Investing For Future Net Worth

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Have you ever daydreamed about your future net worth? The key to a bright future net worth might be unraveling the mysteries of the investment markets. There are so many investment options to choose from, difficult terminologies to grasp, little money to invest and of course the risk of losing it all. You may have heard of the inspiring stories of people who invested their life savings, struck gold and walked away millionaires, but an equally large number of people have shared their horror stories of how they lost everything they had to the market. One would think investing is no different from trying your luck at the tables in Vegas.

So, is investing a gamble? Does it involve luck and cunning or is their method to it? Most people are convinced that investing in the stock market is a senseless risk especially with historical examples like the great depression as reference points. They think it is an indulgence for the wealthy who can afford to lose substantial sums and walk away unscathed or the Wall Street sharks who can keep up with the cutthroat business of stock trading. This could not be farther from the truth.

Investing is not just for the rich and the greedy. It is actually a way for the un-wealthy to build future net worth.  It can be an easy way to change your financial situation and that of your future generation’s net worth for the better.

Why Invest?

We all have life goals, dreams of the brighter futures we hope for our children and ourselves. It could be, owning your dream home, sending your child to a prestigious college, making enough money for a comfortable retirement or simply building future net worth for the price of mind. You can save all your life and still fall short of achieving these goals. Proper financial planning is the surefire way to make your financial goals a reality whatever they may be. A financial plan links your finances to your goals. It involves proper budgeting and making wise investments, whether you invest directly or through a 401K, IRA, etc.

How to Invest

For most middle and low-income Americans, money is tight. Many live from paycheck to paycheck with all their money tied up in survival so they do not have extra money to invest.  However, even if you could manage to spare some of your hard-earned money for investing, where would you even begin?

  1. Learn the basics of investing
  • Risk vs. Reward: Risk can be defined as the volatility of an investment based on the rate of return, which depends on fluctuations in price. For example, stocks have a higher risk than bonds since they are more volatile. Investing is about the reward as much as it is about risk. In an efficient market, the two should correlate. That is, the higher the risk the greater the potential of reward. You cannot trust an investment that promises high returns at minimal risk.
  • Investment horizon: This is basically the duration of your investment. Ideally, long periods absorb risk and translate to higher returns especially in the case of bonds and CDs.

Risk and time are the building blocks of investment return (reward). The expected return is the sum of the time horizon premium and the risk premium. This means that the higher the risk of your investment and the longer the investment duration, the higher the expected return. This is with the exception of times of high inflation. High inflation may deplete your investment return.

  1. Develop a financial plan

A financial plan is a blueprint that gets you to your financial goals.  Developing it entails three parts: first, gauge your current personal balance sheet to know where you are today. Secondly, layout your goals showing where you want to be tomorrow and finally determine what you need to do to get there, that is the investment strategy required and an asset to be allocated to it.

Tips for a successful investor

To be a successful investor, and build future net worth you must first have a clear idea of what you hope to achieve. This should help you know what to get into and what to avoid. Finally, you have to prepare for the worst in as much as you hope for the best. This means assessing possible risks and finding ways to mitigate them. Here are some pointers to make you become a successful investor.

  • Invest in products you understand – You can invest in land, real estate, bonds, equities, cash, gilts, and so many other options. The key is to play on your strengths and invest in something you understand and can be good at. Do not just ride the wave and invest in something deemed “the next big thing.”
  • Diversify – To reduce risk, you should invest in several different assets. For example, if your house is your only investment, you stand to lose everything in the event it is destroyed by a natural disaster. Also, avoid investing in only one sector for example tech stocks. This is because similar stocks have a similar price variation pattern.
  • Maintain your cash flow – Your investment plan will not amount to anything if you keep dipping into it. Make sure that you have enough cash flow to sustain your family and budget appropriately for your investment goals.

What tips or resources would you offer to a new investor to grow future net worth?

9 thoughts on “Investing For Future Net Worth”

  1. Thanks for another great article Brian. The best thing about getting started investing these days is that it’s easier than ever! It’s hard to imagine people used to pay $50 or more for a brokerage trade, whereas today you can buy stocks for free with apps like Robinhood!

    • Thanks Jay, and that’s the key just get started. There is so much information available to help even novice investors make good choices.

  2. Thanks for the short primer on investing! Mr. Picky Pincher is the resident numbers guy in our house, so I’ll pass this over to him. We’re trying to plan out our investment strategy for once we have our student loans paid off.

  3. Pay attention to the fees that mutual company companies charge for managed funds 1-1.5% seems small, but it can take a huge bite out of your appreciation over a long period of time. Even better are unmanaged index funds that buy the whole market for you and have microscopic fees – 0.1%. These funds are shown to beat the great majority of managed funds in annual returns.

  4. Great stuff here, for sure!

    We’ve been able to diversify over the years. Early on, our house was our only investment. It’s now a rent house, since we moved and built another. We began investing, YEARS ago, and not in just one or two stocks. Nope, we’ve been into funds and they have done very well for us. We’ve also been able to put back some cash reserves, too.

    These ideas helped us retire in our 50’s. Been SO worth it.

  5. I love that you point out that investing is not just for the rich or greedy. It sounds funny to say now, but I used to subtly believe some of this. It’s a common misconception I think especially for those who don’t come from a “Rich Dad” kind of background.

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