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Ten Timeless Tips for Wealth Creation – Part 2 of 2
Follow these proven wealth building steps and watch your personal financial security and wealth grow!
Why learn the hard way by wasting your hard-earned money making the same common investment mistakes. It’s better to learn from the experience of thousands of investment professionals over the past 100 years. Here are the top ten timeless investment tips. (See Part I of this article for the other five tips).
- Don’t be too conservative. If you put all your money in a bank account at 4.5%, you’re missing out on about 75% of the total annual income you can earn. Here’s the math: If annual inflation is 2.5%, then that 4.5% bank account only earns you 2% after tax. If instead you invest in a well-diversified collection of US and global stocks across a variety of sectors, your long-term risks are zero and your long-term average returns will be 8-11%/yr. That’s 5.5-8.5%/year after deducting inflation – way more than that savings account!
- Reduce your investment costs. Choose no-fee mutual funds and low-cost index funds whenever possible. The high sales and management fees of many investment vehicles can eat into a significant portion of your annual income. Over decades, the effect can be very dramatic.
- Start early. Start investing in your early twenties. By the time you turn 60, your money will have accumulated 40 years. The highest compounding growth and returns come in the last few years, and you’ll miss out if you only invest for 20 years instead of 40.
- “Average dollar cost”. Here’s what that odd phrase means: An investment strategy designed to reduce volatility in which securities, usually mutual funds, are purchased in fixed dollars at regular intervals, regardless of the direction the market is moving. Thus, as security prices rise, fewer units are purchased, and as prices fall, more units are purchased. also called a constant dollar plan.
- Buy low, sell high. If you follow the dollar buying average, you naturally buy more stocks when prices are low. Now all you have to do is follow its corollary – whenever one of your investments appreciates more than 5% of your portfolio value, sell enough of that winning investment to bring it down to 5 %. This discipline has the wonderful effect of forcing you to sell some of your winning stocks when they are high, locking in your gains and sticking to your principle of diversification.
Time has shown that these principles work with little risk and great returns, as long as you don’t panic over the ups and downs of the stock market every day. And, best of all, you’ll reap a unique and priceless dividend every day of your life – the “sleep at night” factor: because your investments are carefully and consistently deployed over the long term in a well-diversified way, you can live your life focusing on other matters, knowing that your investment account is doing its job: growing safely and realizing your dreams.
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