Wouldn't we all like to know the surefire roadmap to wealth? In fact, there are more than a few infomercials that promise to take you there in a hurry ... once you've purchased the exclusive set of 100 DVDs, that is. Or you could become an endodontist -- but more on that later.
Gimmicks and get-rich-quick schemes aside, we all know the basics of building wealth: a low debt-to-income ratio, an aggressive savings and investment plan, and a certain amount of patience.
Risk to reward
The wealthy, however, traditionally have added another element: risk. The most common path to wealth has almost always involved owning a successful business, and as anyone who has hung out a shingle knows, risk is a bedfellow. For those who have become truly rich, ala Bill Gates, risk is a reason for being.
David Peterson, founder and president of Peak Capital Investment Services in Dallas and Denver, confirms that many of his wealthiest clients (those with more than $4 million in investable assets) made their money by building a business. Oddly, three of his four wealthiest clients are endodontists, a business with typically low overhead and high profit. Other entrepreneurs in his client roster include building contractors and lawyers.
In the last 30 years, it's also been a great ride if you're a CEO. Since 1980, salaries soared to roughly 300 times the average worker's pay, versus a ratio of 40 times in the post-World War II era.
Stock options, relatively low taxes and a roaring stock market in the 1980s and 1990s meant that until the 2008 stock market plummet, a lot of folks fattened their wallets considerably.
The other element of risk typically employed by the wealthy is strategic leverage to increase investment return, but the key is to not get too deep in debt.
A look ahead
Peterson's outlook for the stock market in the next decade is optimistic. Traditionally, he points out, when the stock market has been down or stagnant for a decade, as it has been since 2000, the following decade it rises.
His advice for those who want to increase their wealth is to be as aggressive in investing as your stomach allows, given your age, and to have very little debt.
One mistake many investors make as they near retirement, he says, is to move their portfolio into safer, lower-yielding investments (translation: a fear of risk). These days, people can spend two or three decades in retirement. Once your retirement income needs are met through some sort of annuity like a pension, keep a portion of the portfolio in aggressive investments so you can increase the money that will turn into income as you move through those two or three decades.
What's your plan for increasing wealth? Or if you've already retired with a nice nest egg, tell us how you did it.
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