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My wife and I recently welcomed our first son into the world. We called him Rí (ree), which means “king” in Irish. He is fine, he has settled into private life with his big sister. At the moment his only job is drinking bottles of milk and sleeping. But one day he will ask adults questions like, “What is the stock market and how do I invest?”
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When I was little, nobody ever sat me down and taught me about stocks. Now that I have two children, I’ve thought about what a father should teach his children about money and investing. I’m not talking about any specific tips or tactics, or even what types of investments to buy. But the really “big stuff”. The two or three principles of money that really move the needle.
If I can anchor these principles in my children, I will know that I have done everything in my power to enable them to enjoy prosperous lives. As I’ll show you, there is a “Big 3”. Nail the Big 3 and everything else in your financial life.
You’ve probably worked hard all your life. It allows you to own a home and live a happy life. But I bet you have an eye on building a solid foundation for your children too. This could be called generational building, a legacy that extends beyond your life.
The problem with lasting wealth is that you have almost no control over what your kids do with the money when you are away. How do you set it up for success? By teaching your kids the Big 3 while you’re still around, they can build on your successes. So if you have children and grandchildren, please share this letter with them too.
Step # 1: save, save, save
Saving money is the foundation of prosperity and a prerequisite for investing. Before you even think about investing, you first need to save a lot. If you don’t put money aside, you can never buy stocks. This is hardly any breakthrough advice. Telling someone to “save money” is like having a fitness guru advising you to eat healthy and exercise. Both sound obvious. But without it, no success is possible.
Americans spent $ 37 billion on gym memberships in 2019. However, a recent Harvard study estimates that around 4 in 10 Americans are obese. What gives? A study published in the American Journal of Clinical Nutrition found that exercising makes you feel like you’ve done something healthy, which leads people to rationalize a post-workout eating frenzy. Eating pizza after sitting on the couch all day can make you feel guilty. But mocking junk food after walking five miles feels justified.
The same thing happens in our financial life. Spending more money when getting a raise, for example, is just as tempting as eating junk food after a workout. It feels deserved. But as my grandfather used to say, “If your expenses exceed your income, your livelihood becomes your downfall.”
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For example, imagine if you could only choose one of these for your child:
# 1: You make good money, but you spend every penny.
# 2: You get a decent salary and save a lot of money.
I would choose number 2 every time. How much you make matters, but not nearly as important, how much you save. There is a huge difference between making a lot of money and getting rich. What really matters is the gap between what you make and what you spend. This pile of money enables you to invest.
I’m not telling you to be a penny pincher. Nobody likes the curmudgeon who is afraid to spend a penny. You can enjoy a cup of coffee and a family vacation while saving. And you should get started today.
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In his most recent book, pension expert Charley Ellis highlighted the importance of starting saving at a young age. He found that people who started at 25 instead of 45 saw their required annual savings rate cut by two-thirds. In other words, these people can save 65% less each year than older savers and still build a dream pension.
Step # 2: You Must Own Stocks
Mary and Larry took a risk. In 1997, the couple bought two shares in a new company that sold books online. It was called a little known startup from Seattle Amazon.com (AMZN), traded for around $ 20 / share.
Mary and Larry’s $ 40 investment is now worth around $ 160,000. The couple sent a letter to Amazon founder Jeff Bezos saying, “These two stocks have had a wonderful impact on our family … we wish we’d bought 10 stocks!”
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I told you before that starting a successful business is the best way to get rich. Bezos, now worth $ 196 billion, is the perfect example of this. But you don’t have to build the next trillion dollar empire to get rich. You can “piggyback” great CEOs by buying their companies’ stock on the stock market, just like Mary and Larry.
The US stock market is the biggest money maker in history. You must own a piece of it. A 2020 study by Arizona State University found, “Investing in US stocks increased shareholder wealth by over $ 47 trillion between 1926 and 2019.”
