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The secret foundation of accumulating wealth

In the Victorian age, wealth was inherited and living expenses were adjusted to the returns that the wealth produced. Accumulating wealth was largely political through carrying favors with the king who had the power to grant titles and land that produced the return. Further of importance was building relations through marriage and diplomatic efforts.

In modern times wealth is still inherited, but industrialization and the capitalist economy offer anybody the opportunity to build their own fortune from scratch.

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Many jobs offer high levels of income that allow either a very comfortable life, or to build capital through savings. Furthermore, capital markets offer access to investing in other peoples’ businesses to participate in their success.

Investment always comes with risk

Any investment makes a judgment about the future. If you seed a field in spring, it is an investment into harvesting a crop in the fall. However, lack of rain may make this crop unprofitable or a mistake in guarding the field may let wild animals eat the crop before harvest.

If you invest in things that you directly control, such as farming or performing tradecraft you can mitigate some risks, such as building a fence around your field to keep animals out.

If you invest in other peoples’ businesses, you can control less of the individual risks. To build wealth you need to be aware of the risks you take with your investments and how to mitigate against them.

As a general rule, the higher the risk of an investment, the higher the return should/could be. A second rule is, the longer you have to part with your money the higher the expected return should be.

Wealth accumulation requires long-time horizons

Risk is something that can’t be avoided in investment. However, the capitalist economy has shown that overall it expands and creates wealth, given long periods of time. Over months and seasons, there may be setbacks in business. But over decades a free capitalistic economy tends to expand.

The goal in investment must be to participate in these long-term trends avoiding too many setbacks. Because setbacks mean loss of money for the investor.

There is a fundamental truth, you have to be invested in something to participate in the growth of wealth. Hoarding your money under a mattress protects you against loss, but it does not grow along with the overall economic growth.

Financial discipline is the secret accumulating wealth

Being invested in the economy needs to be translated to your personal situation. You need to plan several steps to make this work for you. And it needs the discipline to follow through with the plan.

Two Hands on a piano symbolizing "discipline of practice"
“Piano Hands 2” by alexanderward12 is licensed under CC BY-SA 2.0

Discipline to balance income, expenses, and savings

All wealth starts with saving some money, the capital to invest. To save money you need to ensure, that your income exceeds your expenses. This may not be the case every month, but averaged over a year, it should happen or you will not accumulate capital to invest.

For most the only income source is employment. This can’t be increased in the short run or at least not under your control. So it is important to limit the expenses to ensure that savings accumulate.

For those that work self-employed or run a business, there is the option to increase income by working more. This is also true if you have a side hustle that you are self-employed with. Still, income must exceed expenses to build capital for investment.

Read more at our Ultimate Guide for Personal Budgets

Discipline to continuously add to the portfolio

As you are accumulating wealth it requires discipline to add to the investments no matter what. The overall value of an investment portfolio is volatile, it ebbs and flows with the markets one is invested in. This volatility induces emotions. If the value increases you feel exuberant about your bright future. If the value contracts, you feel anguish and doubt about the loss of money.

It is natural to feel frustrated when one’s portfolio value seems to disappear in thin air. It takes discipline to add to the portfolio when it seems to make no sense as it disappears in losses anyway.

What should motivate the investor in these dark times, is the fact that the assets one buys are relatively cheap when prices are low.

Learn about the smart way to balance your portfolio for long-term growth.

Discipline to stay invested, no panic selling

When markets fall and so does the personal portfolio, it is hard to trust in the long-term benefits. This is the moment where the biggest fortunes are lost, by selling at the low point of valuation.

It takes discipline to hold the investments with the expectation that they’ll recover over long periods of time. They always have and there is no fundamental change that they would not do this again this time.

Patients in accumulating wealth

As the markets are an aggregate of many stocks or bonds, there are always single stocks or assets that at the moment appreciate even faster than the market. Whoever owns those assets is tempted to brag about their wisdom and success. This is amplified by all the people that make money when assets are traded, such as stockbrokers or money managers.

It takes discipline to stick to the plan and expect long-term returns on investment that are far below the hype of the day, such as cryptocurrency trading or any other trading scheme. The truth is that many of the people that gain a lot in the short term, also lose a lot in the short term. Just nobody likes to talk about their losses.

Discipline to not keep up with the Joneses

Not only requires investing discipline, but also budgeting and balancing income and expenses needs a systematic approach. A lot of people like to spend money like they were wealthy, but they live paycheck to paycheck, just at a high spending level.

It takes discipline to stick with the old car, the smaller house, the moderate vacation destination when neighbors or colleagues, or even siblings can afford these luxuries, that would not fit into your budget. However, in the long run, the benefits of financial independence and long-term security will keep the drama away that living this high-risk lifestyle brings with it.

Discipline to keep quiet about your accumulated wealth

Once your wealth accumulates you could be tempted to share the numbers with friends and family. I’d recommend against that unless you know they buy into the same long-term and disciplined plan.

It used to be that being a millionaire was the goal and a sign of being rich. This number evoked envy and people that thought you could spread that money around to their benefit. However, an investment portfolio of a million dollars does support these days a lifestyle below-median personal income.

If you want to enjoy your wealth in peace, don’t tell anybody about your bank statements and also don’t show it in form of status symbols or other luxury items.

Discipline to take risks with the long-term investments

The conventional wisdom is to reduce your risk when the retirement age has arrived. Most fund companies recommend target funds that almost entirely shift the portfolio to low-yield, low volatility bonds. However, that seems foolish if you want to stay 30 or 40 years in retirement, which is almost as long as you did work and accumulate wealth when you retire at 67. If you retire earlier, it is even more foolish.

Accumulating wealth requires financial discipline

Financial discipline is at the heart of all moves that lead to wealth. Just as an employer expects discipline from the employee to show up for work. As a saver and investor, you need to be disciplined about accumulating wealth. As a retiree the discipline in investing continues while withdrawing a passive income from the fortune accumulated.

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