Sustainable wealth is created through a combination of disciplined saving; disciplined long term investing; and disciplined spending. Wealth is not created by making short term gains, nor by taking speculative risks in an attempt to build wealth. The creation of wealth over decades is dependent on the ability to create consistent investment results with consistent reinvestment of those results, as well as the ability to manage the risks associated with those investments. Those individuals that have adopted a structured approach to managing their finances will increase their likelihood of creating stable wealth over the long term. Sustainable wealth is based upon both the patient nature of its creators and the strategic plans they have established to grow their wealth.
The concept of compounding works best when it has years to work for you. The longer your money is invested in a portfolio of stocks, the greater the benefits that are derived from the reinvestment of dividends paid out to shareholders, and the larger the impact that the growth of the underlying stock prices have on your total amount of wealth.
Some key principles of investing in this manner include:
- Regularly contributing to the account (e.g., monthly)
- Reinvesting the dividend payments received from the stocks you own
- Avoiding excessive trading in the stocks you own
- Consistently making these same actions (i.e., regularly contributing to the account and reinvesting the dividend payments) so that the power of compounding can be maximized and so that the largest possible amount of money can be accumulated
Manage Lifestyle Inflation
When an individual’s income rises, it creates the opportunity to increase one’s spending. However, if an individual does not manage their spending properly, their increased income will simply reduce the size of the surplus dollars available to save each month.
A structured budgeting process is essential to preserve excess income, maintain a consistent savings rate, prioritize long term objectives, and control how much an individual spends.
By controlling their spending habits and the amount of money they spend, an individual will create more opportunities to accumulate wealth in the long run.
Invest Money Strategically by Diversifying Your Portfolio
The primary purpose of diversifying your portfolio is to minimize the potential losses that may occur due to volatility in the markets. By strategically allocating your money into different asset classes, such as equities (stocks), fixed income securities (bonds), and real assets (such as real estate, gold etc.), you can protect yourself against loss of capital and potentially lower the overall risk of your portfolio.
Some examples of diversified portfolios include:
- A mix of equities, fixed income securities, and real assets
- An asset allocation that includes domestic and international investments
- An allocation of investments that includes a variety of sectors or industries
A diversified portfolio provides protection against a single type of loss (or “concentrated” risk).
Protect Wealth with Risk Management Strategies
Risk management strategies, including insurance, estate planning, and having a reserve of liquid assets to meet unforeseen emergencies, help protect the wealth you’ve worked hard to create.
Having a plan in place to prevent damage to your wealth in the event of an unplanned disruption will help protect your financial future and ensure the continuation of your wealth.
Conclusion
Creating sustainable wealth over many years requires a commitment to long term investing, managing spending, diversifying your investments and protecting them with risk management strategies. Structured approaches to managing your finances combined with a patient approach to growing your wealth are the most likely way to achieve long term financial success. Wealth created over the course of years of consistent effort is generally far more resilient than wealth created rapidly and through speculation.
