Don’t tell this to those who are struggling in the trenches trying to survive the current economic cut back, but ultimately, wealth represents less opportunity than obligation. If you think being responsible for the care of a pet dog curtails a lot of fun, try being responsible for taking care of the life savings of someone who relies upon you. I’m not talking about some doddering old aunt; I’m talking about your immediate family. If you suddenly became dependent upon your parents, or your kids, for food, shelter, clothing, medical attention, and personal care, this could be a crushing blow for your family to sustain. That’s what portfolio strategies is about; protecting your family from needing to support you.
A wise multi-millionaire once gave me nine principles on which ultimate success in life will depend. I’ll paraphrase them below:
1. Personal savings and liquidity to insulate you from distress sales to raise cash.
Success books over the ages have stressed living far enough below your means to be able to save 10% or more out of each pay check, and to keep enough cash around to meet emergencies. Being forced to sell or pledge valuable assets robs security.
2. Protection of your assets, purchasing power, and income from inflation.
Everybody on a fixed income understands how rising prices can destroy security. Part of every portfolio should be inflation hedged so that asset values can pace inflation.
3. Faith in your own judgment and in the successful outcomes of your decisions.
Beware of strangers bearing advice. If you were smart enough to amass a fortune, you should be willing to continue to learn so you’ll be smart enough to manage it.
4. Understanding the investment principle that your money must earn a fair return.
How much is your IRA earning? If you want to see a financial epidemic, check out all those poor souls working for a fixed rate pension plan, or those putting money into IRAs who know that their yield is not even keeping up with inflation. The difference between a 2% Money Market Fund and a 10% mortgage isn’t 8%, it’s 500%; or over $62,500 MORE for each $4000 per year invested 30 years in your IRA.
5. Better to pay a fair price for a good investment than a good price for a fair one.
I once bought 20,000 shares of gold penny stocks in the 1970s because they only cost $2000. That was my IRA contribution limit at that time. The money is still there. If I sold them all, they wouldn’t net enough to pay the commissions. On the other hand, that same year a new company called Microsoft was selling for about a dollar a share. That same $2000 could have been worth about $70,000 today.
6. Understanding, and being able to use, compound interest and time value of money.
Einstein said the greatest single concept of man was compound interest; the process whereby interest earns money on itself. $1000 invested for 10 years at 100% would add up to $11,000, but if compounded at the same rate would add up to $1,024,000.
7. Growing an estate by using prudent leverage with no personal liability for debt.
Millions of people are in distress today because they guaranteed to pay their loans. Had they not done this, they could have simply walked away from ruinous their debt.
8. Methodically and systematically eliminating debt to increase income and safety.
Paying off debt creates equity, safety, and cash flow. One way to commit financial suicide is to refinance equity to get spending money. It destroys all compounding and cash flow while increasing risk. If you want to be rich don’t borrow lifestyle!
9. When you know you’ve got it made, stopping taking chances to make more.
If you’ve got enough, you don’t need more. Risking your security to make money that you’ll never spend is the sheerest kind of folly; especially when you lose it. The homeless shelters are full of people who bet their winnings one time too many! Beware of strangers bearing advice. If you were smart enough to amass a fortune, you should be willing to continue to learn so you’ll be smart enough to manage it.
