Once you start to have a small amount of money in your Financial Freedom (FF) jar, you’re ready to start investing those resources. What investments should you go for? What’s a good investment strategy for you?
Obviously, getting a good financial planner will help. But if you prefer a more DIY approach, then consider the tips by Charles Wheelan in his book Naked Economics: Undressing the Dismal Science, where he shares a range of economic and financial principles that explain how the world and markets operate.
THE SURE-WIN INVESTMENT STRATEGY
If you are looking to amass a large amount of wealth, there IS a solution. Unfortunately, this strategy involves old-fashioned financial wisdom, and requires you to make consistent short-term sacrifices, for the slow and steady accumulation of wealth over time.
The great news is, if you are prepared to follow them, these 4 investment principles help you to get predictable returns on your investment.
1. Save. Invest. Repeat.
Capital is scarce, so the market will pay for it. Start by clearing your debts and saving, so you have spare capital. If you have been religiously following the 6 jar approach by Eker, you would have started to save up some money for investment.
2. Take Risk, earn Rewards
Once you have spare capital to rent, you can choose your financial tools. Generally, the riskier the investment, the higher the rewards. Choose risky investments only if you have the tolerance for the risk.
One of the interesting (and sadly true) observations made by Wheelan is how, when it comes to losing weight and getting rich quickly, some of the smartest people will believe the most ludicrous solutions. If you see an investment deal that promises returns that are too good to be true, it probably is.
So, for the average investor, Wheelan advises that the best strategy is to pick a simple index fund and stick to it, because:
• The market may behave irrationally, creating opportunities for profits in the short run. But, it’s not easy to make money off these irrational behaviors in a consistent way in the long run.
• The average investor can’t outwit the markets and hence shouldn’t even try.
Spread your investments over different entities that are independent of one another (e.g. don’t put all your money into just property, or companies in related industries).
4. Invest for the long run.
As Warren Buffett says, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”, and “our favorite holding period is forever.” Investing for the long term is always the best strategy.
You may be disappointed by the “old-school” advice in this article, but unfortunately, this is truly one of the most predictable ways to amass wealth over time.
If you’re based in the USA and wish to get your finances in order, do check out I Will Teach You to Be Rich by Ramit Sethi. Or, learn more about investing in index funds for fuss-free diversification. This is explained in many of the books highlighted above.