Make your money work for you. That’s a piece of advice that gets thrown around more often than the ball in a game of soccer. But when the time comes to put this advice into practice, many people can’t help but feel paralyzed.
All our lives, starting from our childhood and late into our professional careers, society conditions us to follow tried-and-tired paths to success. Of course, success is the wrong term here. A better description would be making ends meet.
What if you want to go beyond making a living and actually start living?
To do that, you need to dive head-first into the world of investments. Here are some field-tested lessons to help you navigate these murky waters and emerge profitable on the other side.
1. Prioritize Consistency Over Intensity
A common mistake people make across every area of life is when they prioritize the intensity of their efforts. They try to tackle challenges with an overzealous drive that can help them make strides in the first few days or weeks. But soon, burnout kicks in and reality takes over.
In terms of investing, it’s the person who gets discouraged by the “low” returns of tested investment options and prefers to roll the dice with riskier investments. Common examples range from lottery tickets and penny stocks to unknown cryptocurrencies.
Unfortunately, those high risk options lead to a complete wipeout of the portfolio more often than life-changing results.
This is why you must focus on the consistency of your efforts over the intensity of your results. An annual return of 10% is far better than a 25% option that could potentially wipe out your entire portfolio.
2. Survival Is the Name of the Game
Some of the wealthiest people alive today got there not by generating some mindblowing annual returns but by producing above-average results over a long time.
As is often the case, the reality of investments is far more boring than social media would have you believe. The most rewarding investments often look dull and boring. But that’s also what makes them rewarding because most people opt for the easier route, which looks more like gambling than investing.
The key point here is that the longer you can survive, the bigger your portfolio will grow. And it’s all thanks to the seemingly magical power of compounding. To bring this point home, let’s look at the example of the man who’s most commonly associated with compounding: Warren Buffet.
As one of the world’s richest men alive today, Buffet’s greatest advice is to “not lose your money”. What he means is that you should never invest in things that you don’t understand. If you try chasing everything that shines, sooner or later you’ll end up losing what you already have.
If you look at the trajectory of his net worth, you’ll notice that over 99% of his wealth came after the age of 52. Again, the longer you can survive in the game of investing, the bigger your portfolio will grow over time.
3. Balance Diversification and Concentration
Much and more has been said about the wonders of diversification. From children’s stories to full-fledged corporate reports, we’re constantly warned against putting all our eggs in one basket, so to speak.
While that’s excellent advice for people who want to preserve their wealth, it’s not the best option for those in the early stages of life and who need to generate that wealth in the first place.
If you make a list of the top 100 wealthiest people on the planet and analyze it, you’ll find that an overwhelming majority made big, concentrated bets to skyrocket their net worth. This is just as much true in normal circles as well. For instance, specialists regularly make more than their generalist counterparts because they can master one small area and reap the rewards from this domination.
For the vast majority of people, it means that you need to balance your diversification and concentration in a way that matches your financial targets.
If you’re starting out and don’t have much to lose (relatively speaking), then you should lean on the side of concentrated bets to maximize your odds of generating life-changing returns.
Whereas if you’re at a point where you already have a respectable portfolio and can’t imagine losing it, then diversification should become the top priority in your investment strategy.
4. Controlling Emotions is The Biggest Struggle
It’s common to think that logic is what drives us. But in the face of strong and overflowing emotions, logic can’t help but jump back into the passenger’s seat.
No amount of planning and strategising can lead you to financial success unless you can tame your inner desires and master the regulation of your emotions. For many people, life becomes an endless loop of working painfully hard to improve finances—only to drain those resources by buying things. In fact, retail therapy is a real psychological term at this point.
The other side of this emotional regulation is panic. As soon as prices go down, people jump ship and cut their losses. While cutting losses can sometimes be a good idea, it’s usually a bad call because markets have always managed to recover and to hit new highs. The fear of missing out is another psychological phenomenon where people buy an asset because everyone else is buying into it.
Managing these emotions will put you ahead of the vast majority of investors out there. So before you ever make a financial call, make sure you know exactly why you’re doing it.
The Key Takeaways on Investing
The longer you can keep your portfolio going, the stronger it will get and the faster it will start growing. As time passes on, you must reasses your investment strategy and find the ideal balance of concentration versus diversification for your portfolio.
Finally, never discount the importance of emotional regulation. As much as we like to think of ourselves as sophisticated, logical creatures, empirical evidence shows that we’re driven by emotions. Taming these emotions is the key to success in not just your finances but every other area of life too.