Summary of 100 Years of Wisdom – The Fivefold Path to Wealth

Finance For Beginners

This fivefold path to wealth can also be referred to as the ‘The-often-ignored-because-it-sounds-too-boring’ path to wealth.

The beginners in the field of investing often expect, and even find assurance in an investing strategy that’s complicated. So they try their hand at stock picking, trading, day-trading, futures, timing the market, and a million other things.

Most however fail to develop a clear long term strategy which provides good returns. In the process, they not only multiply stress, but most often, fare far worse.

Investing is one of those unusual fields where higher effort does not translate to higher results.

The path to wealth, and the rules for gaining a faster financial independence have never changed since the beginning of capitalization. These simple rules are however always ignored — because they’re far too simple and boring.


Fivefold path to wealth


RULE 1

SPEND (FAR)LESS THAN YOU EARN

  • Your expenditures have a way of catching up with your income — better clothes, better phones, bigger TV, bigger car, bigger house, loans.
  • Most folks will be stuck in this cycle of upgrades, until they realize its too late.
  • Building wealth is as much about saving money, as it is about growing money.
  • In other words, keep your liabilities low.

RULE 2

INVEST THE DIFFERENCE EVERY MONTH

  • Don’t let the money you’ve saved lie idle in a savings account.
  • Learn the basics of investing, so you know how to invest so some of it so it grows, and so some of it stays protected.

RULE 3

CREATE A PORTFOLIO OF DIVERSE REPUTABLE BUSINESSES

  • Investing in diverse reputable businesses is the hassle-free way to beat inflation.
  • You could invest in such busineses using index funds, direct plans of diversified mutual funds, or you could acquire stocks on your own.

RULE 4

BE PATIENT

  • Businesses need time to grow. And so does your investment in them.
  • Even investments in simple products like FDs and PPFs needs time for compounding to work.
  • Your returns across these products will vary, but what’s common to both is the need for time. So be patient.
  • The greed to grow money better than the rest will cause you to take risky decisions, which often ends up making things worse.

RULE 5

STAY INSURED

  • Insurance protects your wealth by ensuring you don’t withdraw from your investments to meet the fallout of an unfortunate incident.
  • So whether it’s life, health or auto, always ensure you’re adequately insured.

These five rules summarize the collective wisdom of decades or even a century of investing research. Study after study has shown, that this strategy works.

The fivefold path to wealth only works when:

Like the eightfold path of Buddhism, this fivefold path to wealth works only when all the rules are followed together. You can’t cherry pick or drop one or two. Because a lot happens when these rules work together.

For example:

  1. The combination of Rule 2 and Rule 3 helps you take advantage of cost averaging in equities — which, as an investing strategy works better than choosing to only invest in market lows.
  2. The combination of Rule 4 and Rule 3 allows you to ride out noise and day-to-day market volatility.


Learn the fundamentals you need to start your fivefold path to wealth

Index funds, diversified mutual funds, direct plans, cost averaging — if words like these sound like gobbledygook to you, pick this book up. It gives complete beginners a 10-year head start on their knowledge of finances.


Do a good deed today

It’s likely that you have a family member who will soon start to earn a salary. Make them aware of this path so they can start early. They might spend their first few years blowing up their salaries on shiny new things. But being aware of these rules will help them come to senses far earlier than their peers.

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I’ll be writing three stories next.

  1. The story of a very unassuming individual who followed this path, and built the kind of wealth which shocked the investing world.
  2. A primate which picked stocks and managed to beat the returns provided by most fund managers.
  3. A study which spans more than one and a half centuries, and validates what’s written here.

Have a good weekend.

Vinod