Achieving Financial Independence
If you ever listen to Bob Brinker's "Moneytalk" program on Saturdays and Sundays, then you may have heard him talking about "The Land of Critical Mass." What he is referring to whenever he uses that expression is the subject of today's blog!
Financial independence doesn't come overnight. You can achieve it only by developing sound wealth-building principles and then following those principles faithfully over a period of years. Get-rich-quick schemes and investments generally don't ever result in financial independence.
Wealthy individuals develop a goal-oriented, long-term viewpoint that other people lack. They realize that investment success comes from setting definite goals and meeting them. They write out specific goals for achieving financial independence, and they are willing to ignore the thirst for instant gratification in order to achieve their goals. This means saving money in order to invest in things that will appreciate, instead of buying depreciating consumer goods that might make you appear rich today. As J. Paul Getty once said, "Make your money first, then think about spending it."
If you want to become really wealthy and independent, you will have to own your own business. Only a business can produce the leverage and appreciation that is essential to amassing great wealth. In addition, working for someone else is not going to make your financial future secure, no matter how big your employer is. Even government jobs aren't as secure as they once were.
What investing can do is to preserve the purchasing power of your wealth. This relatively modest goal (beating inflation and taxes) is surprisingly hard to achieve. But, you can achieve it, and perhaps more, by following a few principles.
You have to be your own investment advisor.Too many investors are looking for an advisor or a system that will provide accurate, automatic buy and sell signals. No such person or system exists. Everyone in the investment advisory business has lost themselves, and others, lots of money at some point. Price movements depend upon individual and government actions which are two factors that are extremely difficult to predict.
Ultimately, personal judgment dictates investment moves, and it might just as well be your own personal judgment. And even if you find an advisor who generally beats the averages, you should not follow the recommendations blindly. Only you can determine your liquidity needs, goals, and the amount of risk you can tolerate. So, only you can decide which investments are best for you. You'll be the one living with the losses!
As your own investment advisor, you must develop a strategy and follow it consistently. To a limited extent, it really doesn't matter which strategy you select, because a number of strategies have proven records of long-term success. Investment newsletters, books and seminars provide information you can use in developing and implementing your own strategy. But, it's up to you to interpret the facts and theories presented by those sources.
In developing your strategy, remember that there is no ideal investment or system. There is no single route to profits, and no route remains profitable for very long. The last several years prove this. From the Spring of 2000 through 2002, no matter what investment you were in, chances are you lost money. You made money only if you bailed out of the market early enough and stayed in money market funds. But, 2003 was just the opposite as the current cyclical bull market took off. So the point here is, you should concentrate on investments and a strategy you understand and with which you are comfortable.
You should avoid short-term trading strategies. Short-term movements in the markets tend to be random events. They're largely overreactions to current news or rumors, and they can't be anticipated. No one, except perhaps a floor trader, can profit from short-term trading. So never make any investment unless you expect to hold it at least long enough to qualify for long-term capital gains treatment.
Another trap investors fall into is trying to predict the future. Predictions are dangerous to your wealth because nobody can predict the future accurately. So don't buy an investment until the market actually moves strongly in the direction you anticipated, and don't sell until any downward move you expected actually begins. You'll miss the top and the bottom, but you won't be caught in a market that is moving in the wrong direction.
There's a favorite tool of professional investors that combines the two mistakes I just mentioned. It emphasizes short-term trading based on predictions. That tool is known as technical analysis.
Technical analysis begins with a common-sense proposition: A trend in motion stays in motion until it actually ends. You can't go wrong investing according to that rule. However, many technicians build on this, and believe that they can predict the future by reading past price movements. This is nonsense. Nobody can do it consistently. So if that's your idea of technical analysis, then do yourself a favor and avoid technical analysis!
Another great failing of many investors is a lack of humility. There isn't any investor alive who wouldn't be substantially wealthier if he or she had only swallowed hard and cut losses early. You're going to make some bad investments. Even the best mutual fund managers make mistakes about a third of the time. Accept this fact, and learn to admit your mistakes.
Most investors show a greater total return when they follow a concentration strategy. But conventional investment analysis says your money should be diversified and fully invested. This is a sound strategy if you are buying individual stocks, because each stock has many variables you can't know about. The market could go up while your undiversified portfolio is declining. You need a diversified stock portfolio.
But for other investments, diversification is better known as the surrender strategy. A diversified investor is one who lacks confidence to make the necessary buy and sell decisions. It's one who hopes that, over time, the total portfolio will at least break even. A better strategy is to leave your wealth in the money market until an investment starts to move up. Then, put a substantial part of your wealth into that investment until the trend reverses. This simple strategy is actually safer and more profitable than the diversification strategy.
Finally, if you want to truly remain independent, don't retire. Retirement is an arbitrary policy that takes away your greatest asset -- your earning potential. In today's volatile economy, you cannot risk losing your earning power!
