Saturday, July 16, 2011

The key is that you are in the market


Investing is frustrating and does not make you rich overnight. How is that for encouragement? It is the last thing you may want to hear as a budding investor, yet it is reality! If I was a mutual fund salesman this was probably not something that I would tell you. But then I am not, and as such I could not careless if you buy my arguments.

My mandate, that I set when starting this blog, was to help people to start investing – to, as they say, give back to the community. I landed in Canada from the Netherlands in 1979. I didn't come here because Holland was such a great place to live in; and although I still have a soft spot for the Netherlands, Canada is in my books the best place to live in the whole wide, entire, total, world. It provided me with a successful career in the oil industry; I found here my wife and partner in life; and now that our children are grown up and we're standing at the cusp of an entire new phase in our life, I want to give back.

In general, Canadians are affluent and have a good income. Especially when combined with a spousal income, many of our households live in unparalleled prosperity. We, Canadians are great in offense, i.e. earning money from our work. But we are not good at living off our money. We forget that our life is staged as 25 years education, 25 years of work and the rest of our life - 25 to 60 years - of living off our money. I guess, I expect some of us to reach the ripe age of 110 J

So we have only 25 years to bring up our kids and to finance another 25 to 60 years of financial freedom. That does not necessarily mean that at age 50 our life of personnel development and growth has stopped; that from then on-wards we're waiting for the coffin while leading a stagnating life of golf, travel, wheelchair card games and bingo! Heaven, forbid! No, it only means that we are after 50 years entirely beholden to ourselves. We are no longer reporting to a boss, we're our own boss and we can do anything we want – not necessarily making money, but to lead the life of our dreams. Some may have been as lucky as me and lead a life close to our dreams while still in our earning years. At fifty we may change our lifestyle in a very gradual fashion – I don't think geology will ever be far from my mind. Others will make a 180-turn and change their life completely the minute they reach financial independence. It all depends on who you are. But… whatever we will do with our true adult life, first we have to build the means, the wealth, to achieve freedom 50.

That is what this blog is about, to help younger people to plan and develop the skills not only to achieve true adulthood but also to have the skills to enjoy your adulthood to the fullest, whatever your fancy! So, let me tell you again, investing is frustrating and does not make you rich overnight. When you start your first job and made some money, don't waste it on a stupid BMW or Lexus! After 10 years, whether you bought a Lexus or whether you bought a 'previously-owned' KIA, you still own a pile of rust! After ten years of investment, the money that you didn't spend on that first luxury car has likely doubled – and after 20 years it quadrupled or grew even more! Now, if you after 20 years still want that Lexus… you just use one year's investment return or less to buy it… cash! You probably won't even feel the expenditure.

One aspect of successful investing is living below your means. That way you always save more than you spend and your wealth continues to increase. But investing your savings is truly frustrating. It is not that you're becoming rich overnight – this blogs has many posts about that and I recommend you to review those posts and remind yourself of this fact. Not only should you not expect to become rich overnight; your net worth won't even go up in a straight line. It is two steps back and three or better two-and half steps forward. We call that market volatility!

Some people consider market volatility to represent risk! That is wrong. The risk is when you sell your investment at a loss at the bottom of a market or when the company you invested in goes broke! Every market is volatile; it goes up and it goes down; however, overtime it will result in increased net worth. In the meantime you have to survive! You have to have funds to live off and to be in a position where you're not forced to sell – especially not at a market bottom. To survive you need cash flow. Cash flow from your work, from dividends, from interest, from partnerships, from real estate, from etc. You can even generate cash flow from the sale of investments – hopefully with a capital gain – but that is not a reliable form of cash flow especially if it results from a forced sale. That is the last thing you want.

Right now, we live in' interesting times' – as the Chinese curse goes. In today's world it is even more important to have cash flow than ever. If you are worried about the U.S. debt ceiling, that will pass – good or bad. If bad, you may see another major downturn, but it will end and overall things will right themselves…, provided, you have enough cash flow to live from and even better to have enough cash flow to invest even more while everyone else panics and sells.

It is possible that dividends will get cut. It may be possible that interest income goes even lower, you may lose your job, your rental income may fall, and the world may end. But unlikely, all that will happen at once. Even if it will happen at once, then it will happen to almost everyone around you as well, and your severely reduced cash flow may look outright luxurious when compared to that of your neighbours. So, just like one-eye being king in the land of the blind, you would still have a better chance to get by than your non-diversified neighbours. Percentage wise, your net worth probably hasn't changed compared to your non-diversified neighbours either. "So what's the worst that could happen?", as Danny DeVito's movie says.

Don't let the European debt crises and the U.S. debt ceiling bickering get to you. Investing is frustrating and your wealth is more likely to grow in fits and bursts rather than that you get rich overnight. The key is that you're in the market in the first place!

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