This essay first appeared in The Palm Beach Letter
In my ongoing effort to shock and awe you with contrarian (and sometimes counterintuitive) truths about building wealth, I give you this little nugget to chew on today:
You cannot become wealthy by investing.
Please don’t tell anyone I told you this. If any of my fellow investment newsletter publishers knew I was saying such things they would have me tarred and feathered.
The investment advisory business – and in that I include brokerages, private bankers, and insurance agents, as well as investment newspapers, magazines, newsletters, and Internet publications – is a huge, multibillion-dollar industry based on lots of hard work, clever thinking, sophisticated algorithms, and one teensy-weensy lie.
The lie is that you can grow wealthy through investing.
It’s not a big, black lie. For there is plenty of evidence that strategic investing can provide returns that exceed investment costs (brokerage fees, management fees, subscription fees, etc.) and even produce positive returns after inflation. But for that to work, you need time. A good deal of time.
Say you start with an investment account of $50,000. And you follow a really good investment strategy that has been proven to deliver 10% annually, year after year. At the end of 10 years, your $50,000 net investible worth will have increased to $129,687. At the end of 20 years, it will have increased to $336,375. And at the end of 30 years, it will have grown to $872,470.
Eight hundred seventy-two grand will give you $87,200 of income for 10 years, which might come to about $65,000 after taxes. That’s okay, but it’s hardly wealthy.
And besides, you probably don’t have 30 years to wait before you would want to begin spending that income.
So what’s an earnest wealth seeker to do?
You can start by deconstructing the teensy-weensy lie your investment advisor has been telling you.
What he isn’t telling you is that building wealth involves at least five key financial strategies, only one of which is investing.
Rich people get rich by consistently implementing all five of the following strategies:
- Managing debt
- Increasing income
- Limiting spending
- Disciplined saving
- Smart investing
As you can see, investing is at the bottom of the list. That’s because, in my experience, it is the least important of the five. Most of the rich guys I know spend little or no time investing. And when they do invest, it’s more of a hobby than a serious enterprise.
Phil, for example, is a true expert in municipal bonds. But that’s not how he became wealthy and it’s not how he intends to become even wealthier down the line. He spends an hour or two every week managing his municipal bond portfolio (which I imagine to be well in excess of $10 million). But most of his working hours are devoted to increasing his income through his business.
Phil is no exception. All of the rich guys I know have their own investment preferences and strategies. But none of them spends more than a small portion of his working time investing. They all understand that they can’t build their wealth by investing alone. They therefore spend most of their time and attention on the other four, key financial strategies listed above.
I never paid any attention at all to investing until I started publishing The Palm Beach Letter. And yet I managed to grow from broke to having a net worth in excess of $50 million – without knowing the first thing about stocks or options or other sophisticated stock market instruments.
Don’t get me wrong. I’m not saying investing has no value. On the contrary, I’m delighted to be an investor now and certain that investing will add to my wealth.
But I don’t intend to spend 40 hours a week studying the market. What I will do is devote an hour a week to following the advice of The Palm Beach Letter’s investment experts: Tom Dyson and Paul Mampilly. And I’ll spend the rest of my wealth-building time on the other four wealth-building strategies.
I doubt that you will hear this from the publisher of any other investment publication. We all know that our market – primarily grumpy old men over 50 – doesn’t give a hoot about managing debt or limiting spending or disciplined saving. And they hate the idea of actively working to increase their income.
So what we do is give our readers what they want: the best investment advice we can offer. We don’t mention the little white truth that they don’t want to hear: that they must spend most of their wealth-building time on these other four strategies if they ever hope to become wealthy.
We want our readers to have all five strategies at their disposal. And that’s why, in every issue of The Palm Beach Letter (and in many of our Cigar Bar essays and interviews as well), we talk about these other financial strategies.
Each month, we bring our readers at least one very solid investment recommendation. Tom and Paul and their team spend hundreds of hours every month researching the markets and double-checking their facts to give us a very good chance for a 10% to 15% return on our money.
But Tom, Paul, and I also talk to our readers about saving strategies (such as our gold coin recommendations and our bond laddering strategy) and how to efficiently manage debt and limit spending and – yes – increase their income by actively engaging in business.
So if you subscribe, please pay as much attention to those as you do the stock recommendations we provide. Of course, it will up to you to take from The Palm Beach Letter what you feel you need. Our hope is that you will take all of it.