The 8 Wealth Creation Principles

The journey to wealth is riddled with pitfalls and hazards, such as ignorance, lack of discipline, poor decision making, get rich quick schemes or impatience. 

To help us navigate these choppy waters we need a set of principles to serve as the foundation for the right behavior and decisions to achieve our financial goals.

 

I've made a lot of financial mistakes over the course of my adult life that have cost me, and so I've spent a lot of time reflecting on these mistakes and learning from a variety of financial gurus. It is out of these insights that I've developed the 8 wealth creation principles. 

Hover over each one to learn more and read relevant articles.  

Build a millionaire's mindset

1.

Learn more

Automate wealth accumulation

2.

Learn more

Allocate your capital to optimize returns and minimize risk

3.

Learn more

Become a savvy equity investor

4.

Learn more

Become obsessed with dividends

5.

Learn more

Own real estate

6.

Learn more

Take measured, intelligent risk infrequently

7.

Learn more

Improve your investment knowledge and wisdom over time

8.

Learn more

"Think and Grow Rich "  Napoleon Hill, Best Selling Personal Development Author

Principle 1: Build a millionaire's mindset

I’ve met a lot of poor, rich people.  From the outside these high rollers seem wealthy but the same trinkets that create the perception of wealth are what is causing these high earners from accumulating and building true wealth.   There is a profound difference between high income earners and the wealthy.

What's the difference? A mindset.

It starts with a fundamental understanding that - Nobody cares about your money and financial future as much as you do – nobody! Whether you decide to be a do-it-yourself investor or work with a financial advisor, if you want to build wealth it starts with you being the CEO of your financial freedom.

With this mindset you can set about mastering the fundamentals of wealth creation; saving early in life, using compounding interest to your advantage, investing in yourself, living within your means, being disciplined, investing smartly, and taking the long term view. 

Article: 

The importance of mindset in wealth creation

I'm a paragraph. Click here to add your own text and edit me. It's easy.

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." -- Warren Buffett

Principle 4: Become a savvy equity investor

Before proceeding down the path of becoming a savvy equity investor, the most important question you should ask yourself is – Am I willing to invest my time to become a better investor?  If the honest answer to this question currently is no, than it’s critically important to adopt an investment style that is suitable – in this scenario that would be the “Couch Potato Investor”.  And, for additional protection I would recommend seeking the ongoing counsel of a financial adviser whose motivation directly aligns to your goal of building wealth. There is absolutely no shame in adopting a couch potato approach, only shame in losing all of your retirement cushion due to playing the stock market like its one big casino!

Articles:

The $2.4 Million Pay off for Becoming an Informed Investor

The Informed Investors Checklist for Selecting Winning Stocks

"Spend less than you make. Always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer!" -- Charlie Munger, Investor and Warren Buffett’s Berkshire Hathaway Partner

Principle 2: Automate wealth accumulation

I’ll let you in on the not so secret formula for getting rich – spend less than you earn!  The road to riches for the average person is not by inventing some new technology people will line up for hours to get their hands on – unless of course you are the next Steve Jobs or Mark Zuckerberg.  The road to wealth is rather mundane for most of us. 

 

It starts with understanding the five levers of wealth creation.

It wasn’t until I automated these wealth building strategies for myself did I start to realize sustainable growth.  You can think of this as the set of self-implemented processes that automate the discipline necessary to create wealth over time.  Because a millionaire’s mindset will remain just that – a mindset, without a plan and consistent implementation sustained over long run. 

Article:

How to build wealth thru successful planning,

The importance of your personal savings rate in wealth creation

5 wealth levers.PNG

The five levers of wealth creation

"Based on my own personal experience, rarely do more than three or four variables really count. Everything else is noise." 

-Marty Whitman, Former Manager of $3.2 billion Third Avenue Value Fund

Principle 3: Allocate your capital to optimize returns and minimize risk

Asset allocation is a crucial function of any sound investing approach that determines how best to allocate the money in your portfolio across the various classes of assets (e.g., stocks, bonds, cash, real estate and others) so that you optimize your investment return in consideration of your time horizon and tolerance for risk.  In other words, asset allocation provides you with a road map that helps you get the most out of your investing within the time you have available before retirement, without causing you sleepless nights because you have too many risky investments. 

