The āGame Planā
Wealth Equation š
- Wealth Accelerator: Investments
- Wealth creation is driven by:
- Savings Amount = Salary x Savings Rate (% of Salary)
- Compound Interest on Investments via
- Return on Investments
- Time
Build Wealth by... šļø
- Increasing your earning potential (how?).
- Increasing your savings rate - without sucking all the joy out of your life.
- This can be achieved by spending extravagantly on the things you love and cutting costs mercilessly on the things you donāt (recommended read).
- Investing your savings into assets that grow in value and have superior returns with well-diversified risk.
- Starting as early as possible and repeating the above-mentioned steps.
- Tip: Automate the process (recommended read).
Key IdeasChoose the stock market as your āworkhorseā and starting point for wealth creation.The world economy is anti-fragile, so are your diversified stock investments (if you hold on to them!).Historically, stock market returns are on average significantly higher than the return of other asset classes šĀ Real-Estate often doesnāt š Pitfalls to avoid šŖ¤
ā£
- Stocks allow you to participate in the value creation of the world economy š
ā£
ā£
- BUT: 1.) stocks are more volatile 2.) you need to broadly diversify your investments.
- Donāt have a trading mentality, buy-and-hold your stock market investments for a long time.
- Donāt pick individual stocks, invest in broadly diversified ETFs instead.
- A stock portfolio consisting of broadly diversified ETFs offers the best risk-reward relationship for your investments (hereās a good starting point for constructing your portfolio).
ā£
- If youāre starting from zero, achieving āfinancial freedomā on this path might be very hard as your income, long-term investments returns, and time are generally limited. You probably wonāt get rich š¢
- However, āfinancial securityā is quite easily possible, and āfinancial independenceā is realistic (given enough time and savings). Both can add tremendous value to your life by providing financial stability and by gradually increasing your financial independence š
- Investing gives you a very robust and time-tested way of building wealth if youāre aware of the pitfalls to be avoided and are willing to pay the necessary price.
ā£
- Be aware of āMarket Timingā, it usually doesnāt work (why?)
- Be aware of āStock Pickingā, it usually doesnāt work (why?)
- Be aware of Under-Diversification, itās risky and youāre foregoing a free lunch:
āDiversification is the only free lunch in finance.ā - Harry Markowitz