Creating Wealth: How to See the Big Picture and Make the Right Financial Decisions

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creating wealth

I once wondered whether an investment property or a dividend yielding stock is better. The result was an unanimous vote for investing in stocks.

Since then, boy has the environment drastically changed. The financial crisis unfolded with a 50%+ decline in stocks, followed by stocks multiplying during the next decade only for a pandemic to trash stocks again in a span of just one month.

If I were to ask the same question again, would everyone still vote for stocks?

create wealthChasing the Heat Mentality

Now that I think about it, the vote for stocks last time reminds me of the number one reason why we cannot gain wealth – that six inches of real estate we call our brain. We all know that in investing we shouldn’t chase gains and invests in stocks that has already gone up too much in value. But the same type of human psychology is making us prefer stocks over real estate at the time.

If we really want to combat the effects, perhaps we should seriously consider buying stocks and real estate when we really don’t want to?

I know I know, it’s obviously not as easy as that because we fear the values will go down some more. But to that I say – so what? We all know that the stock market and real estate always eventually goes back up. Have you not seen the 100 years of historical data of the S&P 500 and the long term up trend?

Be Careful Though…

Before you let me convince you to throw every dollar you have into investing, remember that while it will always go back up, we never know how long it takes to do so. It could take 12 months or 5 years. It’s important to put money you need in the short and intermediate term in a safe place like an online savings account. This is extremely important, as I’m sure those who didn’t follow it can tell you after what they witnessed back in 2008.

A Little Tip That Could Make You Millions

So how do we keep our emotions from controlling our behavior and wreaking our wealth? Simple. Just make a plan. It could be as basic as committing to automatic contribution plans and forgetting about it or writing out exactly what you plan to do. Here’s an example:

I will contribute $500 a month to invest in an index fund that tracks the S&P 500.

If the market dips 5% from the month before, I will invest $550 that month. If it dips 10% or more, I will contribute $600.

Once you write it down and remember your plan, it will be much easier to stick to it because you are detaching your behavior from the actual fear of reading headlines. You are sticking to a plan that you developed out of logic and not acting on emotions.

As you can see, the plan can be quite simple but as long as you are committed, it can be quite effective.

Update: Steven in the comments have an even simpler plan. Instead of changing the dollar amount you put into the index fund based on market performance, just buy a set amount periodically. This way, you can totally make the contributions automatically. Set it and forget it, as he says!

I love this idea since it takes our emotions out of investing even more. Sometimes the simplest plan is the best plan of all!

What About You

Do you have a plan? If so, do you find that it helps? Please share so we encourage everyone to start taking steps for a better future.

And if you are still paralyzed by recent volatility, this article might help.

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

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{ read the comments below or add one }

  • Highflyer says:

    Another great piece David.

    I want to add that you never want to borrow money to invest in stocks. It’s true that stocks always go up so keep buying through the thick and thin but you just don’t know whether it’ll take 12 minutes or 12 months (years!) for stocks to go up like you said.

    The market can be irrational longer than you can stay solvent!

    • David @ says:

      Leverage buying sounds good on paper until asset values go against you. Like you said, the market can be irrational longer than you can stay solvent and when the market is irrational, margin calls are a real thing. Just look at what happened in March and the chaos that ensued.

      Leverage can be a wonderful thing but one misstep can quickly see vast amounts of wealth vanish.

      Stay cautious!

  • Derek says:

    I could not agree more. Make a Plan and stick to it. It could not be easier. I currently invest €1000 every month and I try and increase that by 10% every year. It stops me from trying to time the market and thinking I know what is best. Instead I set aside the same amount and buy dividend champions each month

    • David @ says:

      Good job Derek.

      €1000 (or about $1100 USD) is no easy feat to save per month, and you are planning to increase it by 10% every year even!

      Financial independence is not far away for you my friend. Keep the pedal to the metal, stick to your plan for the long term and the world will be your oyster pretty soon.

  • Steven Pearson says:

    You lost me after the $500 a month to the index fund. What difference does it make if the fund goes down in value or not. If it does you get more bang for your buck each month. It’s the opposite if it goes up. So why change the amount? You just made it more complicated. You didn’t reduce the amount you put in every month if it went up 5 or 10 percent. So set it and forget it and in the long run you win, hopefully. There are no guarantees.

