Building wealth is easier and more fun during booming stock markets, as many of us have experienced recently, compared to the challenges of bear markets. Many of us remember the various market corrections over the decades that turned our 401(k)’s into 201(k)’s. Maintaining respectable growth during the boom times while minimizing the downside risk during a bear market can be a difficult balancing act.
Imagine a scenario where your portfolio is designed to minimize downside losses and strategically picks up cheaper assets, positioning you for further growth. That is a basic premise of building wealth. There are many reasons to engage the services of a financial advisor. Building wealth can certainly be one of the reasons.
While each person’s goals have unique qualities, there are fundamental principles that a financial planner must weave into each client’s financial plan. These fundamentals are the building blocks for building wealth over the long term, and it’s important to keep them in mind.
6 Key Ingredients to Building Wealth
1. Start now, wherever you are
If you remember Chris Gardner’s story and the movie called “The Pursuit of Happiness,” he started off as a homeless single father with a little boy. He worked his way up to run a major business. The movie was a huge success. There was a 2nd great book by Chris Gardner called “Start Where You Are.” You get the idea. It doesn’t matter where you are at in life or how you got there. What’s important is that you have a plan to move forward and that you start now.
Don’t try to climb Mt. Everest overnight. Building wealth takes time. I started withholding 2% of my paycheck and increased it slowly until I was maxing out my 401(k). The sooner you start, the greater wealth you will acquire. Compound interest and time is your friend.
I’ve worked with people in their early 20s who are embarking on their careers. They truly have a once-in-a-lifetime chance to get a head-start on wealth accumulation. Even if you’re 50+ years old, you may have “catch-up” money that you can contribute to a 401(k). You can still create a very nice nest egg for retirement.
Just start where you are!
2. Set goals and have a plan
What are you saving for? Retirement? Your kids’ college education? Your first home? A vacation home? The list could be endless. What’s important is to state all your goals in writing so that you can create a written plan to achieve those goals. A written plan is worth its’ weight in gold. You now have something that you can measure and adjust, if necessary, as time goes on.
Also, think about what motivates you the most. Prioritize those goals. Discuss with your partner or spouse to contribute to your savings on a consistent basis. Paste your goals everywhere in front of you so you can keep your eye on the big picture! If a vacation home is one of your goals, snap a picture and paste it on your desk, refrigerator, bathroom mirror, and nightstand.
Plan to live below your means so that you have enough money each month to save toward your goals!
3. Avoid trying to time the market
It sounds so simple. Buy low, sell high.
However, most of us are not wired to dive off a cliff and buy when everyone is selling. Instead, the temptation is to circle the wagons and play defense. Or equally bad, to pile on the buying bandwagon when everyone is buying. In reality, it’s much easier to buy when markets are heading higher. Euphoria can breed euphoria, which leads to a feeling of invincibility. It’s the “follow the crowd” mentality.
Our philosophy is to be selective with several asset classes and funds, without trying to predict the future (i.e. market timing), and preach diversification with a disciplined investing approach that strips out the emotional component. We help the client to develop a personalized Investment Policy Statement (IPS) that can be used as the investing blueprint going forward. We factor in the client’s risk tolerance into the model, giving a unique fingerprint on the investment strategy and plan.
We recommend focusing on the longer-term because stocks have historically been an excellent vehicle to accumulate wealth. Crestmont Research produces a chart each year that reviews the annual 10-year total returns for the S&P 500 Index going back to 1909. These are rolling, 10-year periods. In other words, this chart is reviewing over one hundred 10-year periods:
As you can see, since 1909, there have been only four 10-year timeframes that have generated negative returns – the late 1930s and the end of the last decade. That shouldn’t come as too much of a surprise given extreme valuations that occurred in the late 1920s and late 1990s and early 2000s.
The average annual return on a 10-year rolling basis is a very respectable average of 10%.
Consistent, long-term investing has proven to beat out market timing by a long-shot and is a very good strategy for building wealth!
Both Mark Twain and Andrew Carnegie allegedly said, “Put all your eggs in one basket, and watch that basket closely.” Twain and Carnegie didn’t live in an age where the dissemination of information is almost instantaneous. Bad news comes in like a defensive end leveling the quarterback, it can happen in seconds.
We build investment portfolios with careful attention to asset mix, types of funds, diversification, and proper correlation among the assets. Did you know that proper correlation should be negative? OK, I won’t get into that here! But, believe me, it’s important to the overall stability of the portfolio.
Our goal is to select the right mix of securities that best provides the potential for longer-term appreciation in all major sectors of the economy. And we don’t stop at the U.S. border, as we recognized the potential the global economy offers.
Being “diversified” in a portfolio of stocks is not diversified and can leave you exposed to a market decline. It’s for someone with a very long-term time horizon. A fixed income component or cash position may be critical for many people, especially those nearing retirement. You may not have the time to recover in the event of a steep market decline.
Bonds, cash, fixed income securities, and alternatives can help balance out long-term results. They can help stabilize the portfolio and minimize volatility and possible losses. Many people prefer this approach knowing that they can sleep better at night knowing that a sudden dip in the market is less likely to take a big bite out of their investments and delay critical goals.
Find an expert financial planner help you build a diversified portfolio!
5. Avoid get-rich-quick schemes
I’ve been around the block many times. If it seems too good to be true, it probably is. Many of you are probably thinking, “I know that. Why drill that in?” Because too many smart people fall for get-rich-quick schemes that leave them poorer than when they started. Sometimes much poorer. It’s heartbreaking to hear the tales.
If you ever come across something you believe might lead to quick riches, please let me review it with you. I can help provide you with an objective viewpoint.
Avoid the too-good-to-be-true schemes!
6. Review multiple scenarios to building wealth
A picture speaks a thousand words. Find a financial planner that uses powerful financial planning software that can graphically depict various investing scenarios in obtaining your goals. You should be able to see the “probability of success” of each scenario so that you and your financial planner can make the best decision for you.
Understand the financial impact of your decisions!
Actions You Can Take
Find a Financial Planner that you trust, one whose income is not based on selling you the next “great product.” Look for an analyst that makes his or her living from showing you the potential financial ramifications of your decisions. Financial planning software is an important part of the process and will help the financial planner and you, understand the financial impacts of your financial decisions. One that helps you with building wealth and achieving goals.
If you don’t have a trusted Financial Planner, you can begin right now. Gather your records and fill out our questionnaire to get started!
About Kastler Financial Planning
Our core purpose is to improve the financial life for each and every client we serve. We believe that people of all income levels should have access to affordable and professional financial planning and investment management services, without the pressure or bias of product sales and commissions. Always acting as a fiduciary, the only fee we receive is the fee paid by the client. We put your best interest before our own. No product sales, no commissions, and no account minimums.
We specialize in family planning, families with Special Needs Planning, Retirement Planning, Retirement Tax Planning, and Small Business Retirement Plan Consulting. Our services are analytical and will be appreciated by the engineering and technical-minded individuals. We also use “bubble up” reports for the not-so-technically minded.
Our services can be performed either as hourly, a one-time fee-only project, or as On-Going Financial Planning, depending on your needs. Compare our fee-only services. Our suite of services also include Investment Management Services with the options of % AUM or flat-fee portfolio management.
We aim for a pleasant client experience whether you are in our office or remote across the country through computer screen sharing technology. Visit our Client Portal to learn how to get started with a complimentary ‘Get Acquainted’ meeting.
If you have any question on how our services may apply to you, please contact me at the number below or submit an email through our Contact Us form.
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Kastler Financial Planning | Ortonville, MI 48462