My Advice To Preserving Wealth
At 30s to 50s, if you have put in some efforts in saving up a nest egg, you probably will have an okay to decent size of money, depending on your saving rate and age. At this stage, you probably should start constructing a picture of your networth & portfolio, if you have not already done so. The picture of your networth by market value gives you the idea of where your money is. The picture of your networth by the leveraged total value gives you the idea of how your networth may change per different asset classes that you have. Most people have their networth view as marked to value, but I strongly advise one to always take a look at the alternative picture of the leveraged view on the networth. I won’t go into details of the leveraged view, which you can read more about it by clicking the link.
With all the money in your nest egg, the most important thing for it is how one can preserve (if not expand) the buying power of the money through time before retirement or the time when you need it. Since the modern paper money is a fiat money backed only by the faith in the government, combating above inflation rate is the minimum goal that every money holder or investor should achieve.
Investing money is probably the most difficult task for anyone. Every minute, every second, every dollar from everyone is trying to gain the best return on investment (ROI). You can see how much competition is out there. If there is someone (including me) who tells you that he can consistently produce an annual return of 20% above inflation, you can almost be certain that he is telling a lie. Why? Compounding 20% for 25 years will give you 95.4 times back for your money. A mere $1000 dollar will become $95,400. Now if he has such investment knowledge to have such mida golden touch, will he be investing only $1000? He should be borrowing as much as he can and probably invest $100K to get some $9.54 million dollars. And if he has some $9.54 million dollars, I bet that he won’t be talking to you, but probably even making even more money for himself, or retired in some Carribean island. Such outrageous return simply don’t last long, or if it’s true, no one will be telling you about it. This applies to ALL investment, whether it’s real estate, precious metals, or stocks in general. The investing world is pretty much a self-correcting process. Any inefficiency (for investing trick) in the market will be immediately exploited in a short time to the extent that such inefficiency doesn’t work anymore. Every now and then, there will be some inefficiency in the market, but with so many investors and so much capital in the whole world, you can bet on that it will disappear before you know about it.
Despite the tremendous difficulty in investing, you can be sure that if you don’t pay attention or don’t do it, you will be at the bottom of the ROI (unless by pure luck). There are mainly two approaches to investing: passive and active. Passive investors follows the style of index investing by putting money into the general market weighted by market capitalization. An index investing style believes in the EMH, efficient market hypothesis, that the best current asset allocation is the current opinion of the market, which is expressed through the market capitalization of every stock. Therefore, buying index funds or ETF will give you the best asset allocation. I highly recommend the book Four Pillars of Investing by . It’s one of the most outstanding investment book that one can ever read. The arguments for index investing are so strong that I can barely find any faults in them.
The other style of investing is active investing, which is my current style of investing. I believe that I still have time to experiment with different investing strategies, and afford to get sub-par returns. But the biggest reason for me to follow such investing strategy is that the reasons for $US dollar devaluation and investing in natural resource sectors are so compelling that I cannot turn my eyes away from it. I will have separate posts on my reasons, but it is known that index investing gives you the average performance. Besides, it is also know that EMH in the most strict sense does not hold, and academics are discovering examples of market inefficiencies here and there (which gets exploited right away of course).
My own criticism to EMH is that in the entire formulation of EMH, there exists no time element. Obviously, nothing happens instantaneously. The time during which the market digests the information should be full of opportunities for smart people to take advantage. And while EMH claims that there is no market advantage at every time instant, I believe it does not directly translate into a conclusion that when you look out further in time for months or years, there exist no advantages. In essence, I believe that the entire formulation of EMH lacks the very important element of Time. That’s why I believe that by investing long enough (and smart enough), one should be able to harvest the inefficiency accumulated through time, and/or inefficiency projected into the future.
Of course, I may be wrong in my active investing, but it is for sure, that in every market, there are out-performers and under-performers, and index investing gives you the average performance of all market participants. One of the better books for active investing is the book from the master market technician Martin Pring “The Investor’s Guide to Active Asset Allocation”. It has explanations of how one can use potential knowledge of business cycle to dynamically allocate one’s asset.
While there is not a lot of concrete advices that I can give you for investing, definitely invest, invest, and invest to at least beat inflation. Also I suggest you to at least read my article on the importance of diversification, which relates directly to preserving wealth through diversification. And I won’t tell you that I know a trick to return 20% every year because I will be flatly out lying as I have explained. I have and will have many more articles on Introduction to Investing in certain asset classes, and Reasons for Investing in certain asset classes, to help you on how-to and understand why. But since I have no magic trick, you will need to make up your own portfolio compositions, and invest accordingly. And if you have time to spare, the following two books will probably increase your knowledge in investing tremendously, whether you choose to invest actively or passively.