The proven way to become wealthy
You will win, 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. As you may have noticed, all kinds of investment markets have been volatile recently. A lot of this is due to panic-selling by inexperienced investors – perhaps those are the very same people who are hoarding toilet paper.
There’s no argument that we live in uncertain times: we might be at the start of a long global downturn or at the start of a fresh new beginning, with new innovations and businesses leading the way. Though there’s nothing new about that situation – we always face an unknowable future.
There may be more short-term pain to come, but over the long-haul, the companies that make up the stock markets will recover, 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.
This 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 about the overall concept discussed in this article. 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. A decade or so ago many Kiwi mums and dads experienced difficult times after they invested everything they had into finance companies who were bankrolling risky property developments. When the Global Financial Crisis hit, nearly all these finance companies went bust in quick succession.
- 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 causes people to stockpile toilet paper! 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.
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 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 broader perspective is required.
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 the value of your investments:
- 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 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 win.
So, if you haven’t already started, what are you waiting for?
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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.