I was amazed while working at Merrill Lynch the types of mindsets that clients and peers would have when it comes to investing one’s wealth. There wasn’t a day that would go by where someone was talking about beating the S&P 500. If that is your focus with investing, and you are using an advisor then you are probably looking at things wrong.
The first step with any investment strategy would be if you are striving to create wealth or if you are trying to preserve wealth. If you are trying to create wealth, that is best left in your hands but if you are trying to preserve wealth, that is best left in the hands of others. Actually, in all likelihood you should be developing strategies for both.
Wealth creation investment should be the focus of what you do better than 95% of living people. This will be your full time job – whether that’s a marketing engineer, a doctor, or an entrepreneur. It is up to you to determine the strategy within your specialty to maximise earnings. It could be to climb the corporate ladder, spin off your own business, or just find a sugar mummy/daddy. Sometimes maximizing earnings simply means cutting expenses.
The ideal situation is to build a business, because not only are you collecting a similar pay for your services, but you have the choice of selling your business when you are ready. There are definitely a number of pitfalls to starting your business. With a business you will be more tied to the job and you will struggle for the first few years while you get it off the ground. I think the reason most businesses fail is that they get tired of those sacrifices and replace them with the sure income.
Some or most of the wealth you create from this path should be diverted to your wealth preservation strategy.
This is the strategy you should develop when you have more wealth than you feel comfortable putting into your wealth creation bucket. The key to this strategy is diversification and that’s where the octopus strategy comes in to play. Traditional brokerage firms would lead you to believe that diversification means stocks, bonds, and cash. They think you should diversify these products through mutual funds, ETFs, hedge funds, or money managers and they got it partial right.
You do need to diversify between all those investments and you also need to include other products. In addition to more products you also need to think about how you are holding the investments. For instance with gold, you can hold it physically on your property, hold it at a bank, hold it a private storage company, or hold it through an ETF like IAU. With those options you also have the decision to hold it locally or globally. The key with wealth preservation is diversification so it would be in your best interests to engage in a couple of the above strategies.
Do not neglect “alternative” investments as you’ll want to look at all major investments including real estate, commodities, securities, your business and cash.
Think of your investments as an octopus. The head is wealth creation, and the tentacles are your various investments. The more tentacles you have, the more diverse. As you are young your tentacles will be small and you will likely only have a couple. As you get older your octopus head and tentacle count grow.
On our path to prosperity we get distracted, and life happens – that’s OK. The key is to remain focused and stick to your long term goals. May you become the headless tentacle octopus we all strive to be.
For fun I drew up a couple of different octopuses and their characteristics. Are you one of these octopuses, or would your octopus look completely different?