Solid returns, compounded over a long period, can generate staggering wealth. But first, you must take control of your own finances.
“My superannuation is not what it should be.”
“What should I do with my BHP Billiton (ASX: BHP) shares?”
“Is Telstra (ASX: TLS) a buy today?”
Emails like these come from people – Fools, all – who are taking control of their own finances.
Forget how to invest, where to invest and even what to invest in – choosing to take personal responsibility for your financial future is the single best financial decision you can make.
We love hearing from members, but the best emails are the ones that begin with “I’ve just started to invest…”
We have friends who haven’t yet realised the opportunity they’re missing. Actually, in some cases it’s more accurate to say that we’ve tried our best to get them motivated, but they’re yet to do anything about it.
And it’s a crying shame.
Fools, Einstein may or may not have declared compound interest to be “the most powerful force in the universe”, (there’s no reliable evidence that he did) but it’s not far from the truth.
Solid returns, compounded over a long period, can generate staggering wealth. But for compounding to do its work, you need to do two things:
Earth shattering, huh?
A proportion of you (a small one, I hope!) is now shaking your heads.
“This is too simplistic” they’re thinking. “I’m a sophisticated investor”.
I don’t blame them. You see, they’ve been indoctrinated to believe complex formulae, frequent trading and expensive fees (especially the latter!) are required.
The ads exhort them to “take control”. Their brains say “do something, anything”. It’s a completely understandable response – but potentially wealth-threatening.
Decades ago, Warren Buffett famously moved out of New York City to Omaha, Nebraska in the mid-western United States. He did it specifically to minimise the ‘noise’ and those same urges.
Now, of course it matters what you invest in. It’d be silly of us to pretend otherwise. We happen to think owning shares in quality companies, bought at attractive prices, is a fantastic way to achieve long-term wealth.
An investor with $10,000 to invest and who received a slightly-below average return of 9% per annum (ignoring taxes and franking credits for now) would have over $56,000 in 20 years, without adding a cent.
Another investor who was too busy, or had other things to do with the money, and who waited 10 years to invest that $10,000 would have to achieve a return of almost 19% to amass the same amount of money.
You’re reading this, so you’re obviously a smart Fool, so I’m going to add two more things to the list:
- Add small amounts regularly
- Avoid debt
Don’t pay huge fees, and think very, very carefully before taking on debt to fund any purchase, but particularly margin loans, where the financial institution might be able to force you to sell shares if they feel uncomfortable about the debt level relative to the shares you own
Fools, here’s the last thing to add to our list:
- Invest well
Know what you’re buying. Pay an attractive price for quality businesses (not just three-letter codes). Don’t trade in and out on the basis of ascending triangles, chicken entrails or because you’re feeling emotional.
Buy for the long term. Aim to hold your shares forever, and sell only when the shares are significantly overvalued or the company (not the shares!) no longer deserve your money (because you’re no longer comfortable with the performance or strategy of the business).
Understand the biases behind the advice you get. Listen anyway, but recognise that everyone has a (conscious or unconscious) bias.
At The Motley Fool, we only get paid if our Share Advisor members get enough value out of their subscription to renew when the time comes. That’s pretty transparent (and keeps us on our toes!).
To wrap up, here are 5 rules for long-term wealth accumulation:
- Add small amounts regularly
- Avoid debt
- Invest well
It may not be the simplest thing you ever do, but it’s certainly not as complex as many would have you believe.
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Scott Phillips is an investment analyst with The Motley Fool. He owns shares in Telstra. You can follow Scott on Twitter @TMFGilla. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691).
Where to invest $1,000 right now
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*Returns as of June 30th