Why does a get rich scheme or hot investment topic appeal to the majority public? Why, if we know it sounds too good, do we still listen? Why do we think money can be made so easy? It’s common to see an advertisement that pitches you can make money overnight, or the financial news showing an investment which gained some ridiculous percent in a short time frame. It draws a crowd, and because of our human behavior, we can’t help but pay attention. The media knows what sells.
Most recently we saw this type of investment mania over crypto assets, such as bitcoin. This wasn’t necessarily something that was pitched as a get rich scheme, but more of a topic that the media caught onto due to 1390% increase in 2017. Crypto is a perfect example of human behavior and we don’t want to miss out on something that could be a money maker. Well…news flash…money doesn’t come easy. Investment mania grabs the attention of people that typically wouldn’t be interested in investing and its seen as a possible way to make money without any effort. The problem is people don’t understand what they are investing in and pour money into it. How many of you invested in a crypto asset? What did you know about it? How long did you spend on research? Many buyers of these digital coins heard about it on TV, from a friend, and heard about how someone else made money. The point is, hype and word of mouth is hardly an investment strategy, especially if you don’t spend the time to research what you are buying. I’m not advocating for bitcoin or crypto in one way or another, I am just using this as an example of how hype over an investment idea can drive human behavior. Sure, you may have made some money on it, but why did you make money? If you can’t answer that question, then there wasn’t a plan.
Chris Gardner sums up this easy money idea in the book “Start Where You Are”:
“Maybe one of the main reasons that I resist these magic wand approaches to happyness that advertise overnight success and easy money is that they undermine the importance of purpose, struggle, sacrifice, planning, and discipline required for succeeding in most meaningful undertakings.”
This is a perfect example of what it takes to build wealth and create a plan. Most of the public that bought into the bitcoin hype weren’t investing for the long term, it was short term speculation. FYI short term speculation doesn’t build wealth. Let’s break down this quote into how to build a plan to create long term wealth.
Purpose– This is the foundation of your financial plan. Know what you are investing in and why. Construct an asset allocation that fits your risk tolerance and can reach your goals.
Struggle– Things in life will change, your financial plan will have to adapt to changes in life. You’ll have to learn to deal with unforeseen events and market noise. If you have a financial plan in place built around your current situation, it’ll be easier to maintain the plan during the struggle.
Sacrifice– Sometimes building wealth means asking yourself what you are giving up by making a purchase today on something you may not need. What I mean by this is that sometimes we don’t need buy that new item or even figure out ways to cut extra expenses. By having better financial literacy, you’ll build more wealth. The opportunity costs of sacrifice can be a retirement game changer.
Planning– Building wealth takes time. Educated calculations need to be made on where you are and where you want to be. You must look at your overall situation and implement strategies that fit into your plan. A plan is something that is living. It will continue to evolve and your grow through life.
Discipline– Understand that a financial plan is only as good as the people who build it. If its too risky and emotions get in the way during a market drawdown, then you won’t ever let your plan play out. Investor reasoning goes out the door when combined with emotion. You must understand why the plan was built and have the discipline to recognize how it was built around your financial situation. If you don’t have an advisor and you are your family’s own CFO, then you own your responsibly to create, implement and understand how the plan will work through various investment cycles.
You’ll never find a financial plan being advertised as a get rich quick scheme, if you do…run. A financial plan also isn’t a bunch of mutual funds thrown into your portfolio. A plan takes thought, calculations, asset allocation, stress testing and execution. A financial plan is something you build around your current situation and project it into the future. It must be revisited each year as your life changes, its constantly evolving. Let’s call it a living financial plan. As you grow throughout your life and career, your plan evolves over time and maintained when you reach goals. If you don’t have a financial plan, or have questions about your current plan, lets talk about it!