Monday, January 12, 2009

How to Build Wealth - Part 1

100 Reasons Why Managing Your Own Money is the Safest & Quickest Way to Build Wealth

How to Build Wealth

Millions of people all over the world seek the key to building wealth, yet it remains an ever elusive achievement even to those that have more resources than the average Joe. In fact, it doesn't matter if you are black, white, Latino, Asian, Arab, Christian, Buddhist, Muslim, Brazilian, Japanese, Kuwaiti, British, German, Spanish, Italian, Cuban, Chilean, Argentinian, American, or Canadian, the key to building wealth is the same no matter your nationality, ethnicity, race, or religion. Yet so many people seek so many different solutions such as changing investment firms from Merrill Lynch to Goldman Sachs to J.P. Morgan in seek of higher returns; seeking out independent financial consultants; specula-ting in assets they don't understand; and buying investment newsletters to provide research & recommendations. And the great majority of people that have been searching in this manner to build wealth are still searching today.


The answer is quite simple. All of these investors have a particular shared denominator of failure and another denominator highly predictive of success that is missing. Their common denominator of failure is their motivation to find the easiest method to build wealth. The placement of their money in someone else's hands to manage, the purchase of newsletters to provide their stock picks for them, and the greed driven behavior of gambling in speculative assets are just some of the many pursuits investors undertake in search of wealth. Their common missing ingredient and their reason for lack of success is their exhaustion of all possible methods to build wealth except for one - Seizing personal responsibility for learning how to manage their own money.

So the million dollar question is literally this: What is the fastest way to build wealth? Ready for the answer? Take the time to learn a proper investing system, seize responsibility for your financial future, and manage your own money. Unfortunately there are truly no viable alternatives to this answer. There is a reason that the best method to accomplish something is almost never the easiest way. When it comes to investing, it is simply amazing that the vast hordes of investors believe that the easiest ways to invest are the best ways to invest. This is the furthest thing from the truth.

100 Reasons Why Managing Your Own Money is the Safest & Quickest Way to Build Wealth

No one will ever care more about the performance of your money than you. Period.

(1) No financial consultant or investment firm will ever care more about the performance of your portfolio than you. Reasons (2) and (3) are quite lengthy because they help clarify reason (1).

(2) A financial consultant's job is to make his or her firm wealthy, NOT to make you wealthy. These two objectives are vastly different. This is per-haps the second most important reason why you must take responsibili-ty for managing your own money. Most people realize that most financial consultants are nothing more than glorified salesmen and saleswomen, even if they do work for a prestigious investment firm. If you currently employ a financial consultant, the next time you visit the office, make a point to speak to the branch manager and ask him for the annual returns of the top five best-paid financial consultants in his office over the last five years. Then ask him which financial consultants in the office have earned the best returns for their clients over the last five years and ask to see these returns. Don't let the branch manager answer your questions by giving you the annual returns of the best five internal or external money managers that the investment firm utilizes. This res-ponse does not answer your question. First of all, it is highly unlikely that the top producers hire the top five best performing money managers year after year as any major global investment firm utilizes hundreds of money managers.

By this, I mean that most financial consultants make zero decisions about what stocks are purchased with the money that you give them. They hire either internal or external money managers to do this for you. You want to find out what are the returns of the top five best-paid producers in your office based upon the mix of money managers they hire for their clients. If a branch manager refuses to divulge this information, you have to wonder why. If they tell you they do not know, and they only know the returns of the various money managers their offices employ, this is even more incredulous. Why would the manager assign such little significance to the kinds of returns his top producers are earning for their clients that he or she doesn't even track this information? And if he or she can provide this information, ask if the returns he or she can give you are the exact figures that his or her top financial consultants have yielded on average for all their clients or fi they are just estimates. Again, if a manager is just guessing, you have to wonder why they wouldn't know this seemingly critical information.

Finally, if they know, but won't tell you, why would they not release this information? Shouldn't the best paid financial consultants in any office be earning their clients the best returns year after year after year over all other financial consultants by a very wide margin. And if not, why are they being compensated so highly? The answers to these questions, if you receive honest answers, should reveal that great salesmen are compensated very handsomely by their firms while almost zero premium is put on the ability of a financial consultant to earn great returns for their clients.

