Multiply your age times your realized pretax annual household income from all
sources except inheritances. Divide by ten. This, less any inherited wealth, is
what your net worth should be.
What Stanley and
Danko and other researchers into the pursuit of wealth have proved over and
over is that becoming wealthy is more a matter of mindset than income levels.
It starts with saving and continues with having your savings invested in ways
that optimize growth over the long term. That may mean utilizing tax-advantaged
investments to avoid having earnings eroded by taxes, looking for ways to
control risk without unduly sacrificing return, taking full advantage of
employer sponsored benefit programs and managing investment expenses. That's
where we come in.
There's no better
time to build your personal wealth than today. If you are not where you would
like to be, let's take a look at your goals and what needs to be done to
achieve them. Because being wealthy can make a lot of life's headaches less
painful.
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Seven common denominators among those who successfully build wealth, according to Thomas J. Stanley and William D. Danko:
1. In general, millionaires are frugal, living well
below their means. They're willing to pay for quality, but not for image..
2. They allocate their time, energy, and money
efficiently, in ways conducive to building wealth. They begin earning and
investing early in life and spend more time focused on financial decisions than
purchasing luxury items, such as cars and clothes.
3. They believe that financial independence is more important than displaying
high social status.
4. Most millionaires were not financially supported
by their parents. 80% are first-generation affluent. Fewer than 20% inherited
10% or more of their wealth. More than half never received as much as $1 in
inheritance.
5. Their adult children are economically
self-sufficient.
6. They are proficient in targeting market
opportunities.
7. 50% are self-employed, making their money
largely in "dull-normal" industries.
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What Does it Take to Have $1 Million in Investments?
To have $1 million by retirement, all an individual needs to do is to invest
$10,000 a year for 30 years and have it earn at least 8% compounded annually.
That's assuming no fees or taxes erode your earnings each year.
Can't quite manage $10,000 annually? Consider investing $4,000 for the first
five years and then increasing your investment to $8,000 annually the next five
years, $12,000 for five years after than and so on, reaching $24,000 annually
by year 26. By year 30 you will have invested $420,000 compared to $300,000 for
the individual investing $10,000 per year, but your account balances will be
relatively close.
Earn more or less and naturally
your final result is going to vary. But what this illustration shows is that $1
million in investments is attainable for individuals with less financial
resources but the dedication to stick with a plan of steady contributions.
Even if you don't have a 30-year time frame, steady
investing combined with a carefully considered investment approach can build a
substantial portfolio faster than you might think.
Remember this is a hypothetical example and there
can be no guarantee that your account will achieve an 8% return each year. All
investments have risk and can lose as well as make money. Past performance
should not be considered indicative of future returns.
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More
Money to Invest
Cutting back on gourmet coffees can help you save
money but don't overlook savings on big ticket items: Here are a few ideas to
help you have more money to invest.
1. Price it on-line.
Before you buy, shop on line to find what the price
range is for the item you want. Then take a printout with the price you are
willing to pay to the store or dealer. If you buy on line, make certain you
know the shipping costs.
2. Wait a week.
Don't impulse buy a big dollar item. Before you
purchase that new rug or sofa, go home and think about it. Prioritize how you
want to spend your money.
3. Leave your checkbook or credit card at home.
Going car shopping? Leave your checkbook or credit
card at home to give yourself an chance to get away from the sales person's
pitch and think. It's too easy to be pressured into a bad deal. Get the facts,
get out and get another estimate.
4. Ask for a better deal.
Who says you have to take the price you're quoted?
Ask for a better deal, or what discounts might be available to you based on
memberships. Find out if there are any upcoming sales.
5. Consider booking direct.
You might want to start your search for flights or
accommodations with a travel site, but before you book, check with the airline
or hotel directly. You may find cheaper prices and more choices.
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The Bright Side of Volatility
Which would you consider the healthier financial market environment? One in
which stock values steadily increase over time, or a market subject to fits and
starts with periods of price increases interrupted by corrections?.
The first example may be easier to live with, but
the second - the market filled with greater volatility - is actually the
healthier environment for investors. .
Stability has one major disadvantage. The longer a
condition exists, the more people expect it to continue.
Complacency is an investor's greatest enemy. When we start thinking we know
what the future will bring, it inevitably leads to riskier behavior, which can
drive values higher over the short term, but, historically results in a more
severe correction.
The housing market is a prime example. By 2002,
housing prices had been on the rise for more than a decade and were posting
double digit returns in many U.S. cities. Burned by the financial markets,
individuals turned to housing as a "can't lose" investment.
Since everyone knew home values were only going to
increase, creative mortgage products -- from no or minimal down payments and
interest-only loans to adjustable-rate mortgages carrying starter rates as low
as 1% -- became common.
Even individuals who might not consider themselves
housing speculators took part in the housing boom through refinancing and
withdrawing equity from their homes. Financial instability, points out Nobel
Laureate economist Hyman Minsky, is created by mounting indebtedness building
up through time. Complacency equals riskier behavior.
Today, this build up in housing-based debt and the
use of speculative financing tools are blamed for a large part of the explosion
in foreclosures. The housing markets hardest hit are those that experienced the
greatest gains.
The dangers of complacency are even greater in the
financial markets. At the start of 2000, internet stocks were the place to be.
These were the investments with the greatest long term potential, the stocks
that were changing the world. Hindsight tells us otherwise.
