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 capital markets. These simple rules are however always ignored — because they’re far too simple and boring.
Fivefold path to wealth
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 it’s too late.
- Building wealth is as much about saving money, as it is about growing money.
- In other words, keep a constant check on your liabilities and lifestyle.
KEEP INVESTING THE SAVINGS 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.
- This will also ensure you build an emergency fund.
FOR LONG TERM, CREATE A PORTFOLIO OF DIVERSE REPUTABLE BUSINESSES
- Investing in diverse reputable businesses is the hassle-free way to earn inflation beating returns.
- You could do this by investing in bluechip stocks.
- Another simple way to invest in such businesses would be using a combination of direct index funds and/or direct plans of diversified mutual funds
BE PATIENT. NOT GREEDY
- 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.
- In equities especially, the greed to grow money better than the rest will cause you to take hasty decisions, which often ends up making things worse.
- Insurance protects your wealth by ensuring you or your dependants don’t have to withdraw from your investments, to meet the fallout of an unfortunate emergency.
- So whether it’s life, health or auto, always ensure you’re adequately insured.
- Pick up term life insurance of at least 10-20x times your annual income. Top it up whenever your liabilities go up.
- Buy adequate health insurance to cover medical emergencies of all your dependents.
- Don’t rely on company insurance/group insurance alone. In case of a job loss, even purchasing a new health insurance immediately will expose you to a waiting period where no cover would be applicable.
These five rules summarise 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.
- 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.
- 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.
Have a good weekend.