Grow your wealth faster by following these rules.
One way or another, I've been actively investing now for 25 years, which is a mildly depressing thought. In that time, I've seen any number of passing investment fads, and also seen my share of stock market busts -- and booms.
And although investing isn't the day job -- my wife and I still work, and intend to go on doing so for a long time yet -- I have seen my wealth gradually accumulate. It's spread across ISAs and SIPPs, index trackers and direct shareholdings, and these days there's also the odd actively managed fund or two.
I've also, over the years, seen and spoken to a good number of people whose wealth-accumulating powers appear to be substantially lower. And in fairness, I've also met with others whose wealth-building prowess has been significantly greater.
So here's my take on what really works when it comes to wealth accumulation.
Keep it simple
It isn't rocket science, for a start. And nor is it get-rick-quick trading -- at least, not for those who lack the skills and discipline to rigidly cut their losses and get out of a sinking stock while they can.
In fact, I think a lot of it boils down to five simple rules.
1) Save regularly
The discipline of regularly putting money to one side and investing it does two things. First, it gets your money invested, and earning returns. No excuses; no "Things are a bit tight this month, I'll do it next month...". It's done, and that's that.
But better still, it avoids the 'investing at the peak' trap. When stock market euphoria is at its highest, you'll see people dive into the market by the bus load -- and then lose their shirts when the bubble pops. Buying regularly gets you in at the market's lows, as well, when the law of pound-cost averaging says that your money will buy you proportionately more shares, as well.
2) Stick to what you know
Over the years, I've seen countless people seduced by shares they knew nothing about. The discipline of investing only in businesses with well-understood business models may cause you to pass up on some stellar gains, but you'll also duck a good-sized pack of dogs.
Warren Buffett has a variant of this rule -- the 'refrigerator test', where he advocates buying shares with simple easy-to-follow business models such as companies manufacturing consumer staples such as Coca-Cola. Peter Lynch had another: "Never invest in any idea you can't illustrate with a crayon."
3) Costs matter
From the eye-watering spreads on thinly traded AIM shares, to the trailing commissions paid by funds to investment advisers, high costs sap returns. Over the years, on both sides of the Atlantic, the Motley Fool has actively campaigned for low-cost investment products -- the sort of funds offered by American fund giant Vanguard, for example.
Better still, the Fool now offers a low-cost dealing service of its own. To build wealth, more of your gains need to be going into your pockets -- and not those of financial intermediaries. Low-cost SIPPs, low-cost ISAs, low-cost index trackers and low-cost dealing services: these are your friends.
4) Diversify
Over the years, the Fool has also been a huge fan of index trackers. Are they the perfect investment vehicle? Probably not: arguments still rage over fundamental indexing and all the rest of it. But are they a decent way for the average investor to cheaply ensure that they have a low-cost diversified portfolio? Yes, yes, and yes.
And if index trackers aren't for you -- or low-cost actively managed funds, aren't for you, either -- then check out the portfolio approach adopted by the readers of our High Yield Portfolio board. In short, the precise details of the investment vehicle matter less than the principle: diversification is good; concentration is bad.
5) Ignore investment fads
The dotcom boom, BRIC economies, oil shares, emerging markets, precipice bonds -- I've seen every stock market mania since the Poseidon boom-and-bust of the 1960s. By not leaping on board, I've certainly missed out on potential gains, without a doubt. But I've also sidestepped potential losses, too.
This isn't being contrarian, it's just being sensible, in my view. Warren Buffett and Neil Woodford have both had 'bad' periods when their returns lagged others because they stuck to their guns: Woodford may well be having one now, and once came close to losing his job. Veteran fund manager Tony Dye did lose his job. But being right is better than being ruined.
So is that it?
Boring? Perhaps. Nothing too esoteric or abstract there. But then, why should there be? No one ever said that wealth-creation had to be complex and complicated.
True, canny and experienced investors can make shedloads of money through extending the art of the possible in countless complex ways. But for the average investor, getting rich amounts to little more than staying the course, keeping your costs down, and not doing too many daft things along the way. Good luck!
More from Malcolm Wheatley:
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