The difference between becoming wealthy and staying wealthy

Our job as retirement planners is to help you ensure that money is there when you need it, to meet your goals – so that you have enough to cover your day to day spending, to help your family or cover the cost of care, or whatever else you might want to do.

There are a lot of ways to become wealthy. One of the things I most enjoy in my job is hearing people’s stories; as you imagine, lots of people, over the years, have told me about how they built up their wealth. Some may have pursued a career in a high earning profession like accountancy, investment banking or IT. The more adventurous may have built and owned a successful business. Once in a lifetime, you come across a speculator who successfully pocketed their gains. But the most reliable (but least exciting) way to do so is to spend less than you earn and invest the rest. Repeat consistently for four to five decades, and you are likely to secure a decent retirement.

Money savings into money jar

A common theme among wealthy individuals is the realisation that money earned quickly can be lost just as quickly. They have a healthy fear of making a mistake they will regret. Morgan Housel put this perfectly in his book, “There are a million ways to get wealthy, and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.”

Few things in the financial world can give you the thrill of taking a high risk bet and winning; sadly, the temptation to chase the next thrill is hard to resist. But it’s the final bet (the one which didn’t pay off), which is the one nobody shouts about.

Getting rich and staying rich are two very different skills. Getting rich can be exciting, and the critical ingredients of success for some people are risk taking and luck. Staying rich is boring, bordering on the mundane. The only way to protect wealth with any degree of certainty is to diversify – don’t put all of your eggs in one basket. Diversification spreads your risk; so there will always be some lucky soul who has done better than you. In the short-term, a diversified portfolio will never be the best performer.

Tree in glass sphere - protection

There are tradeoffs to every investment and risk management decision. Shares have historically beaten inflation and pay reliable dividends, but every now and then, their value will fall by 35% or so. Property has a similar profile to shares, but it appears to fluctuate in value less day to day (in reality, that’s just a result of the way the property market operates). Cash pays almost no interest at all, but the FSCS provides a government guarantee that you will get your money back.

And sometimes, there are the bright and shiny objects that surface to attract our attention. Today we have cryptocurrency and Tesla shares. It’s hard not to be distracted watching others take victory laps with their winnings on these trades. With these investments, it’s usually a case of getting out before it all goes wrong (the “greater fool” theory). If you can throw this money on a fire, and watch it burn, without risking your financial plan, then take the gamble, if you want to (but I bet you could find a load of other things that you could do with the money, that will give you more long-term pleasure. Make sure you don’t risk your long-term wealth and happiness for the thrill of a bet.

Good retirement planners know that staying wealthy requires you to do boring stuff with your money, and we’ll always encourage you to stay dull and diversified. We want you to stay wealthy. Sadly, we may be good listeners, but we really aren’t exciting people (my family and friends will confirm this!). I’d love to hear about your parachute jump, but I’m not about to come with you next time.

 

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner

 

A pension is a long-term investment. The value of your investment and the income from it may go down as well as up.

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