What a difference a decade makes.
Ten years ago everyone was chasing the next hot stock. Equity markets were generating double-digit annual returns and dot-com companies were doubling overnight. Greed was widespread in the psyche of investors and no one wanted to miss out on the next sure thing: a social epidemic of excitement running rampant.
Everyone was getting rich.
Or so it seemed.
Fast-forward to today and everyone is running for cover. The country is mired in a deep recession and major stock market indices have declined over 40 percent from their highs. Fear has set in with investors of all ages. Our country is now struggling with a social epidemic of pessimism as investors cope with how to build back portfolios that have been sliced in half.
With one eye on the grim economic headlines and the other on a depleted portfolio, there is a tendency to think that everything is out of your control, and, unfortunately, that is when financial paralysis sets in.
Despite all the bad news thrown at us by an overbearing media, the truth is that you are in control of your financial future, and now is the time to recognize it and take charge of it. Why is this so important now? I am not saying this is an opportunity of a lifetime, but because of the significant declines in the stock market, current valuations suggest that the next decade, and beyond, are likely to generate attractive returns in common stocks. Don't let this next decade pass you by.
In my book, The New Coffeehouse Investor, first introduced in 1999 and now in its third edition, I share three simple principles to guide you in building wealth. These are principles you already know to be true and in your control.
- Save for a rainy day. Establishing your own personal financial plan is paramount to building long-term wealth. In doing so, you create an awareness of whether or not your current saving and spending levels translate into achievable financial goals down the road. If not, what changes need to be made? You might not be able to make enough adjustments immediately to reach your savings goal, but at least you have created an awareness of the gap between today's current saving and spending levels and your future expectations. Then, when saving and spending choices come up in the future, this financial awareness is at least present at your decision-making table.
- Don't put all your eggs in one basket. The key to building a successful portfolio and reaching your financial goals is to diversify your assets in such a way that you maximize your chances of achieving your goals with a minimum amount of risk. The personal financial plan you have created for yourself brings clarity to your saving and spending issues. It also allows you to determine how to best allocate your investments between stocks, bonds, real estate and other asset classes to achieve a required rate of return based on a level of risk that is appropriate for you in relation to your goals and where you are in your life.
- There is no such thing as a free lunch. Because markets are relatively efficient, any attempt at beating the market through the selection of individual stocks or actively managed mutual funds is likely to prove disastrous to your long-term financial health. The smartest way to build a globally diversified portfolio is through a line-up of low-cost index funds. This investing strategy is at the core of Coffeehouse Investor portfolios. Wall Street will forever tout its stock-picking prowess. Don't let them gamble with your money. Low-cost index funds are the surest way to capture the entire return in any asset class over the long haul.
The benefits of embracing these three principles are straightforward. First, from an investing standpoint, you maximize your return potential in each asset class by capturing its entire return. Second, and more important, it allows you the emotional freedom to turn your attention away from Wall Street and focus on the one component of wealth that matters most of all: How much you save and spend.
The financial media is quick to remind us that we are a nation of irresponsible, overspending consumers, living for today at the expense of saving for tomorrow. Along with the woeful tales of those who spend too much is another story that needs to be told: that of millions of Americans who do want to take responsibility for their saving and investing decisions by making the right choices today.
The problem is that we have been so inundated by the financial industry's marketing machine over the past quarter-century, that we have been brainwashed into thinking that the secret to our long-term financial well-being lies in Wall Street's hands, instead of our own hands. Nothing could be further from the truth.
For Coffeehouse Investors, our three simple principles allow us to be in charge of our own financial future. We wouldn't have it any other way.
Author: Bill Schultheis
Bill Schultheis is author of The New Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life. Schultheis is an investment advisor in Kirkland, Washington. To learn more, visit his website.