With 2017 upon us, rather than making stock market predictions which will likely be wrong, I thought I’d start off the new year showing you how you can build your financial fortress which stands the test of time.
We become investors and traders for a variety of reasons, but the one reason we all have in common is to amass wealth. Of course, there can be great variance in financial goals. You might want to create a nest egg so you can retire comfortably, while I might aspire to become the next Warren Buffett. No matter what our ultimate goal is, it is safe to say that all of us want to be able to enjoy the rewards we reap and have the peace of mind that goes along with those extra dollars.
The question is, how do you begin investing and accumulating wealth? It certainly does not involve just throwing some spare dollars into an investment and waiting for it to grow. What it does involve is creating a solid strategy, staying focused on our goal and resisting anything and everything that tries to steer us in a direction other than towards our goal. This is especially so with so many predictions in the new year about such and such likely to go up…
If our objective is to build wealth, become independent and create a solid financial future, it’s necessary to construct a strong financial fortress. Our fortress must be resistant to attacks from inflation, competition, taxation and other enemies created by a capitalistic society which prevents most from amassing real useable wealth.
When a broker tells you to buy a particular stock because it is about to go up, we should be asking whether it would contribute to constructing our strong financial fortress. If we keep this question in the forefront when making decisions, our goals over time will become more reachable.
Here are some useful tips for building your own financial fortress-
1. Never go back to the starting line
We have all heard the warnings by advertisers that the clock is ticking and if you wait to start investing, you won’t be able to enjoy your retirement. However, let’s think about what happens if we rush into investments that later turn out to be bad decisions or simply experience bad luck. All the money we invested is lost and the only thing we can do is go back to square one and start all over again. It’s tough the first go around and the second time gets even harder. I know, I’ve been there…
No matter what we invest or how much we earn, the most important rule to remember is, never go back to the beginning. This is simple to do if we avoid putting ourselves in a position where we risk that happening. When we hear about investors who have lost everything, like the Enron collapse, we feel for them. However, following this rule will keep you from investing your future in just one or two high risk companies.
2. Keep your expenses lower than your income
This may appear to be an obvious statement, but it seems that most forget about the importance of spending less than we earn. Unless we have already built our financial fortress and are enjoying retirement, the most effective way to become financially independent is to save money. It’s very easy for us to find reasons why we should spend now instead of saving for tomorrow, but if we can’t afford to buy the bricks we need to strengthen our fortress, we won’t be able to fend off the financial attackers.
Nobody will argue that it is easy to resist paying for luxuries we can enjoy today, but if we don’t resist, we’ll eventually look back in regret as the years pass by.
3. Keep your expectations realistic
No matter what the advertisements say, there’s a high probability that we won’t be able to compound our money at 25% annually for the long-term. Over the long run, the stock market never has returns like this every year. So if you’re able to save $150 a week, which amounts to around $8,000 for the year, it’s hardly sufficient to purchase your dream car or dream home. Either settle for something more affordable in the short term and figure out how to start saving more for long term prosperity.
4. If you don’t understand it, don’t buy it
It is no easy task for most of us to resist what is promised as the next big thing. The allure of the wealth promised to us if we just invest is tempting, but in most cases, it turns out not to be as big as we thought.
Always understand what you’re getting into. Understanding does not mean comprehending some general ideas. It means thoroughly understanding all of the factors that will make our investment unsuccessful or successful. The most successful investors live by this principle.
5. Invest in quality
It is easy to be sucked into buying what we think is about to go up in the next week or month. Yet, if we really want to be successful, we should instead be focusing on buying into stocks we feel confident will go up in the next five or more years. Investing in high-quality companies with top-level management will pay off in the end.
By investing in quality, we have the ability to hold on for the long term and this gives us significant tax and brokerage savings whether they are blue chip or second-line stocks. If investing in speculative stocks is something you enjoy, understand why you buy them and make sure to limit the amount you invest to a percentage of your portfolio you can afford to lose.
6. Reinvest your dividends
Reinvesting simply means adding our dividends to our regular savings and doing so over time instead of spending it on unnecessary things. What is nice about this is that we will invest more annually without putting any additional effort into it. Just in case, in order to prevent ‘accidentally’ spending the dividends, it is a good idea to keep a separate bank account just for dividends and your investing dollars. This will avoid that guilt we all feel when we spend our dividends on the newest gadget rather than using them to make even more profits.
7. Always do your utmost to make smart financial decisions
Making smart financial decisions, no matter how small they may be, will make a huge difference in the long-term.
Let’s say I am in the market for a new washing machine. I have a choice between one that costs $150 more than the other, however the more expensive machine is an energy efficient model that saves around $75 per year in electricity. In the short term, going with the cheaper and less efficient model will leave some more money in my pocket, but most people keep their washing machines for many years. If I am patient, eventually, the savings will surpass the additional cost of the machine. Two years in this example. That is smart investing.
8. Stay away from debt
I know you’ve probably heard this many, many times, but it is worth repeating. Whatever you choose to do with non-tax-deductable debt, it is extremely unlikely that this is going to contribute to the construction of your financial fortress. We need to avoid credit card balances, car loans and personal loans like the plague. Don’t let anyone convince you that your half-paid off mortgage is untapped equity. It is nothing more than a liability that should be paid off. I know that I want to own my home, not hand it over to the bank so it can profit off me.
When it comes to tax-deductable debt, always remain cautious. Yes, margin loans can be very profitable when stocks go up, but when they go down, they go down fast and hard. Constructing a financial fortress means being able to withstand the difficult times and margin loans are going to cause financial damage when we’re least able to afford the dreaded ‘margin call’.
9. Don’t forget to have fun
Having lots of money is great, but if we can’t enjoy it and it takes over every aspect of our lives, there really isn’t much of a point. A good way to know if we are making the right investing decision is to ask ourselves whether taking a particular action will affect how well we sleep at night.
Sleeping well is vital and if the stocks we invest in are keeping us up at night, the probability is that they aren’t going to be winners in the end. Building a strong financial fortress and maintaining financial independence will bring us peace of mind and the quality of life we deserve.
I really hope this helps start your year on a sound financial footing, and if you want to learn how to make your money work harder for you safely, you can download your free investing checklist here.