This is a follow up on the idea that everyone wants to be rich but most people don’t prioritize it and don’t achieve it. I touched on this in yesterdays post titled Financial Independence that discusses a life transition I am starting.
The order of priority is important. Robert Keyosaki wrote in his book Rich Dad Poor Dad that we all want to be rich but not everyone achieves it. Most people put comfort and security ahead of being rich. Most people underestimate the potential upside of choosing rich heavy actions and overestimate the risks associated with those actions.
It costs money to be safe and comfortable. You end up trading opportunity in time, options, learning and raw capital that could be used on investments that return a higher rate. My suggestion is to sacrifice comfort and security in the beginning of your investment timeline. This will hopefully allow you to make higher returns with most of your resources then buy back your comfort later and be way ahead of those other guys who paid for comfort from the get go.
A lot of people worry about what would happen if the don’t have the safety of a regular job or guaranteed and stable returns from low risk investments. Most people don’t want to deviate from the investment strategy their friends, colleges and family use typically stocks and bonds invested through a fund at a local bank.
If you were to go against the advice of your peers and fail you may not only lose your investment but potentially feel foolish. But that’s actually in reality not such a bad thing. The idea of going to maximum growth up front means that if your strategy fails you can try again and again a few times learning as you go and you still have the opportunity when you are older to invest with time to save for retirement when you need it.
Iterations on ideas, strategies and investment types.
The more times you do something the better you get at it. There is a saying, when a man with money meets a man with experience, the man with experience ends up with the money and the man with the money ends up with the experience. Cheeky but the point is that while you may fail at your investment plan at first as long as you keep trying you will improve and overtake the vast majority of people who passively invest in the market.
Because of compounding most investments really pay off at the end so it doesn’t really make sense in my opinion to sit on investments without high potential when you are starting out or have a base net worth of zero.
Having a risky asset class or a risky allocation of only a few asset classes carries lower inherent risk when carrying a lower net worth. So the benefit of diversification or the type of investment you choose plays a smaller role than most people assume. For example if you are investing your first one thousand dollars and decide to buy Bitcoin rather than a stock index fund and plan on saving two million dollars for retirement, exactly what is the difference in the long run between those two options? The stock market could double or triple in thirty years, Bitcoin could go up five or ten times. Nobody knows but as you continue to invest you will have the opportunity to keep adding to each of these different asset classes and give yourself the most amount of time exposed to the highest gains you can anticipate.
Risk weighted against opportunity.
A lot of people look at risk factors in isolation but what should matter more is the ratio of risk relative to estimated gain.
Investing to be rich rather than safe can look like investing in an asset you think will return the highest after ten years rather than a good investment that will return a fixed consistent amount each year. The ten year play may sit at a loss for nine years and only pay off when its ready. This is where the price of comfort and safety is paid by you. If you need the money unexpectedly or want the reassurance of steady growth you will have to make do without or make other arrangements. But when the long term plays pay off you can usually buy 10x the safe consistent investments you would have otherwise because your investment capital would be smaller and spread out.
If there are fundamentals in an asset class or patterns that repeat the buying into undervalued assets and selling or reallocating overvalued assets is a good option.
When starting out in a wealth accumulation phase rather than a safe wealth preservation phase, I would invest in asset classes I think will have the highest risk weighted return. Currently in my opinion some precious metals like silver and cryptocurrencies fit into this bucket. I will explain in another post the some factors that could affect these asset classes both negatively and positively.
My personal strategy:
Buy assets with strong estimated future fundamentals. I.e. things people need that are rare or becoming more rare. Buy when the price is historically low and going up, Sell when the price is high relative to historical trends and starting to go down. Use the money to buy other assets that are undervalued. Use a ten to twenty year price history if available. Trade small amounts over time relative to the rate the price rises and falls in the past and based on your target allocation.
Some Random Asset Categories:
Realestate: REITS, Investment properties. In Canada the housing market is at a 100% fifteen year bull run.
stocks: Index Funds. Markets in the US and Canada are also in a ten year all time high.
bonds: National both foreign and domestic. Interest rates are low so these pay out low interest.
Structured Notes: Banks offer options for gains with some investment protection.
Private Quity: Business opportunities sold as Investment Bonds, TFSA and RRSP eligible.
Precious Metals: PMs used in industry are at a ten year price low and could potentially become rare in the future.
Crypto: Bitcoin, and alternatives. Seeing increased user adoption and upward trending.
These allocations illustrate a possible interpretation of investing for gain vs. safety.