    • David @ says:

      Thanks for chiming in Steven.

      While that plan I wrote was just an example, you bring up a very good point about making everything simple. The beauty of your plan is that you can totally set everything up so money is automatically taken from your bank account to the brokerage accounts where it can then be invested. This way, we can keep our emotions out of investing even more.

      Would you mind if I add your suggestion to the piece as a better example?

  • Confused says:

    So explain to me how having a plan is useful again? How does that make me money?

    • David @ says:

      The plan doesn’t make you money, but the risk assets you own does. By having a plan, you will buy more ownership of these assets, or your rights to their earnings (in the case of stocks) through time. Without a plan, you run the risk of panicking and selling at lows when volatility of values show up because of emotional trades.

      Having a plan basically helps you stay invested in your risk assets through time, which is where you make that money.

  • Which way? says:

    Who wants to take a stab at which direction the market is going next week?

    Up, down, sideways?

    • David @ says:

      I have no clue, but I’m going to guess that it’ll go up Monday and then start heading down…

      That doesn’t change what I plan to do, which is to periodically buy into the market though.

    • KT Smith says:

      I’ll bite…. the S&P is going up to 3,000 before it drops back down.

      Seriously though, listen to David, and just stick to the plan and keep buying whenever you have money.

  • BillyG says:

    It’s just incredible how optimistic everybody is now that the fed decided to pretty much nationalize the credit markets.

    Goldman Sachs is now saying that the V-shaped recovery is back on the table. We are all still stuck at home and can’t even spend much money if we want to for God’s sake.

    People who think they can time this market is being crazy. I’m sticking to my planned buys and just riding this out. I just hope we don’t create a long term slow growth period because that’s going to be the real wealth destroyer.

    • David @ says:

      The sad thing is plenty of people got lucky with timing and they will gloat forever that they can time these things.

      All I can say is good luck to these people next time another swoon happens.

  • Andrew says:

    Buy solid companies that you believe will continue to grow and be strong players in their sectors, that pay reasonable dividends (2-5%), and that you believe will rebound from downturns and large hits to the stock price. PLAY the LONG TERM game. Dividends + stock appretiation over the longer term will make you more money and cost less in fees if you get lucky enough to pick the right stocks. (you can play volatility if you want, and I am still trying but only sell part of your position so that further upside and dividends can still be taken advantage of).Trying to be a trader has taught me some expensive lessons. Can I predict stock prices? NO! Will I panic and sell when a stock takes a 30-40% hit? YES if I am playing outside my risk tolerance and am afraid the company isn’t as good as I initially thought (why I stay away from small caps)…Not if I buy a stock that is consistent (I like to look at their previous 10 years) and a company big enough to weather a storm and come back up. I’ve done this with Goldcorp over the last 2 years. I, however, am over weighted and have reduced my position by selling part of my position when I began to see profits and waiting to sell a larger portion of the position at a higher profit.

  • Chiko says:

    Yes, I have a plan to be financially independent by the age of 25. One the thing s that I will be implementing in my plan a year from now is the steady investment of an index fund that follows the S&P 500.

  • Dorothy says:

    Yes, my investments are in stocks. My plan all along was to have them be “for the long term.” Yes, they took a beating, and yes, I expect the value will return one day. And for the money I put in investments, I can afford to wait 5 years for that to happen.

  • steveo250k says:

    If you are just talking where to put some cash now, stocks. But if you have some significant cash to buy property, the knowledge to make the contracts, and the skills to maintain property, then is sounds like following Marci’s path is a good option. Especially given the deals you can find in most markets on property today.

    I am still amazed, though, at people questioning if they should buy stocks because of the downturn. I had one friend tell me she stopped investing in her 401k because it had lost so much. She didn’t seem to understand that by investing now she was buying shares on sale.

  • marci says:

    My savings and investments are automatic. I don’t have to think about them – they just happen. The 401K, I increased when all this started to take advantage of the great buying opportunities. My stock dividends are automatically reinvested in my stock accounts – I don’t see them, so I am not tempted to spend them. It’s really just a matter of attitude… decide you are going to do it, then set it up automatically, and away you go. Quit fretting about the ups and downs and just let it ride.

