If making money was easy, everyone would be rich. The fact that the majority of people in the United States are poor tells you something about investing. It also tells you what you should have already suspected and that is the easy conventional wisdom about investing, that you hear every day from friends and family, is almost certainly wrong.
Getting rich is hard work and there are a lot of painful learning lessons along the way. Many times the path to wealth means defying conventional wisdom. Everyone who has achieved financial independence had one stretch when friends and family all thought they were crazy. Bucking the trend doesn’t mean you have to be some crazy risk taker who gambles your family nest egg on a risky business venture, it just means you stick to your plan when everyone else is going a different direction. Here are five examples of hard financial decisions that can determine whether you end up poor or wealthy.
Buying a House
Owner occupied homes are a terrible investment but ask the average person and he or she will claim a house is a great investment. These days a house can tie up nearly forty percent of your combined income. Stretching to buy more house than you need, thinking you’ll grow into the payments and space is a great way to cripple your personal finances for decades. Thinking of housing as an expense instead of an investment is a simple mental change that can keep homebuying from becoming an emotional decision.
Investing conservatively means allocating your investments between different asset classes based on your age and tolerance for risk. After a year that original investment mix will be thrown out of alignment by changes in the market. Rebalancing means selling off some of your winners and buying more of assets that are performing poorly. This is the part of investing that makes you look crazy and the part that makes you feel crazy. Your brain will be screaming at you to do just the opposite. You have to fight the advice of friends and relatives, along with the voice in your own head, to sell off some of your winners and use the money to buy more of the losers.
Choosing An Investment Advisor
The vast majority of investment advisers are little more than salespeople trained to be likable and seem authoritative. They are professionals at implying what amazing results they’ll be able to achieve for you. It’s easy to give in when someone pretends to have the right answers. What’s much harder is doing the reading and mastering the math and spreadsheets necessary to do it yourself. You don’t have to be an economist or an academic to calculate your asset allotment, you just have to put the time in to learn the basics.
Ignoring The Financial Media
The financial talking heads on cable television and financial websites are to investing what the circus is to entertainment. It’s a show, nothing more. If you follow the advice you get from financial cable shows, you will almost certainly be poor. Those shows are a veritable fountain of conventional wisdom and backward facing metrics.
Trying To Beat The Market
Trying to beat the market is like thinking you can beat the house at a casino. Forget beating the market, you can get rich just matching the market. Okay, it takes a little longer but there’s less risk and a lot less stress. The path to poverty is crowded with people who had an angle, who were certain they couldn’t miss. You might get lucky here and there, that’s actually worse than getting burned the first time because it inspires something called illusory superiority. You might win once, you might win twice but financial markets specialize in brutalizing the unwary. You will get burned, you will lose money. Stick to your plan, maintain your asset allotment and rebalance once a year.
Poverty is a mindset that leads to specific behaviors. Don’t get caught by thinking poor and don’t get greedy. Invest regularly and invest wisely and you’ll get rich eventually.