How you can join the ranks of the rich and wealthy

As I was saying, about that stock market correction…

Overnight, the Dow fell 140 points, sending it down to its lowest level since May.

On  Bloomberg , Walter Hellwig of BB&T Wealth Management said…

“I would attribute the dip in S&P to the rumour that Russia’s getting ready to invade Ukraine. That created additional technical difficulties with high-frequency trading.”

The prospect of war is never pleasant. War itself unimaginably horrific. 

Stock markets hate uncertainty.

What happens if Putin’s Russia invades Ukraine? How does it end? What does the world’s only super-power, the USA, do?

What about any potential disruption of Russian gas exports to Europe? Tiger-wrestling muscle man Vladimir Putin has a few “sanction” levers of his own he can pull, and he’s not afraid to use them.

So many questions, so much uncertainty.  Heck, if it’s throwing the high-frequency traders into a tizz, you know it’s a big deal for the world’s stock markets.

Here in Australia, the  S&P/ASX 200 Index  has followed US markets lower. No surprises there. Year to date, the index is now up just 2.8% so far in 2014.

It hardly seems like bubble territory material to me.

Still, I’ve long given up predicting markets.

The folly of even attempting to do so has been highlighted in recent days, firstly as markets fretted about rising US interest rates, and now about Ukraine.

What’s next? Bird flu, again?

Geopolitical events are impossible to predict. As are outbreaks of deadly viruses.

My advice? As an investor, don’t even bother to think about them, let alone try to predict them.

World share markets, including the ASX, have prospered, and grown, over the long-term, through Two World Wars, the Great Depression, numerous civil wars, invasions, umpteen recessions, the GFC, the Asian currency crisis, the dot com bust, and home loan interest rates as high as 17% in 1989/90.

Speaking of interest rates…

One thing’s for sure — 17% home loan interest rates today would burst a few bubbles.

I’m old enough to remember earning 14% on a term deposit from that era. With inflation at the time running at close to 8%, no wonder Australia and many other countries fell into recession. It was all simply unsustainable.

You could say the same about today — ultra-low interest rates, here in Australia, but more so across Europe, the USA and Japan, are unsustainable.

And you’d be right. In the US, where interest rates are effectively at zero, the only way is up. It’s just a matter of when.

The market is not stupid. That higher interest rates are on the way is somewhat already priced into the share market. How much higher is the big unknown.

But, we can take an educated guess.

The 10-year Australian Government Bond is currently yielding 3.46%.

Citing over-inflated house prices, Credit Suisse recently said it thinks the peak in domestic interest rates would be below 3.5%.

Following the RBA’s decision yesterday to keep the cash rate on hold at 2.5%, the AFR today said…

“Interest rates in state of suspension”

As a reminder, the boffins at Macquarie Bank think interest rates won’t rise until 2016.

Add it all up, and you’re hard-pressed to see interest rates much above 3.5% for the next three to five years. 

It’s an uncomfortable truth for savers. Accept term deposit rates of around 3%, or look elsewhere.

Regular readers of Motley Fool Take Stock will know for me, ‘elsewhere’ means ASX stocks and US-quoted stocks.

You won’t catch me buying property at these levels — the rental yields are too low, and that’s before you have to worry about repairs, maintenance and unruly tenants who don’t pay their rent on time.

You may have seen the article in the Weekend Financial Review where Philip Baker said the rich individuals and families are…

“… thinking that shares, here and offshore, are a much better investment over the next three years than the hot property market.”

There’s a good reason why the rich are rich. Two reasons, actually…

1) They spend less than they earn, even if they are millionaires. Multi- billionaire Warren Buffett continues to live in the home he bought in 1958 — for $31,500 — in Omaha, Nebraska.

2) They invest cautiously, but wisely. For the rich, the power of compounding returns can add millions of dollars to their already vast fortunes. It’s why James Packer, Executive Chairman of Crown Resorts Ltd (ASX:CWN), and Frank Lowy, Chairman of Westfield Corp (ASX:WFD) perennially top the rich lists. Money makes money.

We can always learn from the rich. Whether you join them is entirely up to you.

Back to these volatile markets.

As I write, the S&P/ASX 200 Index is bravely staying above the psychologically irrelevant 5,500 mark, a fall of just 18 points, or 0.33% on the day.

In the whole scheme of an investing lifetime, it’s totally insignificant, of course. But hey, it’s fun to watch, and fun looking for those compelling investment opportunities that inevitably pop up when markets swoon.

That day may not be today. But it will come. Grab a watchlist of shares, and be prepared to pounce.

Then again, you can still make a small investing fortune buying high quality stocks and holding them for the long-term, regardless of the market.

A case in point is one Motley Fool Share Advisor recommended stock that’s now up close to 200% for subscribers who bought it just under two years ago.

I own it too — it being part of my huge $412, 288.82 bet on stocks.

At the time Scott Phillips tipped the stock, the S&P/ASX 200 Index had jumped 8% from its 2012 low, just three months prior. In other words, at the time, the market was already riding high.

Motley Fool CEO Tom Gardner says the best time to buy stocks is always now. Time in the market always trumps timing the market. The longer you own great companies, the longer you have to compound your returns higher and higher… and potentially join the ranks of the rich.

Add to your winners. Don’t water your weeds. Tomorrow’s big winner might already be sitting in your portfolio, staring you in the face.

It’s a brave investor, or stock tipper, that advises subscribers to add to a stock that’s already up almost 200%. But that’s what Scott Phillips did recently, re-recommending one of our big winners to the thousands of Motley Fool Share Advisor subscribers.

Time will tell if he’s right, of course, but he’s off to a good start, the re-recommendation already ahead of the market.

A value price tag + growth + big dividends!

Investors: Don't miss what could be the 'story stock' of 2014! Get The Motley Fool's #1 pick now in our newly updated investment report. It's yours FREE. Simply click here for your copy of "The Motley Fool's Top Stock for 2014."

Bruce Jackson doesn't have an interest in any of the companies mentioned above.

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