* * * * *
Financial independence doesn't come overnight. You can achieve it only by developing sound wealth-building principles and then following those principles faithfully over a period of years. Get-rich-quick schemes and investments generally don't ever result in financial independence.
Wealthy individuals develop a goal-oriented, long-term viewpoint that other people lack. They realize that investment success comes from setting definite goals and meeting them. They write out specific goals for achieving financial independence, and they are willing to ignore the thirst for instant gratification in order to achieve their goals. This means saving money in order to invest in things that will appreciate, instead of buying depreciating consumer goods that might make you appear rich today. As J. Paul Getty once said, "Make your money first, then think about spending it."
If you want to become really wealthy and independent, you will have to own your own business. Only a business can produce the leverage and appreciation that is essential to amassing great wealth. In addition, working for someone else is not going to make your financial future secure, no matter how big your employer is. Even government jobs aren't as secure as they once were.
What investing can do is to preserve the purchasing power of your wealth. This relatively modest goal (beating inflation and taxes) is surprisingly hard to achieve. But, you can achieve it, and perhaps more, by following a few principles.
You have to be your own investment advisor.Too many investors are looking for an advisor or a system that will provide accurate, automatic buy and sell signals. No such person or system exists. Everyone in the investment advisory business has lost themselves, and others, lots of money at some point. Price movements depend upon individual and government actions which are two factors that are extremely difficult to predict.
Ultimately, personal judgment dictates investment moves, and it might just as well be your own personal judgment. And even if you find an advisor who generally beats the averages, you should not follow the recommendations blindly. Only you can determine your liquidity needs, goals, and the amount of risk you can tolerate. So, only you can decide which investments are best for you. You'll be the one living with the losses!
As your own investment advisor, you must develop a strategy and follow it consistently. To a limited extent, it really doesn't matter which strategy you select, because a number of strategies have proven records of long-term success. Investment newsletters, books and seminars provide information you can use in developing and implementing your own strategy. But, it's up to you to interpret the facts and theories presented by those sources.
In developing your strategy, remember that there is no ideal investment or system. There is no single route to profits, and no route remains profitable for very long. The last several years prove this. From the Spring of 2000 through 2002, no matter what investment you were in, chances are you lost money. You made money only if you bailed out of the market early enough and stayed in money market funds. But, 2003 was just the opposite as the current cyclical bull market took off. So the point here is, you should concentrate on investments and a strategy you understand and with which you are comfortable.
You should avoid short-term trading strategies. Short-term movements in the markets tend to be random events. They're largely overreactions to current news or rumors, and they can't be anticipated. No one, except perhaps a floor trader, can profit from short-term trading. So never make any investment unless you expect to hold it at least long enough to qualify for long-term capital gains treatment.
Another trap investors fall into is trying to predict the future. Predictions are dangerous to your wealth because nobody can predict the future accurately. So don't buy an investment until the market actually moves strongly in the direction you anticipated, and don't sell until any downward move you expected actually begins. You'll miss the top and the bottom, but you won't be caught in a market that is moving in the wrong direction.
There's a favorite tool of professional investors that combines the two mistakes I just mentioned. It emphasizes short-term trading based on predictions. That tool is known as technical analysis.
Technical analysis begins with a common-sense proposition: A trend in motion stays in motion until it actually ends. You can't go wrong investing according to that rule. However, many technicians build on this, and believe that they can predict the future by reading past price movements. This is nonsense. Nobody can do it consistently. So if that's your idea of technical analysis, then do yourself a favor and avoid technical analysis!
Another great failing of many investors is a lack of humility. There isn't any investor alive who wouldn't be substantially wealthier if he or she had only swallowed hard and cut losses early. You're going to make some bad investments. Even the best mutual fund managers make mistakes about a third of the time. Accept this fact, and learn to admit your mistakes.
Most investors show a greater total return when they follow a concentration strategy. But conventional investment analysis says your money should be diversified and fully invested. This is a sound strategy if you are buying individual stocks, because each stock has many variables you can't know about. The market could go up while your undiversified portfolio is declining. You need a diversified stock portfolio.
But for other investments, diversification is better known as the surrender strategy. A diversified investor is one who lacks confidence to make the necessary buy and sell decisions. It's one who hopes that, over time, the total portfolio will at least break even. A better strategy is to leave your wealth in the money market until an investment starts to move up. Then, put a substantial part of your wealth into that investment until the trend reverses. This simple strategy is actually safer and more profitable than the diversification strategy.
Finally, if you want to truly remain independent, don't retire. Retirement is an arbitrary policy that takes away your greatest asset -- your earning potential. In today's volatile economy, you cannot risk losing your earning power!
* * * * *
posted by Bob Moser at
8:53 PM
0 Comments:
Post a Comment
<< Home