    About real estate – I made a LOT of money in real estate, and am still collecting on some of it now. I bought rentals, rented them out for 5-10 yrs or so and got the tax goodies out of them, then sold them on land sales contracts (ie, I carry the paper and get the interest) some for as much as 11.5% interest, and that’s a nice amount of interest to still be collecting on monies.

    One example – bought a house in 1980 for $19,000. Fixed it up, and rented it out for about 5 years. Had some ups and downs with renters, as can be expected. Got in a really good renter and after 2 years they wanted to buy the house but didn’t have the financing to go thru the bank, nor would the old house finance well. I sold it for $35,000 in 1986, carried the paper on it at 11% interest for 30 years, and am still collecting on it and into the future. Due to the serious economy problems in our area back in the early 90’s, he missed one payment (called me and asked permission – ok’d by me), I added the interest to the contract, and he’s been good as gold ever since. Didn’t hurt me to miss that payment, and think what the interest on that missed payment has meant to my income stream over these years. So – I got tax goodies out of the property, had renters pay for the property thru their rents, sold it for almost double, and have been collecting 11% interest on the balance for over 20 years…. I think I made good money on this one 🙂 And at this point, if I had to take the property back, it is worth over 4 times what they paid for it, so I can’t lose. In all these years, I have only NOT made money on one real estate investment – and I at least came out even on that one – which is more than I can say for the stock market lately.

  • Steve C @ says:

    A proper plan is essential to any sound investment plan. But the hard part is staying on plan when your emotions are going nuts. You can tell yourself that you are going to sell or buy but sometimes pulling the trigger is extremely difficult. I usually set stop limit orders as soon as I make a purchase for exactly this reason.

  • Mizé says:

    I would never have voted in stocks because it´s not a stable investment.
    I´ve been in a familiar/small property business for over ten years and I think it´s a very good choice when you consider long term profits.
    In my country, house prices and rents have gone up alot in the past years making this area a very good investment.
    A good Thursday.

  • MoneyNing says:

    Sandy: Writing it down is the first step. Try to make one tonight. It really could be quite simple to start off.

    Eric: I’m a huge advocate of DRIPs as well. They are great and really help investment returns.

    Erica: Mathematically, stocks are definitely better than real estate but it’s tough sometimes since most people probably need to make “both” investments.

    Ryan: Precisely 🙂

    ToughMoneyLove: Insurance strategies – do you mean buying options and the like? What insurance does a person buying real estate have other than time?

  • Mr. ToughMoneyLove says:

    If you are creating wealth to provide financial independence, then you must look at the long term consequences of your investing decisions. Thinking about only what has happened in 2008 will skew your analysis and cause you to make poor decisions on incomplete data. On the other hand, risk tolerance can change. The best way to respond to those changes is to reduce risk in other areas of your financial life, using insurance strategies for example.

  • Ryan says:

    Stocks are always better than real estate even though there will be periods (sometimes long ones) where one asset class dominate over others.

    However, you can always live in a house if you wanted to so performance should not be the only consideration.

  • Erica Douglass says:

    Stocks over a long time period FAR outperform real estate. Stocks since the Great Depression have averaged 9.3% a year return. Real estate in the same time period has averaged 2-3%.

    Of course, you can use leverage in real estate, but you can use it in stocks too.


  • Eric J. Nisall says:

    I happen to agree whole-heartedly. First, having a plan in place is always the most important step whether it involves investing, saving, debt reduction, etc. But sticking to the post’s purpose, I think it is an excellent plan to adjust your investments as the market changes, specifically if you are investing in dividend-payers and you are reinvesting those payments. The whole concept of compounding comes into play with each dividend payment. If the stock should happen to fall, the reinvested dividends will purchase more shares (even if it is a fractional amount). Each of those additional shares earns the next dividend, and continues on as long as the stock is owned. When (yes, I said when, not if) the economy and market turn around, you will begin seeing a more substantial increase in the value of your holdings due to the combination of dollar cost averaging and the compounding of the dividend reinvestments. This just happens to be the way I invest my own money, and I have already seen the results in a few of my particular holdings.

  • Sandy says:

    No plan here but I’ve heard others suggest something similar. I think it’s pretty tough to maintain a commitment like that (maybe that’s the reason why I haven’t thought of a plan since I’m afraid to stick to one) since we have so much obligations but I do see your point. Great post.

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