with the timeline of what you are planning for. If your goal is to buy a house in two years, an investment in the stock market may be inappropriate. What would you have done in mid-March when many major stock indices were down over 30%?
Most people want to own the next “unicorn stock” and watch it appreciate in hopes it will become the next American household brand like Amazon.com. The problem is, you don’t know which company will join the trillion-dollar club and which one will join the list of penny stocks.
This past January, only four publicly-traded companies held market capitalization of more than $1 trillion. At the same time, numerous stocks were considered penny stocks. If you invest in the stock market, make sure you are diversified properly. There are plenty of ways to receive investing assistance.
Commit
For many of us, the best way to commit to a plan or a goal is to develop a systematic process. That process can be, for example, how a 401(k) plan works, in which a contribution is completed every pay period. This process can be easy to set up, as there are ample tools available that can initiate transfers on an automatic basis for you.
A process that is objective and systematic is preferable to one that is subjective, such as writing out a check, because discretion may get involved when the check is being written.
It can be hard to stay committed to a goal as unforeseen expenses appear.
Communicating your goal with people close to you can be helpful. This can be especially true when you are in a partnership.
Reminders can help solidify your commitment. For example, if you want to buy a house, you can have notices of local houses for sale sent to you.
The Takeaway
Remember that sizable market corrections do happen. Are you prepared to overcome the fear of the moment when the next correction occurs, or will you decide that your goals are no longer attainable?
Have a look at your track record. When the S&P 500 corrected 34% after making an all-time high on Feb. 19 or when it fell 25% in the fourth quarter of 2018, did you stay the course, or was that when a prior plan broke down?
Goals can be obtainable by identifying them, developing a plan to achieve them and then being disciplined to stay the course. Find support when needed and communicate this to those who are going to support you.
