By Jim Woods
Building wealth really isn’t that hard.
The compounding math is there for anyone to grasp, as are the basic concepts. The tough part comes when you deviate from these principles in search of a shortcut, or if you make one or two bad decisions that put you in a big financial hole.
Let’s look at the three basic rules for building wealth.
Rule No. 1—Be Right More Often Than You’re Wrong
Making decisions means taking action. But no matter how smart those decisions, and no matter how much thought or research or effort you put into those decisions, you are still likely going to be wrong many times.
Think about this as it applies not just to your investment portfolio, but also to life in general.
If you’re reading this, you’re likely someone who has made many good, as well as many bad, decisions in life. Some of those decisions you are extremely thankful you made, and some you no-doubt painfully regret. Hey, we all make mistakes, and that’s because humans are fallible. Yet we don’t have to be right all the time to be successful in life—or in our wealth building.
The key here is to be right more often than you’re wrong. And, when you’re wrong, to minimize the damage. The latter part of this prescription leads us into our next rule of wealth building.
Rule No. 2—Win Bigger Than You Lose
Win some, lose some.
This reality is just part of life. And try as we may to always win, we can’t. Indeed, part of being a Renaissance Man is understanding that life has its good days and its bad days. And while the big winning days are fantastic, the big losing days can really, really hurt.
The key for a Renaissance Man, both in life and in the money and investment realm, is to win bigger than you lose.
What I mean by that is you want to ride your stock, bond, and commodities wins higher. Don’t just bail out on a small gain because you have one, or because you want that shiny new car, boat, etc.
As for losing, most of us have been on the wrong side of an investment decision. The key is to not let those losses go from small to large. Just like one or two really bad decisions in life can end up being the difference between happiness and sorrow, one or two catastrophic losses in a portfolio can be the difference between retiring wealthy and living the rest of your life on Social Security.
Remember that investing (as opposed to short-term trading, which there definitely is a place for) means you build positions in strong assets likely to continue appreciating over time. And, you use the power of compounding and the requisite patience and time, to build your wealth.
Of course, to find those wins in the first place means you have to invest in the right picks from the beginning, and the details of how to do just that are contained within the pages of my newsletters.
Rule No. 3—Seek Income and Capital Appreciation
When you’re investing (as opposed to trading), you ideally want assets that pay you income AND that go up in value.
This may seem simple, but you would be surprised by the number of people I’ve spoken to in my career that think income and capital appreciation are two separate entities.
The best long-term wealth-building assets are those that not only appreciate in value, but that also pay you to own them. This means owning a basket of the best, most-stalwart, dividend-paying stocks the market has to offer.
I’m referring here to stocks of companies that have consistently raised their annual dividends each year, and those who have done it for years, decades, and in some cases more than a century.
This isn’t a quick-fix, get-rich scheme or some kind of real estate flipping strategy. It’s investing consistently in the biggest, most-profitable companies that have demonstrated they are committed to growing their business long term, and increasing the wealth of their shareholders.
You see, when it comes to the basic Renaissance Man rules of wealth building, simplicity reigns supreme.
Once you understand that, you then need to muster up the requisite manly courage, discipline and willpower to see those rules through to the end.
In the name of the best within us,
Jim Woods
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