The proven way to become wealthy
How to get rich in NZ, but this is no 'get rich quick' scheme
There is a near certain way to become wealthy that doesn’t involve the lotto, an inheritance, or a get rich quick scheme: simply invest for long enough.
Given a long enough timeline, your chances of becoming wealthy are close to 100%.
Accumulating wealth is the ultimate long game. If you stick with it for long enough, there are only two outcomes:
- You become wealthy (compared to where you are now), or
- The world as we know it ends. If that happens, who cares about money?
Simple, just not always easy
Staying invested for a long time is as straightforward as can be, however, that doesn’t mean it’s always easy.
We had a reasonably recent reminder of this with the initial Covid-19 outbreak. Especially during the gloomiest periods of early 2020 as Covid swept the world, a lot of investment market turbulence was due to panic-selling by inexperienced investors – perhaps the very same people who were hoarding toilet paper.
There's no doubt we still live in uncertain times, though there’s nothing new about that situation – we always face an unknowable future.
There may always be short-term pain just around the corner, but over the long-haul, the companies that make up the stock markets will continue to innovate and expand, and for any that fail a new and better company will take their place. A 2009 study sponsored by the Kauffman Foundation found that more than half of the largest companies in the world were launched during a recession or downturn.
The graphs below show one common stock (share) index from 1973 to 2019. While some periods of decline (displayed in yellow on both graphs) have been significant, the periods of growth (shown in green) overwhelm them. The blue line on the top graph represents the growth of a single dollar, invested in 1973.
The graph shows that thriving through a downturn is nothing more than a time horizon problem – given enough time, you will prevail. Investing is essentially guaranteed to work over a period of decades, though over days and weeks it’s pretty much a “coin flip” whether your investment values will go up or down in value.
Many smart readers might have already thought of a few exceptions or questions to this rule. Let’s take a quick look at a couple of these:
- To clarify – when we mention investing it’s assumed that the investments adhere to the first principle of investing: diversification. There surely isn't a clearer way to see this than by reviewing this complimentary resource, The Periodic Table of Investment Returns. Global investment heavyweight Mercer compile this resource annually, and have kindly given us permission to display it. The resource shows the annual returns for all major investment asset classes, ranked from best to worst across each of the last 10 years. After reviewing this periodic table, several crucial investing lessons are very clear:
- Investment returns in any single asset (such as New Zealand property, shown in dark green on the table) are unpredictable,
- There's a need to keep at least some investments in low risk/low return securities to smooth out the peaks and dips of high risk/high return investments, and
- The importance of diversification!
- Some might ask that if you’re sure to win by “playing the investing game” for long enough, then who loses? For every winner there must be a loser, right? This is a tricky area, and in the simplest terms, the “losers” in this game are the ones who panic and sell-up when the going gets tough (shown in yellow on those graphs above). Remember, the mindset of those types of people might be the same that irrationally caused people to stockpile toilet paper based on emotions such as fear! In a strange way, this actually helps the long-term investor who’s still making investment contributions (i.e. still buying) at discounted prices – they’re buying up whatever is being offered for sale by those without such a long-term focus. There's an effective way to help stay calm during such times, called reframing.
Reframing your thoughts
Reframing means looking at a situation in a different way. To reframe a problem, you may need to get an external perspective. Consider a non-investment example:
A quick look at any mainstream media source might lead you to think that humankind is in terrible shape: the media is full of talk about death, global warming, accidents, disease, social issues, and a range of other catastrophes. However, if you sit back and look at the progress of humankind from a wider perspective across our history, it’s obvious that this is the best time ever to be alive – humans are living longer than we ever have, we’re healthier, more educated, have more technological assistance, and have more liberties and freedoms than at any other period in time. Even the average Kiwi has better healthcare and a longer life expectancy than the wealthiest King or Queen could expect just a few hundred years ago.
Circling back to the investing world, focusing too much on weekly (or even monthly or quarterly) value movements or attention-grabbing news stories usually represents short-term thinking, and a broader perspective is required.
Depending on your personality type, another tip to maintain long-term focus is measuring things.
What gets measured, gets managed
If you’re the sort of person who likes measuring things on a regular basis, then try measuring something other than just the value of your investments. This is because the value of your investments will fluctuate due to things outside of your control. Focusing on what you can control is a much wiser idea, for instance:
- Regular investment contributions in the year-to-date. Perhaps as a dollar figure or as a percentage of your overall income?
- How many shares or fund units you’ve purchased?
If you keep a level head and keep your eye on a long-term path, you’ll be making real progress. Even better is to keep feeding cash into the market over time. If the market falls, you’ll be picking up more units (such as in a managed fund) at a lower price. You’re edging steadily closer to victory.
The bottom line: persistence pays
"The best time to plant a tree was 20 years ago, the second-best time is now." Chinese proverb
Always remember: if you’re in the investing game for long enough, you will become rich.
So, if you haven’t already started, what are you waiting for?
If you would like to discuss anything above with a trained professional in a complimentary initial consultation, it would be our pleasure to assist. Simply leave your details below, or call us during usual work hours.
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About the data
Large stocks are represented by the Ibbotson® Large Company Stock Index. Downturns in this example are defined by a time period when the stock market declined by 10% or more from its peak, while the recovery period indicates the number of months from the trough of the downturn to the market’s previous peak. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.