Simple truths behind building wealth

Realising how important money and wealth are in this world, we need to understand what we need to do to build it and what mistakes to avoid in the wealth ramp up.

Saving right from day one – We all need to get into the basic discipline of saving some money from what we earn, irrespective of the earnings level. This is the first tenet of building Wealth.

Starting investments early allows us time to put away money over time, which will compound and balloon into a wonderous sum. We need to make this a habit.

Random investment is not diversification – Many investors put money into many new schemes they get to hear about including IPOs/ NFOs. This just makes the portfolio bloated without aiding in diversification or achieving one’s goals. Lot of such people struggle to just keep up with what they have done as they have bought these through multiple vendors and have too many investment accounts. Recipe for chaos!

High Investment return does not contribute to wealth buildup – It sounds logical that a high return is needed for building wealth. Only that it is not true.

Every product has certain characteristics ( including how much risk-reward is possible ) and that is why we have them in the portfolio.  Also, assets are prone to cycles and offer good returns at certain points, which benefit an investor who has the asset already in the portfolio.

Also, a high return without other desirable characteristics may not help. A portfolio is built to take care of needs of that family and that is the primary mandate. Not being able to achieve a goal in spite of high returns would be unforgivable. For instance, a portfolio comprising of real estate assets giving high returns but not saleable when needed, is useless in funding children’s education.

Income plays a limited role in wealth buildup – That may sound surprising. For most people, income is not something they have too much control over. Also, whatever be the income level, what one saves and invests is what helps in building wealth. Most people think their main problem is that they are earning less when the problem may be in other areas.

The focus should be on other levers which are far more controllable.

Expenses, lifestyle, and goals play a major role in wealth buildup – These are the controllables. We have seen time and time again that keeping the expenses low/ manageable levels is a prerequisite to wealth buildup.

Lifestyle should be scaled up slowly, at a pace less than the income growth level. Warren Buffet, Narayana Murthy, Azim Premji and a host of others have kept their lifestyles more or less intact, in spite of their wealth. I would argue that they are where they are due to their humility and right habits.

Goals should be those which are truly important and necessary and should be in accordance with the legitimate aspirations based on one’s station in life. Unbridled dreams with weak finances wreak havoc and should be avoided.

Take on Liabilities only when really necessary – We need to understand that we take loans when we do not have enough to fund a goal today. By buying something on a loan, we are cashing in on our future income!

For some acquisitions like a home, a loan may be absolutely necessary. This loan, taken at the right stage in life should be fine as it is generally a low-cost loan and creates an asset. But even in this case, one is taking on a responsibility to pay EMIs for years on end. Income disruptions ( like what has happened during these Covid times ) can be very challenging.

Taking loans for other things like a holiday, white goods etc. should be avoided. If one does not have money to buy a TV, why buy it at all? It is better to accumulate the money and buy it later.

Avoid blunders; follow wise counsel – Just avoiding blunders will keep one ahead! Many times, a blunder can set a person back by several years.

The best way out is to have good advisors whose counsel one should seek and stick to. Subtracting negative from one’s life can be hugely positive!

You need not follow fads and new ideas – Fads breakout from time to time.  It can be a sudden surge in Crypto currency, manic interest in real estate, a sudden fancy for Gold, or some other new, red-hot product.

Many times, following fads takes you away from what you need to do in your portfolio. Also, one may liquidate legitimate investments to pursue fads, jeopardizing one’s own future. Fads rarely yield positive results and most times those following it get stampeded in the wildebeest rush!

Investments need not be exciting – Many investors want their investments to be interesting. It need not keep you busy and on the edge of the seat, to get results. Investments should help in realizing one’s goals and help in creating wealth.

Investment portfolios should be constructed carefully considering all parameters that are necessary to achieve upcoming goals and objectives. If one is looking for excitement, there are many other avenues for it – horse races, movies, game parlours, theme parks etc.

What works for someone need not work for you – Each person’s needs are different. Also, the investment must be a function of one’s temperament, risk appetite, understanding of the domain etc. That is why Equity / Real estate investments work for some and not for many others who jump in and out of such investments without ever making serious money.

Thinking long-term – Wealth is created over time – a very long time. One needs to have patience to wait it out and the discipline to put aside money during the working years, to ensure compounding.  Also, one should not interrupt the long-term wealth creation potential of the long-term corpus, by drawing down from it at frequent intervals. A sapling grows and becomes a massive tree only if it is left undisturbed for long and has access to sunshine, water and nutrition.  Time compounds money.

Be prepared to take required risk – Being extremely conservative and putting all of one’s money in low-yielding, low-risk investments will not create wealth. One should assess one’s risk profile and be prepared to take an appropriate level of risk for better returns in one’s portfolio. Not taking enough risk, is a risk in itself.

These are some of the basic principles to follow while building wealth. They are simple and yet many find it difficult to follow them; reason why many keep talking wistfully of being wealthy but never getting there!