Invest the difference
So far in this seven-part series, I have explained how to have a better relationship with money, how to spend less than you earn, how to have a good budget and the power of compounding. Now it’s time for the best part, which is to take the money that you’ve saved and invest it.
This key principle can seem very scary to most people and for good reason. I too was someone, who had absolutely no clue how to invest, how the stock market worked, or even how to buy stocks. Thankfully, with the age of the internet, there are so many great resources, when it comes to investing, that can help you on your journey. As long as you have the right attitude towards money, you will find a way. If this is something that you want to learn more about, so it doesn’t feel so overwhelming, I go into detail, how to do this, in my book, “Create The Life You Want.”
The most important thing, is that whether you invest yourself, or have a financial adviser do it for you, make sure that you understand what is happening to your money; along with the risks associated with this. There has been much research conducted, that has proven beyond a shadow of a doubt, that for the most part, financial planners and stock brokers are not able to provide their clients with superior results, to that which the client could gain on their own. This is precisely why I strongly recommend that you take a proactive interest in your own financial affairs. This is what I did and I am glad I did.
My father was a well-known accountant in our city and was everyone’s accountant growing up. One regret of mine, was that I had no interest in money when I was younger, so I was not able to benefit from his incredible wealth of knowledge, when it came to money and investing. One thing that I do remember Dad saying when I was growing up, was that if you want to be assured of winning in the game of investing, you must diversify.
You can’t just put all of your money into the bank or put all of your money into a house and not have anything else. His reasoning for this, was quite simply. If you have all of your eggs in one basket, and something happens to that basket, you could lose everything. This line of thought is echoed in every one of the finance book that I have read, by some of the greatest minds in the world of investing. People like Warren Buffet, Ray Dalio, Phil Town, Robert Kiyosaki, Tony Robbins and many others, all agree that you must diversify.
For a full list of books on investing that I recommend, check out my reading list.
Most people are scared of investing, because they have either heard horrors stories of people losing all of their wealth, or they themselves have lost everything. In many cases where this has occurred, it has happened from a lack of diversification, or a lack of education. When the stock market crashed in 2009, like most people, my superannuation took a huge hit too. I didn’t have a large amount to lose in the first place, but none the less, on paper, I lost a lot of what I did have.
This made me realise, what I confirmed years later, that most professionals investing our money, are as bad as the rest of us, when it comes to protecting our wealth. What it also taught me, was that if I wanted to avoid that gut-wrenching feeling, that I had when I saw my superannuation statement with 20% less money in my account, then I needed to take control of where my money went.
To create a well-diversified portfolio, you must spread your money across different asset classes. What this does, is act like a metaphoric bed of nails for your investments. We all know that if we were to lay on one single nail pointing upwards, or even four or five nails, they would all pierce through our skin, at the point of contact. On the other hand, if we were to place thousands of nails pointing upwards and lay down on them, the impact would be spread sufficiently, so that no single nail, nor the collection of nails, would make any impact; other than a small mark.
Creating a diversified portfolio, works in the same way. By spreading the risk, we decrease the chance of damage. For example, many people buy a home and put all of their savings into paying it off. They then buy another investment property, or even a few. This is fine, however, if the property market crashes, they stand to lose a lot of money. For the most part, yes, house prices go up, but there have been occasions, where there have been crashes in the market, so it is still a better idea to not put all of your money into that asset class.
I go into much more detail how to create a diversified portfolio, in my next blog – “Creating a diversified portfolio,” but below is a brief example of what a diversified portfolio should look like.
Just to clarify, the main asset classes that you should invest in to create a balanced or diversified portfolio are: Property, Cash, Bonds, Shares & Commodities. I go into much greater detail of these, in the next blog, “Creating a diversified portfolio.”
Each of these asset classes, for the most part, fluctuate independently of each other. For example, if there is a crash in the housing market, then generally, shares won’t be affected, in the same way. If interest rates go up, earning you more interest on your cash investments, bonds will generally go down. Very rarely will all of these asset classes move in the same direction, at the same time. There may be some correlation, but generally, they will move independently.
By having your investments spread across some, or all of these assets classes, you will maximize the upside, while protecting against the downside. If the stock market crashes and you lose a big chunk of your investments in shares, your bonds or property will more than likely move upwards; or at least remain steady. Making sure that you diversify, is key to succeeding in providing for your future. A well-diversified portfolio will usually have some assets up, and others moving down, at any given time. That is how it is supposed to work and how it protects against big losses.
My father had a well-diversified portfolio. When he died, aged 91, my brother was the executor of his estate and began dismantling all of dad’s investments. What my brother found, surprised me, because given that dad was 91, I would have thought, that he would have spent all of his money and had very little left at the time of his death. Not only did dad not run out of money at age 91, but he still had quite a portfolio of investments, that well and truly outlived him.
Dad’s investing timeline, included the stock market crashes of 1973, 1987, 1992, 2000 and 2008 (along with many more “corrections” throughout the years). This proved beyond a shadow of a doubt to me, that a well-diversified portfolio of investments, is a must, if you want to be wealthy and not run out of money.
For more detailed information about this, and other areas of creating an exceptional life, check out my book, “Create The Life You Want.”