Articles:

Build your Perfect Portfolio to Optimize Returns and Minimize Risk

A cow for her milk, a hen for her eggs,

And a stock, by heck, for her dividends.

An orchard for fruit, bees for their honey,

And stocks, besides, for their dividends. - John Burr Williams, The Theory of Investment Value

Principle 5: Become obsessed with dividends

There are lots of good reasons to begin a lifelong love affair with dividends.  With their predictability dividends will be there for you when the market betrays you.  Dividends will protect you and keep you safe during market lows – dividend aristocrats will still payout dividends when the market tanks.  Dividends are givers – dividends provide a cash return.  Plus, many dividend paying equities have dividend re-investment programs that act as an accelerant to compound growth and help you buy more shares when the price is lower.  But the biggest reason why I love dividends is simple – high dividend yielding companies outperform companies with low to no dividends.    

Articles: 

The Wealthy Owl's Definitive Guide to Dividend Growth Investing 

“Buy land, they’re not making it anymore.” - Mark Twain

Principle 6: Own real estate

Owning real estate is a critical building block to building wealth.  Multiple studies have shown that people who own their own homes wind up with an average net worth that is much higher than people who rent.  A 2001 University of Toronto study[1] showed median net worth of Canadian renters was $1,900 in 1999, a decline of 48% from the median in 1984.  Conversely, the median net worth of Canadian home owners was $145,000, an increase of 24% over the 1984 median net worth for home owners.  

Skeptics might try to point out that you should expect the average wealth of home owners to be higher than renters, it’s why they can afford to buy a home.  But the benefits of home ownership suggest the relationship between home ownership and wealth is more of a cause and effect one, rather than just a correlation.  Homeowners get leverage that not only increases the rate of return on their mortgage down-payment but it also can provide them with future equity that they can leverage to invest in real estate for investment purposes.  Home ownership is also a way to force savings, through the equity you are acquiring with each monthly mortgage payment.

Home ownership may not be for you. It may come with too much responsibility or you may remain skeptical. There are alternatives that give you benefits of a diversified portfolio of income-producing real estate without the hassles of home ownership. Real Estate Investment Trusts (REITs) are a way for the average investor to easily add real estate to their investment portfolio. Over the past 20 years (1999-2018) REITs have delivered 9.9% annualized returns, outperforming all other investment types[2].

[1] Center for Urban and Community Studies, “A tale of Two Canadas”, David Hulchanski, August 2001

[2] Globe and Mail, "The lazy way to investing success" April 2019, 

“If you're looking for a home run -- a great investment for five years or 10 years or more -- then the only way to beat this enormous fog that covers the future is to identify a long-term trend that will give a particular business some sort of edge”

- legendary investment manager Ralph Wanger

Principle 7: Take measured, intelligent risk infrequently

How many have you caught yourself saying “If only I had invested in Google…or…Microsoft…or….Apple…or Starbucks or any industry titan today, before the stock took off”.  Scoring double baggers (an investment term for a stock that doubles your money), five baggers or ten baggers, that investments in the aforementioned companies have the capacity to produce if you buy at the right time, seem quite elusive.  But, with the right investment hypothesis, research and buying what you know; allocating a small portion (e.g., 5% or less of your portfolio) of capital to taking measured risk can be worth the potential of hitting the odd home run that super charges your returns.   

Article:

My formula for picking tech stocks that deliver wealthy returns

"What looks like tomorrow's problem is rarely the real problem when tomorrow rolls around."

- Dan Gardner

Principle 8: Improve your investment knowledge and wisdom over time

While Warren Buffett resides over a personal net worth of $58.5 billion (as of 2013), it didn’t happen overnight.  It took Warren till age 32 to become a millionaire, and then another 28 years to become a paper billionaire at age 60.  What took you so long Mr. Buffett?  No doubt an extreme example but my point is that building wealth is a journey.  It takes time for the full power of compounding to take effect and it takes time for your investing expertise to improve.   

Stay on the journey with a growth mindset and the rewards will be there for you. Some suggestions for increasing your investment knowledge and wisdom over time:

  1. Surround yourself with mentors, advisers and experts; building a team of experts you can trust will serve you very well throughout your investment career

  2. Join an investment club

  3. Read, read, read

  4. Subscribe to newsletters and magazines

  5. Build a framework and your own set of principles for making personal finance decision, refine it as you learn