THE 7 GOLDEN RULES OF WEALTH CREATION

We all have dreams and aspirations, especially when we are young. Be it an early retirement or palatial home or big cars. Unfortunately, most of us find us difficult to reach these dreams and have to either give up on grand dreams and set realistic ones or wait till you become too old to afford it. There are only two ways to ensure that you change this. First, earn enough money which may or may not be possible for everyone. Second, walk the easier but the longer path of saving & investing.

One of the important pillars of financial wellbeing is proper financial planning. Financial wellbeing is simply where you have more than what you need, and the extra is invested for an even better future. Often, we complicate wealth creation much more than needed. At risk of repetition, we dare say again that we have to go back to the same age-old principles of investing and wealth creation. They are timeless, simple and yet, very easily forgotten. There are still people out there who have dreams and aspirations but do not follow these critical and life changing rules for wealth creation. In this article, we present the seven rules of wealth creation

 

1.       Time is of essence:

Starting early is half work done. The best time to start investing was when you got your first pay cheque. The next best time was not today, but yesterday! There is no tomorrow, you have got to do it today if you are serious. We all know about the power of time and the power of compounding which can do wonders. But unless you don't start early or asap, the end date for the wonder to unfold will be too late. We have to get time on our side else, we would have to work doubly hard to make up for the lost time.

2.       Saving aggressively matters:

Give a 5-year-old child her favourite ice-cream and ask here if she wants to eat it now or give it back and have two the next month. What will she do? Often, we are no less than that 5-year-old kid when it comes to choosing between instant vs delayed gratification. We cut corners here and there to buy things we don't need to show off before people whom we don't like. Frugality and minimalism and the in words today. Instead of spending on riches & luxury, it's always better to spend on upgrading yourself, learning, setting up side-business and save /invest in appreciating assets at the very least. The more focussed and aggressive you are today and the more you enjoy the journey, the sooner will you reach your destination.

3.       Asset Allocation, is the key:

We often cannot see the forest for the trees. We lose sight of the big picture and spend more of our time in knowing which fund will perform the best, which is the next big multi-bagger, how my funds have performed, and so on. How does it matter even if your fund level performance if plus or minus a few percentages when it occupies only a fraction of your portfolio? Shouldn't we really see the big picture? A typical household in India today has huge exposure to real estate and gold, occupying almost half of all the wealth. The other half is in financial assets where again bank deposits, government small saving plans, insurance investments, etc garner a large share. The lowest exposures are to equities and mutual funds - the products which are crucial to exponential wealth creation over the long term. What we are only suggesting is that everyone should have a well-balanced portfolio with the right exposure to equity asset class as per the risk profile & returns expectations. This will have to be revisited and portfolio rebalanced from time to time, periodically and market event driven.

4.       Emotions need to be tamed:

Many studies have found that equity markets have delivered very attractive returns over the long term, outperforming other asset classes. This is in spite of all wars, events, crisis, pandemics, etc, etc. However, investors have rarely made those kinds of returns. And the reason is exactly these temporary aberrations which tested the conviction of investors and most investors unfortunately failed. Warren Buffett once said "If you cannot control your emotions, you cannot control your money." Our emotions and our behavioural biases often cloud our decisions and instead of acting rationally and against the herd mentality, we become part of the herd. We enter markets when it is late and exit early. With all the noise around us and all the easy information available, we try to time markets and make 'smart' decisions, when perhaps, even getting stranding on a lonely island without a mobile network would have proved to be financially more profitable! Remember, even refusing to do anything is doing something.

5.       Diversification helps, but only to that extent:

We all know that diversification reduces the overall risk of your portfolio. The guiding principle is that not all assets will behave the same at the same time as they would carry different set of risks and return factors. Diversification at the broad level is required also so that you can play that asset allocation game properly and as per a set strategy which can be executed on an ongoing, periodic basis. However, too much diversification into too many asset classes, products, etc would also mean that a lot of underperforming assets sneak into your portfolio. You can't really make good money betting on all horses in a race. Some experts are also of the extreme view that you diversify if you don't really know what you are doing. So it is a matter of the optimum balance, the right mix of a few important things. One may zero it down to say equity, debt and physical asset classes and have exposure to select financial products /securities within these asset classes and again some limited diversification w.r.t. fund categories, AMC, market-cap, sectors, duration /time to maturity, underlying instruments, etc within these products.

6.       Don't miss out on wealth preservation /protection:

All it takes to wipe out your wealth, is one unfortunate moment, event in a lifetime. We have seen many cases around us where families have been pushed back on years of progress in life by a tragedy, by business losses, by court cases, by crimes, accidents and so on. We can't really control what can happen in life, although we can be careful. However, we can certainly control the financial repercussions originating from such events such that our financial well-being is not compromised and we are not left at the mercy of fate. Having proper insurance, is one sure shot way of minimising financial losses and suffering. There are many products out there, both personal and non-personal out there which can protect us financially. Explore products related to life, health, personal accident, critical illness, home, motor, fire, travel, shopkeepers', professional indemnity, etc to minimise your financial suffering. The other way to minimise financial risks in life is to not take unnecessary risks (avoidance) and huge bets.

7.       Build on yourself. Build multiple sources of income:

One thing very common in all self-made millionaires is that they take themselves seriously. They are clear on what they want, they are focussed and passionate, have build good habits, strong character and display behaviour in line with their image and goals in life. They invest in people, in learning, developing their knowledge and skills, in building networks. Often, they don't risk everything on one product alone, even though they may be committed to one idea. They would have multiple sources of income, diversifying to things which interest them. They would try and automate /outsource /partner with or hire people in such a way that these different sources of income take very little time of their own. For them, money is not the destination or end goal but its journey, the game that excites them. This is what sets up apart from all of us on the wealth creation journey. Picture yourself what you want to become and be that today.

The above is an extract from my digital newsletter of December 2022.