Your colleague bought a technology stock earlier this year that has tripled in value. Your brother-in-law bought Ethereum in January, and the crypto-currency is up 950 percent. You keep bumping into people who claim they’ve made a fortune. With so many making outsized gains, your FOMO-a-meter might be running red hot.
If that’s the case, take comfort knowing this: most wealthy retirees didn’t earn their fortune with a single home run. Sure, stories of fast fortunes grab our attention. But they aren’t the norm. Instead, most people grow wealthy because they spend far less than they earn, they invest responsibly…and they’re patient.
That might be tough to accept when we want immediate big gains, especially when we believe so many others are fast-tracking to seven figures. But if we interviewed a new batch of retirees in 20 years and ask them, “How did you do it?” few would credit a single hot stock, dynamic trading software, market timing or even a crypto-currency. No, most wealth building comes from hitting singles, instead of swinging hard-knock balls out of parks.
I recommend a diversified portfolio of low-cost index funds. Add money every month and rebalance as needed to maintain your goal allocation. No, you won’t be able to brag about beating the market. You won’t be able to claim you made 500 percent this year. But on the flipside, you won’t be as stressed about your money disappearing. You won’t have to follow the markets. You won’t have to worry about trading at the right time.
Sure, your portfolio’s value will drop when stocks fall. But it won’t fall to zero, and it will always recover to hit new heights. In fact, stock market drops are great for young people. And even if you retire on the eve of a market crash, with this strategy, you shouldn’t run out of money. With such a portfolio, you’ll also sleep better than those who continue to roll the dice.
This brings us to the question of life satisfaction.
When we ask whywe do something, the responses always boil down to life satisfaction. We donate to charities because we feel it’s the right thing to do. And research suggests this makes us feel better. It can even boost our health. That boosts our life satisfaction. When we exercise, it helps our mental clarity, builds or maintains physical strength. It might even extend our lives. That also enhances our life satisfaction. When we do our best to raise our children, that has the same effect. When we invest for our futures that helps us feel secure. And that security contributes to life satisfaction.
But when we gamble with our futures, we’re often on edge. And if those gambles don’t pan out, we could permanently lose our money. That can add a lot of stress.
Some people say to me, “Andrew, you built a million dollar investment portfolio on a teacher’s salary before your 40th birthday, so do you put aside play money to invest just for fun?” I don’t have anything against those who do. But here’s why I don’t.
The Nobel Prize winning behavioral economist, Daniel Kahneman, has researched how people feel about financial losses and gains. He found that people dislike losses twice as much as they like profits. If I were to allocate “fun money” to anything, I wouldn’t speculate. Instead, I would use it to donate to charity. I might spend it on an experience that will provide me with a memory, preferably with someone I love. That’s how to enhance life satisfaction.
Following my lead is easier said than done. I realize that. But in today’s rampant age of speculation, it pays to ask why we might want to speculate. It pays to ask, “What’s the downside?” It pays to diversify and invest responsibly instead of gambling. It pays to worry less about money and market fluctuations while getting on with our lives.
That’s why it pays to invest in a diversified portfolio of low-cost index funds. You’ll increase your odds of building long-term wealth, and you’ll worry far less than if you speculate.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas