Invest Actively Rather Than Making Passive Investments

(22001) Michael Masterson says: 

It is impossible to acquire a sizable amount of wealth in a short time solely by making passive investments in stocks, commodities or limited partnerships. To make above-average returns in these areas, you usually have to work hard for 25 years or more before you know what to do differently. If you want to get wealthy sooner, there are no shortcuts. You will need to choose a wealth building method that will involve lots of hard work. Everyone has to pay the price to get ahead.

Traditional Investment Methods Are Like a Marathon

It’s wonderful to think that you may be able to invest $10,000 or $20,000 in something and then sit back while that investment makes you a million dollars or more. Perhaps that does actually happen from time to time when people get in on the ground floor of something spectacular, but the odds of you actually doing that are extremely small. Furthermore, do you really want to leave your financial future in the hands of something you have no control over, no involvement with and that has exceptionally long odds of success?

Learning how to choose the right investments takes decades

The next time you read about some investment advisor who makes a killing on the stock exchange or with some other type of investment, remind yourself that making money that way actually takes lots of hard work. Warren Buffett is widely considered to be one of the greatest investors of all time, but he is not an instant success story. Every time he makes an investment decision, he automatically brings to bear all of the know-how and experience he has garnered over a lifetime of investment activities. If you aspire to be as good as he is at investing, you’ll need to first invest 25 or 30 years learning how to choose your investments.

Compound interest doesn’t help over a short time frame

It is widely recognized that compound interest is a powerful force in wealth building. That’s very true, but keep in mind that the really impressive increases in wealth happen right at the end of the investment period. If you’re serious about generating a seven-figure net worth in seven years or less, that’s too short a time frame for compound interest to be much help.

Seven Figures in Seven Years

So let’s talk specifics about what you would need to invest in in order to achieve some noteworthy net worth within this seven-year time frame. Obviously, your gains will be a function of two factors:

How much money you can invest each year

The return on investment (ROI) you achieve each year

Required annual investment figures

As you can see, if your goal is to have a net worth of $1 million within seven years, then the amount you will need to keep investing each year will be:

At a 10% annual ROI: $95,823

At a 20% annual ROI: $64,520

At a 30% annual ROI: $43,479

At a 40% annual ROI: $29,945

At a 50% annual ROI: $20,722

Requirements for creating wealth through passive investments

This is a good illustration of the fact that it’s actually quite difficult to build wealth quickly unless you can afford to invest enough money to start with. To make a lot of money through passive investments, you need to:

Start with a reasonable amount of money. (Investing $10 or $20 a week just won’t generate any impressive gains, notwithstanding the magnificent effects of compound interest).

Generate above-average (more than 10-percent) returns on your money year in and year out, without a single down year where you end up going backwards rather than forwards.

Keep adding a large amount of money to your investments every successive year irrespective of any other financial pressures or events in your life.

Avoid any need to draw anything out of your passive investments, even if a dire or urgent family emergency should arise during the seven year period.

Investing Isn’t the Only Wealth-building Method

All of this is not to say that investing doesn’t have its place in wealth building. It most certainly and obviously does, but it’s more than likely your investment activities will need to be an extension of the other actions you’re taking to build wealth rather than your sole wealth building strategy.

A reasonable investment strategy

In fact, a reasonable investment target for most people would probably look something like this:

1. Start a new business from scratch in which you have a meaningful stake

2.Make money in real estate

3.Work hard at increasing your income and saving more

Create a pool of between $20,000 and $200,000 each year that you can then invest.

Avoid the Wrong Investment Attitude

Once you put in place the various elements that will create this pool of investment money each year, you can then figure out how best to increase your annual rate of return. This will be the point of distinction between a “passive” investment and an “active” investment strategy. Passive investors put their money in and hope for the best, where as active investors get busy working on ways to increase their likelihood of success.

There are a few other points to be aware of:

Spending more than you make — Many people fall into the trap of spending more than they make each year. If you can’t find ways to avoid this, you will never be able to build your net worth. Wealth builders understand that it isn’t really necessary to spend a lot in order to live well.

The more you earn, the more you spend — There is a natural human tendency for people to ramp up their spending as their incomes increase. This is also a problem for aspiring wealth builders. Simply put, the more you earn, the more you should be attempting to save and then invest. Start trying to save and invest at least 15 percent of everything you earn and then find ways to keep increasing your investment rate as your income grows. Anyone making in excess of $500,000 a year really should be able to save and invest at least 40 percent of their income each year. It’s all a matter of committing to building net worth and making thoughtful buying decisions rather than spending money unnecessarily on lifestyle accessories.

Lack of will power — Building wealth needs to be a front-of-mind issue if you aspire to being successful in this area. If you don’t make this a priority item and tell yourself that you need to get started today, other things will always come along that soak up your money without getting you any further ahead. Reducing current expenditures and building wealth always needs to be a conscious decision on your part rather than something you just happen to stumble into. It needs to be job#1. When you make a firm decision, it will be surprising how things change.

Lack of an appropriate investment portfolio — The type of investments you will choose will probably vary according to the size of your annual investment pool, otherwise your investment results will be lack luster. Most likely, your choices will be something along these lines:

Annual Investment Pool

$150,000: You’ll probably do most of your investing in the stock market, generating 10-to 20-percent gains

$100,000-150,000: You’ll be looking for 25-to 35-percent gains, which means a mix of real estate and stocks

$50,000-100,000: You’ll want 40-to 50-percent gains, meaning real estate, stocks and small businesses

$20,000-50,000: 50-percent or greater gains will be needed, requiring that you start your own business

Learn more about Michael Masterson’s philosophies from his book Seven Years to Seven Figures.