In Individuals, Market Outlook & Strategy

I have always been fascinated with the fact that some concepts simply stand the test of time. In high school and college, for example, I often gravitated toward teachers that taught classics. I felt that if certain ideas have held their relevance for over 2,000 years, I probably should be paying attention.

The same premise holds in wealth building, too. While there will always be new innovations and trendy tactics, a knowledge of the timeless concepts of wealth building is foundational in any solid strategy.

Here are some concepts in finance that have stood the test of time – and that I believe anyone would be wise to consider.

1. Everything in Moderation

This ancient Greek standard certainly applies today to investing via the concept of diversification.  Chasing yesterday’s hot idea is often a recipe for disaster. The fact is that past financial results do not give a reliable indication of future results; a hot stock may continue to go up or it may flame out.

2. Live Within Your Means

In my 20s I dated a woman during an economic recession who had an expression that I believe more should live by: “No income, no out go.”

I have often seen people begin to spend money they have “earned” through high portfolio returns.  However, after a period of strong returns (such as the last 10 years), investors can have unrealistically-high expectations about the continuation of high future returns. Unfortunately, current spending patterns are usually much more consistent than the market, leaving many people unprepared to bring their spending in line with volatile or declining market conditions.

3. Knowledge is Power

Often the best way to minimize investment risk is to fully understand the underlying economic dynamics of the industry.

For instance, an investment in a biotech company with a lead candidate pharmaceutical drug that doesn’t receive FDA approval may represent a near-term disaster – or at the very least, volatility – causing someone who doesn’t know the story to sell on the bad news. However, understanding that the same company has three other products in the pipeline that are as good or better than lead candidate would enable a well-educated investor to weather the storm of volatility more successfully.

4. Start Investing Early and Often

The time value of money is one of the most powerful concepts in investing.  While hard to believe, a person who puts in $5,000/year when they are 25-35 ($50,000 total investment) is projected to have approximately the same amount of money at retirement as someone who invests $5,000/year 35-65 ($150,000 total investment) using the exact same investment return assumptions.

5. Pick Low-Hanging Fruit

Often the advice I give my clients is that if they do nothing but pick low hanging financial fruit their entire lives, they will be just fine in retirement. An example of low hanging fruit – capture the match in your company’s 401(k). Simply stated, the single best way to grow your financial wealth with no investment risk is to take advantage of this type of program. It’s hard to believe, but 30% of people with a 401(k) plan with a match do not participate in the plan.

6. Come up with a Plan, and Stick to It

Investing is one of the trickiest things to do well. I believe that the best money managers in the world are right on the stocks in their portfolios only about 55% of the time. Think how hard it is to outperform the market without a team of analysts and stock researchers to support you.

The way to do this is to invest with a long-term perspective, which mitigates the risks of near-term volatility and takes advantage of more dependable and stable long-term investment returns.

7. If the Facts Change, Your Investment Strategy Should, Too

Coming up with a long-term plan does not mean sticking to it blindly. If, for instance, you get sick and anticipate needing money in the next 5-10 years, your investment philosophy is dramatically different than it would be if you were investing for a retirement 10-20 years in the future. Likewise, investing like you are 25 at 55 is a recipe for disaster.

Also, be mindful of market valuations, as if the outlook for positive long-term returns appear muted, then your investment risk profile should change. You should always be paid to take investment risk.

8: Sweat the Details

Little things matter. For instance, paying up for that unlimited cell phone data plan by $25/month, even though you never use all of your data, costs money. Assuming +6% annualized returns, I calculate that every $100/month spent on unnecessary expenses reduces your retirement wealth by $46,204 over 20 years.

9. Death and Taxes

Although inevitable, try to postpone these events for as long as possible. While you do have an obligation to pay taxes you owe, there is nothing wrong with legally avoiding and postponing taxes. You can do this by investing in tax-deferred accounts (IRAs, 401(k)s, Roths, HSAs, 529s) and securities (municipal bonds).

In Washington State, all estates with a value greater than $2.0 million are taxed at a 14% rate, which goes all the way up to 20%. Basic long-term financial planning, gifting, and charitable strategies can minimize this liability dramatically.

10.  Know Thyself

Frugal habits can have some risks. It is always a good idea to be mindful of financial service fees (mutual funds, administrative services, etc.), as they can eat into long-term value. However, good advice pays for itself many times over.

If you are an investor that can make emotional decisions and then ends up with a portfolio with a high percentage of cash, you likely would be well-served having an investment adviser that will help you stay invested during times of uncertainty.

11. Cash is Not a Long-Term Investment

I do not consider cash to be an investment, as these days you are getting investment returns that are below the rate of inflation. This means your account is depreciating, in real terms, over time.

Stocks and bonds involve taking some investment risk, which investors get compensated for in higher investment returns. Stocks should be the cornerstone of most people’s portfolios.

12. Diversification is Not for Wimps

I have many clients that have a very high degree of investment risk tolerance. They often tell me they can stomach any downturn and won’t flinch from a long-term, high risk/high return investment strategy.  While that may be true, what if they (or a family member) has an unexpected health issue and their time horizon changes? What if that time horizon changes during a market downdraft? Thoughtful diversification first, high risk/high return investment strategies second.

13. Invest in Yourself

Happiness should be your ultimate objective, not financial asset accumulation.  Think of spending as making an investment in yourself – don’t abstain from it. Do it wisely.

Looking for Personalized Financial Guidance?

Living by these 13 timeless concepts is a great foundation for building wealth. Follow them, and you’ll be on the right track. And if you’re looking for more personalized wealth management guidance, I’d love to hear from you.

As a financial advisor in Seattle, Washington, I help clients build intelligent risk-taking strategies that are customized to their goals and result in portfolio growth. I named my firm “Sapling Wealth” because my clients value thoughtful investment strategies that will grow and appreciate over time. This enables them to focus on living life to the fullest.

If you have questions around strategic wealth building, I’d love to schedule a time to talk.

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