Financial independence means having the freedom to do what you want – and not being tied to a job merely because you need the money. Isn’t this an excellent goal worth striving for? Money buys you freedom, the freedom to do what you want to do. Studies have proven that it is impossible to be truly happy without freedom.
To acquire wealth, we need assets that produce our income. To do this, we need to accrue investments that are roughly 10 times the annual income we need to support our lifestyle. In this way, the dividends generated by our investments, on average 10%, will create the income we need without eroding our asset base.
Build income-producing assets by following these 12 essential rules:
1. Develop a suitable investment plan to ensure you have the appropriate growth and return from your investments.
2. Always start by identifying your risk profile and the required term of your investments (i.e. short, medium or long-term)
3. Calculate the appropriate investment portfolio mix for your risk and term profile.
4. Build your investments into 3 categories: low, medium and high risk.
5. Divide your investment choices into these 3 ranges, building the safest first.
6. In a very volatile market, steer clear of all high risk investments.
7. Get the best financial planning advice. If your financial planner doesn’t assess your risk profile before advising their recommendation, then move on and find a better one.
8. Stay with your plan. If it is the right plan for you, and you give it sufficient time (all asset types fluctuate over the short term), the plan should succeed.
9. Don’t put all your eggs in the one basket. Many people think that paying off their home mortgage and then buying an investment property is a safe investment. But what happens if the property market collapses?
10. Build in appropriate time frames. If you choose good investments and stay with them for, say, 10 to 15 years, you will ride the waves of the market.
11. Avoid high-risk investments, such as risky business ventures, highly speculative stock, tax avoidance schemes or too-good-to-be-true propositions that promise unusually high returns.
12. Avoid borrowing for your investments. This can be fraught with danger. (The fundamental cause of the 1929 Wall Street crash was too many people bought shares on margin calls – and when the market started falling, they had no money to pay their debts or buy more stocks. Ultimately this caused the severe downward spiraling effect that caused the crash.)
The best way to succeed in investing is to stay with good investments over the long term (say, 10 years or more). Markets will always rise and fall, yet even the best experts have difficulty in picking the highs and lows of the market. Over time the share market will rise, usually at a rate of 15% to 20% over a 15 to 20 year period.
Unless faced with significant changes to your circumstances, stay with your plan. If it is the right plan for you and you give it sufficient time, the plan will succeed.