Nasdaq Composite Index - Weekly Prices
The Nasdaq Composite is a market-value weighted index of all common stocks
listed on Nasdaq Exchange. Investors cannot trade an index directly. The above
graphic does not take into account trading costs or fees that would be incurred
to invest in a representative basket of stocks. Past performance is not
indicative of future returns.
The Nasdaq Composite's tremendous build-up in 1999
has become a case study for why market bubbles happen and how much people want
to believe that the recent past will continue on indefinitely. There was no
shortage of forecasts at the start of 2000 that proclaimed this a new era for
the markets, that the old rules no longer applied.
What history proves again and again is that
avalanches happen. Stress tends to build up in markets as investors become
complacent and take on more risk. Values can continue upward longer than might
seem rational in another time. And ultimately, markets correct.
Much like a volcano, small shocks over time can
lower pressure along growing fault lines, moderating or postponing more severe
reactions. But perhaps their greatest value is that of a reality check. They
are a reminder that bad markets can happen to good people and that risk is
always an element of investing.
Our job as advisers is to help clients avoid
complacency, to remind them of the risks and to manage their assets with the
recognition that we don't know what tomorrow will bring. Investment strategies
need to be flexible, to look for opportunities in trends and cycles, but to
also recognize that there has to be a plan in place to limit losses should the
markets turn against us. Complacency may be a lot easier to live with, but
paranoia has its place in any investment approach.
Anatomy of a Bubble
The following stages of a market bubble and collapse are from "Can It Happen
Again?" written in 1982 by Nobel Laureate Hyman Minsky.
Stage 1: The shock wave - A disturbance alters the
current economic status quo, putting the spotlight on an asset class.
Stage 2: Acceleration - Fuel gets the fire going,
starting the boom.
Stage 3: Euphoria - The latecomers rush in while
the insiders start stepping out.
Stage 4: Financial distress - Fear sets in, and the
latecomers begin to sell.
Stage 5: The market reverses, and the boom turns
into a bust - Prices begin to drop, money tightens up and losses start to
accelerate.
Stage 6: Panic - The boom is officially a bust.
Professional investors start to get interested again
Stage 7: The White Knight rides in - This occurs
when the bust really explodes and the government steps in. While well-intended,
the results of the knight's actions are not always the best solution to the
problem.
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Famous Market Bubbles
1634 -1637 - Tulipomania
1711 - 1720 - South Sea Bubble
1717-1721 - Mississippi Scheme
1840s - Railway Mania
1920s - U.S. Roaring Twenties Market
1970s - Nifty Fifties
1980s - Biotech stocks
Late 1980s - Japanese stocks
1987 - Taiwanese stocks
Late 1990s - Internet Stocks
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A New File for Estate Planning
Do you access account balances and make
transactions on line? Perhaps you have a positive balance in your PayPal
account or have set up automatic deposit or payment plans online for
subscriptions and other on-going expenses. You probably have your own login and
password to access personal files on your personal computer.
What you may not have considered is what
happens with login accounts, should you die or become mentally incapacitated.
Will your login information and password be lost with you? Will your survivors
be able to access information and documents kept on hard drives or in on-line
accounts? Will they be able to stop auto-shipments or cancel on-line
subscriptions? Will your executor need a court order to access the information,
provided the individual even knows where your accounts are?
Keeping track of assets in the electronic age means
adding another file to your estate planning process. A file that provides the
information needed to access password protected sites, accounts and information
. Each member of your household should keep a
spreadsheet with Institution Name, Website, Account Number, User Name, Password
for any financially related sites as well as personal login information for
your computers.
. This spreadsheet must be updated WHENEVER a
change is made to an account, including new passwords, or accounts are added.
. Save the spreadsheet to a removable media format
(CD, DVD-R, USB Flash-Drive, etc).
. Place the removable media format in a safe
location that your spouse, power of attorney, key adult child(ren) and attorney
are aware of (safe deposit box, fireproof vault, drawer in the house where the
important stuff is).
. If putting all this in a safe place and telling
key people of it concerns you because those people might have access to your
accounts before something happens to you, you need to rethink the key people.
This record-keeping should apply both to personal
and business accounts.
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Faulty Logic
21% of adults surveyed said a lottery would be the
most practical strategy for accumulating several hundred thousand dollars,
according to a recent survey of about 1,000 Americans by Opinion Research
Corporation.
The likelihood of this "practical" strategy failing
is 99.99997394%. Buy tickets for 50 successive lotteries and you are 99.998697%
likely to lose. That fails to meet even the most liberal definitions of
"practical."
Lotteries are voluntary taxes, not a means of
achieving financial security. Those who do win find the money brings with it a
host of woes, first and foremost of which is that others don't believe the
individual(s) deserved to win, much less deserve to keep the money when others
less fortunate could use it.
The real key to accumulating several hundred
thousand dollars starts with investing funds you've chosen not to spend.
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Has Your Life Changed?
Just as markets change, so do the lives of our
clients. Which is why we try to ask you at least once a year if there have been
changes in your life that might necessitate a change in how your assets are
invested. This might be good news, such as a new family member, a new job, a
move or even an inheritance. Or it may be an event from the other side of life,
such as a family illness or death, the loss of a job, or losses from
investments outside our control.
Sometimes, it doesn't occur to clients that these
changes may also impact the investments we manage. If we haven't had a chance
to catch up on changes in your life, please give the office a call and let's
schedule a meeting. This can be an excellent time to review progress in your
account and where you would like to be in the next few years.
Naturally, we are always interested in receiving
additional funds to manage and welcome any referrals you might have of family
members, friends or associates who might benefit from our services. Take a
moment now to call and let's talk!
