The Keys to Building WealthSubmitted by on August 4th, 2015
For many Canadians, building true wealth might seem unobtainable, or even illusory considering that many people, who very recently were sitting on six and seven-figure RRSP’s and home equity values, now feel unprepared for retirement. The primary lesson learned from the recent financial crisis is that wealth can be fleeting. However, wealth creation always has been, and still is, a process grounded in sound principles and practices that, when applied with discipline and patience, are manageable for most people.
Clearly Define Your Wealth Ambition
Without a clear definition of what wealth means to you, individuals are more likely to focus on the here and now, and end up favouring consumption over savings. Absent a clearly defined personal wealth ambition, people often take their cues from the actions of those around them; i.e. taking vacations or making large purchases based on what they see their immediate peer group doing, regardless of their own ability to afford these purchases.
Wealth building begins with a clear vision of what a long-term good life looks and feels like. Only then can you work out a strategy to help you build, enhance, and preserve your wealth for a good life now and through your retirement years.
Develop and Stick with a Long-Term Investment Strategy
In a 10-year study conducted by Dalbar called, “Quantitative Analysis of Investor Behavior,”1 it was found that investors, through their own behavioral missteps, consistently failed to capture as much as 60 percent of their possible returns generated by the stock market. Whether it be through chasing returns, succumbing to the euphoria of market highs, or fleeing with the herd at market bottoms, the investors allowed their behavioral tendencies to guide their investment decisions; this almost always guaranteed their underperformance.
Academic studies conducted over decades have clearly shown that investors, who adhere to a long-term investment strategy based on well-defined objectives, will outperform investors who do not. With a well-conceived long-term investment strategy, investors are more likely to stay true to their own personal benchmarks rather than concern themselves with the returns of the market indexes; they will also be more likely to maintain the discipline necessary to avoid the herd mentality of panicked buyers and sellers. Working with the right investment advisor in developing and executing a long-term strategy can help you maintain the optimum asset allocation for your portfolio, while minimizing the fees that can eat into your returns over time.
Be the Tortoise, not the Hare
During the early 2000’s, stock prices and home values swelled, creating a “wealth effect” which made people feel as if they were wealthy; which resulted in many Canadians not feeling the desire to save. Since the crash of equities and home prices in 2008, the savings rate has rebounded somewhat; but now, many in the Baby Boomer generation, arguably the most prolific income earners of any generation, feel unprepared for retirement.
The lesson learned from the financial crisis is that wealth can be fleeting. True wealth is built over time utilizing a disciplined savings and spending approach. The amount of wealth you build is not just a function of how much you can save and invest strategically; it’s also a function of how much you spend. Living under your means will almost always result in a higher savings rate.
Having a clear definition of what wealth means to you will ensure that the additional dollars you realize from moderate spending or increases in income will be properly applied to achieving your vision. By applying the same level of discipline and patience to a long-term investment strategy based on sound principles, you have a much greater likelihood of keeping your wealth on an upward trajectory.
Still, individuals can make all of the right moves, and still have unforeseen circumstances disrupt their financial security. While no one is completely immune, there are some measures that you can take to help cushion the impact of this type of crisis, and a qualified financial specialist can guide you through that process.
1 Dalbar, Inc. “Quantitative Analysis of Investor Behavior 2012”
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2015 Advisor Websites.