For over nine decades, US stocks have brought shareholders an average of $ 500 billion in annual earnings. That’s enough to pay every American a lifetime check of $ 1,500.
I told you that saving is the foundation of wealth creation. This is the first step – but you don’t get rich with it. Shortly before his death, Vanguard founder John Bogle said, “I think whatever your view of the world is, you have to invest. You can’t put the money in the mattress, and in this day and age of low interest rates, you can’t put it in the money market fund or a bank CD, so invest, you have to. “
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Throwing money in a CD account was a good option if the banks were paying you 5%. Today, the average CD rate in a year is a measly 0.18%. Meanwhile, the value of our hard-earned savings is constantly being eaten up by “inflation”. The US government’s own calculations show that one dollar is worth 16% less than it was 10 years ago. And almost 90% less than 50 years ago!
Nowadays, owning part of a successful company, also known as owning shares, is not a “nice to have”. It is a must. Buying stocks is one of the best ways to fight inflation.
Higher costs are bad for you and me, but can be good for businesses. They are able to pass higher costs on to customers, which can increase profits … and their stock price. Investors who simply bought and held the S&P 500 stayed ahead of inflation.
Remember being a shareholder like you had a lucrative part-time job without the hard work. With this “second job” you earn money when you are sleeping, on vacation and retired.
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For example, think of buying Amazon stocks. Every time the disruptor rolls through a different industry and its stocks skyrocket, you get a share of the profits. If it is crushing revenue and Jeff Bezos’s net worth goes up, it means you are winning too
Step # 3: You Must Own the Mega Winners
Just owning stocks is not enough. You have to own the right stocks: the mega-winners.
Let me explain. About 150 years ago whaling was one of the most important industries in America.
Electricity wasn’t invented. People burned highly flammable whale oil to light up streets and houses at night. By 1850, whaling was America’s fifth largest sector, and it was paying very well. Just a few thousand whalers made the current equivalent of $ 27 billion in a year.
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But most trips never earned a penny. A few years ago researchers at the University of Chicago wrote a book about the US whaling boom: In Pursuit of Leviathan. They analyzed more than 4,000 trips and found that a third of whalers actually lost money. The top 1.7% of whalers made almost all of the returns.
What if I told you that same goes for modern investments? Take a look at the venture capital (VC) industry, for example. Most venture capital startups fail. A small portion is good. But only a handful become multibillion-dollar winners.
In VC: An American History, Tom Nicholas compared VC yields over the past few decades to whalers 150 years ago. And they look very similar. About a third of the funds lost money, and only a tiny fraction made it out of the park, as you can see here:
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Source:
Risk hedge
Tons of losers and a few big winners. The US stock market follows the same pattern. JP Morgan Asset Management found that between 1980 and 2020, nearly half of its stocks suffered a “catastrophic loss”. That is, they crashed and never recovered. Another 26% of the stocks generated lower returns than the market as a whole.
In fact, all market returns came from just 10% of what JPMorgan called “mega-winners”. Whether you’re measuring 19th century whaling, early-stage startups, or large stocks, the results are all the same. Lots of losers and some big winners.
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Because of this, choosing individual stocks is not for everyone. In fact, many people are better off owning a broad basket of US stocks or buying indices. Simply by owning the S&P 500 ETF (SPY), you would have doubled your money in the past five years. It’s a good, stress-free option.
But investors who really want to accelerate their wealth creation have to go on the hunt for these “megawinner” stocks. You can build lasting wealth by owning great, disruptive businesses. In other words, support companies that are changing the world and transforming huge industries. Companies that achieve this on a regular basis turn out to be mega-winners who can hand you multiples of your money.
Get my report “The Great Disruptors: 3 Breakthrough Stocks That Will Double Your Money”. These stocks will bring you 100% profits as they disrupt entire industries. Get your free copy here.
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source https://dailyhealthynews.ca/three-investment-lessons-for-my-son/
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