What is the best way to build wealth?
Do you need the same things to “feel rich” and to “be rich”?
Building wealth is a slow process. After working as a financial advisor for over 20 years, I realize that there are 10 simple steps that my successful clients take. If you walk the same path that they do, and follow this 10-step plan, you should find yourself on the path to improving your financial situation.
- Gather your information
Get organized, and take stock (no pun intended!) of what you have. For example, what savings plans and insurance policies do you own? Do you know what’s inside your investment portfolio? Create a list of all your assets and debts, both current and future.
- Define your goals
Everyone has a different definition of “financial success,” so take the time to define your financial goals. These can include paying college bills, buying a home, saving for retirement, going on a vacation, depending on your personal needs, wants, and desires.
- Identify the barriers that prevent you from reaching your goals
Once you know what you want, figure out what is stopping you from achieving it. Ask yourself what concrete steps you can take to turn your dreams into a reality. While some obstacles in your path may be removable, others may be insurmountable. Once you know your limitations, prioritize your goals to differentiate between real goals and mere wishes. Focus on what you can realistically do. If you receive a $100,000 inheritance, realize that it can’t possible cover goals that cost more than the principal or what it can reasonably generate.
- Determine an ideal asset allocation
As the proverb goes, “Don’t put all your eggs into one basket.” In the financial world, spreading your chances is called “asset allocation.” It means spreading your money among various different investments, in an attempt to minimize risk and maximize gain. Learn more about different asset allocation strategies, with this six-minute podcast.
- Respect your tolerance for risk
Can you handle risk? The answer to this question depends both on your specific situation and also your personality. If you are close to retirement age, your risk tolerance should be lower than a younger working person, because you don’t have time on your side to recoup potential losses. Read this blog piece to learn more about what factors affect someone’s investment risk tolerance.
- Select the individual investments
When you have your ideal asset allocation, you need to pick specific investments to fit into the different asset types, stocks, bonds in your asset allocation. There are many factors to consider when selecting individual investments, so make sure to consult with a qualified financial advisor about which ones are the most suitable for your needs. Remember it is not only about choosing “the best” investment, but choosing investments that work best together.
- Monitor your progress
Building an investment portfolio doesn’t mean buying stocks/bonds and then leaving it to run on automatic pilot. Review your portfolio’s performance every six months, or more often if there is a change in your financial status. Monitoring your investments’ performance gives you the opportunity to catch small problems before they become difficult to fix.
- Reserve your emotions for your family and friends, not investments
One of the biggest dangers in investing is your emotions. Ask yourself why you are thinking of selling or buying a certain stock. Is it out of fear or greed? One way to avoid making decisions based on your emotions rather than rationality is to consult with a financial planner. Apart from having extensive knowledge about investing, a financial planner is objective about your portfolio, and has your best interests in mind when giving you advice. He won’t feel committed to keeping a certain stock just because you inherited it, if it doesn’t serve your financial goals.
- Avoid scams
As technology advances, so does criminal sophistication. Today’s fraudsters are smart and cunning. How can you know when an email asking you for financial information or offering a new investment is genuine? Read this for important guidelines on how to avoid fraud.
- Learn how to understand simulations
Many economists base their projections and forecasts on Monte Carlo simulations. While it is impossible to predict the future, this type of simulation can give you a reasonably accurate projection of what may be. Watch this 7-minute video on Monte Carlo simulation.
Following these ten steps will hopefully help you build wealth and achieve your financial dreams. Let me know which of the 10-steps you find the most challenging.
Douglas Goldstein, co-author of Rich As A King: How the Wisdom of Chess Can Make You A Grandmaster of Investing, is an avid chess player, international investment advisor, and Certified Financial Planner (CFP®).