Wealth Growth – Pillar 3 of a Solid Investment Strategy
Wealth Growth is very important if you ever hope to get your head above water financially. A common misconception is that Saving is the key to financial success, but Saving and Wealth Growth are not the same thing. Saving (if done properly) is wealth preservation, period.
As Robert Kiyosaki, author of “Rich Dad, Poor Dad” says, “Savers are Losers!”
Sorry to be so blunt, but sadly this is often true. Saving without wise investing is no different than burying your money and reaping no rewards. This is not to say that you shouldn’t save, but you should combine saving with growth and income generation.
Before getting into wealth growth, let’s revisit the 3 pillars of a solid investment strategy. They are:
1. Wealth Preservation (safe saving)
3. Wealth Growth (smart investing)
Wealth Growth in the Parable of the Talents
The best way I know to illustrate that saving itself is not enough is in the Bible story “The Parable of the Talents” (read it in Matthew 25). This story is really meant to illustrate spiritual investment and rewards (parables are by definition not literal), but it is also a very good illustration of the need for wealth growth (smart investment) in addition to wealth preservation alone.
What is a Talent?
In case you don’t know ancient history, a “talent” was originally used as a measure of weight and value of precious metals. While there is some question today over the exact weight of a talent, 2000 years ago when this parable was told one talent of gold was the largest unit of currency.
Some scholars equate the value of a talent of gold to 20 years wages for a laborer. Others estimate the weight of a talent of gold to be up to 120 pounds troy or over 1400 troy ounces. If the weight is accurate, one talent of gold today would be valued at nearly $2 million. In any case, a talent was a very large sum of money.
The Parable of the Talents
Let’s get back to the parable. Jesus tells of a servant that was entrusted with his master’s money, but because of fear, he simply buried it until his master returned. Upon his return, the master was angry with this servant because he did not invest the money to make a profit for his master. The money was taken from the fearful servant and given to another servant that did what his master expected.
The fearful servant lost everything while the servant that appeared to take the most risk was rewarded the greatest. In the end, doing nothing out of fear is really the greatest risk and greatest failure.
While this parable is meant to illustrate wasting of spiritual gifts, it also gives us a picture of financial stewardship, which is the responsibility to invest wisely to produce wealth growth. Not only should we be productive in our businesses or jobs, but our money should be productive, as well.
Investment Risk versus Gambling
However, there are 2 other cautions we should take away from this parable:
1. Don’t confuse investing with gambling
2. Don’t risk your whole savings on investments
When the average person uses the word “investing” today they are really talking about gambling. If we look at the definition of gambling you can see why:
“Gamble: to bet on an uncertain outcome”
To be sure there is always some risk in making investments. But many people pick their investments by blind chance. A true investor understands the real value of what they are purchasing before investing. The true investor minimizes risk when they invest.
In contrast, a gambler will buy based on a “hot tip” or because the stock market has had large gains recently. The average person just follows the crowd without understanding what they are doing. They buy high and sell low, usually losing much of their investment just as if they were betting on the horses or slot machines.
The second caution is to always keep some of your savings as safe as possible from risk – what we call wealth preservation. Even though the parable doesn’t specifically say this, we can infer that a wise businessman would not risk his entire fortune by giving it all to his three servants to invest. It is very likely that only a small portion of the total was given for investment.
Remember that saving does not normally produce wealth growth and it should not be approached this way. Saving should be done purely for safety and future use. In the rare case that growth occurs with savings it can be considered icing on the cake.
Alternative Assets Positioned for Wealth Growth
During times of market volatility and instability, such as new stock market record highs when real GDP is flat, alternative assets are often the best performers. There are also rare cases where one asset class is positioned for both safety and growth.
Investment Real Estate and Private Businesses are usually the best and safest vehicles for Wealth Growth.
Investment Real Estate can provide growth by “Forced Appreciation,” which is a method that starts by recognizing undervalued properties. However, this only works with certain types of properties. Residential homes, for example, do not apply.
Smart Investing for Wealth Growth
Wealth growth is achieved by investing in an undervalued asset. This is just the opposite of what the average investor does (and by being here, you are stepping out above average). The average investor buys high and sells low because they wait until the value creates an emotional “high” for them. By then, it is usually too late and they lose most of their investment when there are no more buyers to inflate the price.
Buying when asset values soar to new highs is often called the “greater fool” theory. When an investor buys purely on emotion without understanding the real value, they are expecting the price to keep rising. This expectation is, perhaps without the investor even realizing it, based on more and more new investors buying, thus driving the price higher and higher. Eventually, there are no more “fools” to be found and the price returns to something closer to the real market price.
Wealth Growth follows Wealth Preservation in any successful investment strategy. Both can be learned by anyone willing to put some simple ideas into practice.