Sunday, September 6, 2015

Is it necessary to take huge risks to create wealth?

Not only is it unnecessary to take huge risks to create wealth but it is actually counterproductive.  To me, creating wealth boils down to three basic ingredients: saving, investing, and time.  Often times, people will be lacking one or more of these causing a need to take greater risk in order to provide the same amount of return.  The big issue here is that it is not very likely that an increase in risk will lead to increased returns and actually more often than not leads to a higher likelihood of losses.  The easiest way that I’ve found to build wealth is to make sure that you are always taking maximum advantage of these three fundamental ingredients.

Saving is so important because it provides you with a base to invest from.  Lack of savings is akin to a farmer not having any seeds to grow the next years crops with.  A large portion of whatever you receive in income needs to be invested in order to allow for the growth of your money.  Saving can be hard especially if you live in an area with a high cost of living but it is absolutely necessary if you ever expect to grow wealth.  Think hard about what you need to get by with and then think harder about how to get by with even less.  Don’t worry, this frugality doesn’t last forever, in just ten years you’ll be thinking hard about what to do with all of the extra money you’ve got laying around.

Investment is equally important because this is where growth comes from.  Money under your mattress actually becomes less valuable over time due to the nature of inflation.  I think that a lot of people, including myself, tend to over complicate this aspect of wealth creation either by trying to time the market or by searching for rare and exotic investments that provide “increased” returns.  Again, these increased returns are not without increased risk and are therefore no better or worse than any other investment.  Take the easy approach and spread your money around into various types of investments in order to take advantage of diversification which is just a word for not putting all of your eggs in one basket.

Finally, time, I think is the most valuable of all three of these ingredients because it is essentially priceless.  In order to avoid having to take impossible risks later in life you need to make sure that you make the most out of every day that you have to invest.  Discount brokers offer commission free investing nowadays on a wide variety of products that allow one to take small amounts of savings and invest as often as weekly or even daily to take maximum advantage of time.  I buy when the market is up, I buy when the market is down and over time I essentially get a fair price.

Remember to always use these three key ingredients to your advantage and you'll be giving yourself a great chance at becoming wealthy at some point in the future.