(3) Hiring a truly gifted financial consultant is still not the answer, because chances are that a truly gifted financial consultant will not hire you. Building on point (2), many investors will then say, OK. I'll find myself the financial consultant, the one that falls in the top 0.5% of all consultants that really know what they are doing, and I'll hire him or her. Here is why they are wrong again. Because most people never take the time to properly learn how to invest themselves, they never can understand the investment strategies of those that truly know what they are doing. This lack of understanding, despite any efforts on behalf of the consultant to educate the client, inevitably leads to incessant questioning of this consultant's actions, strategies, etc. which can grow very tiresome very quickly.

I have dropped large accounts in the past because of such meddling,
sophomoric behavior from clients that had a lot of money. Furthermore, I have refused to accept large accounts as well because I could tell, in speaking with a prospective client, that he or she firmly held so many misconceptions about investing that he or she would be a nightmare to deal with. Consultants that truly know what they are doing, despite their efforts, can not educate anyone fully in 3-4 hours time if one has been conditioned for years to believe the nonsense that global investment firms have taught him or her. Furthermore, because great consultants realize that so many widely believed concepts about investing are nonsense, and have achieved their great performance by realizing this, they will constantly be fighting an uphill battle against clients that believe this nonsense. Therefore the chances that they would keep these clients in the long run are slim to none.

Even if one finds the rare consultant that truly knows what he or she is doing, and truly has outperformed the markets significantly year in and year out, because these types of consultants invest so differently than the status quo, any lack of exposure to such intelligent investment strategies will undoubtedly cause fear. It is human nature that ignorance leads to fear. In turn, fear causes incessant badgering and questioning, a behaviour that 100% of the time will cause a great financial consultant to terminate a relationship with a client.

Because great consultants achieve their outperformance by making decisions that go against the grain of what 99% of other financial consultants do, a great level of understanding of how to invest properly is necessary for one to even to maintain a relationship with a great consultant. In the end, even if one doesn't wish to manage his or her own money AND even if one is able to find that rare 1 in 1,000 financial consultant that really knows what he or she is doing, one still needs to learn a comprehensive investment system just to maintain a healthy relationship with their knowledgeable consultant. Ultimately, this is why you should learn to manage your own money!

(4) Global investment firms always tout a message of trust in their commercials. But where is the historical performance that merits that trust? 6% to 10% a year?

(5) If being a financial consultant required such specialized knowledge, why do investment firms hire financial consultants from a vast array of back-grounds and degrees? The investment industry is most likely the industry that possesses the greatest amount of diversity regarding the former professional careers of its frontline personnel. This is because there is no specific set of knowledge required to be a great financial consultant. Only great people skills and sales skills. You can not find a single other industry that is so willing to hire people from all walks of life. If you want to become a lawyer, you need a law degree. Want to become a marketing executive with a large firm? You better have at least eight years of marketing experience with a Fortune 500 company. However, if you want to become a top manager at a prestigious investment firm, your degree is irrelevant as long as you have an uncanny ability to sell.

(6) Think about what #(5) implies. Think your financial consultant has an MBA or business degree in finance? Think again. The typical financial consultant does not have an MBA. However, the common denominator that all successful financial consultants have is a great knack for being able to sell.

(7) There is so much misinformation disseminated by investment firms in order to keep you dependent upon them. That alone is a reason why you should cut the umbilical cord to investment firms and learn to do it yourself. There is a reason why investing legends like Warren Buffet state that he only reads firms' analyst reports when he wants a good laugh. He realizes the level of misinformation that is necessary to build client-firm dependency. You should too.

You'll never build wealth quickly with diversified portfolios (diversified by asset allocation, diversified by style, diversified with mutual funds). But this is all investment firms do. I once met a top financial consultant at a major firm that believed in buying nothing but index funds for his clients. If this is how your money is being managed, do you really need to pay someone to buy index funds for you? Figure out the equation: A. Diversification won't create wealth. B. Investment firms diversify portfolios. C. I give my money to an investment firm, thus my portfolio is diversified. What's your conclusion?

You will never build wealth at an investment firm. Preserve it? Maybe. Build it? Fat chance.

(9) 6% to 10% will never help you build wealth. You must learn to at least earn 15% to 25% or more every year. At 8% a year, it will take you 9 years to grow $250,000 to $500,000 and 18 years to grow $250,000 to $1,000,000 in a non-taxable account, not considering the erosion in purchasing power due to inflation. At 25% a year, it will take you less than 7 years to grow $250,000 into a $1,000,000 in a non-taxable account. That's the difference between building wealth and preserving wealth. 6% to 10% a year helps you preserve wealth, not build it.

(10) Major global firms will NEVER find the best stocks in the global market and hold them in your portfolio.

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