Most people work 50 to 60 years to accumulate wealth, so their latter years are comfortable and their needs and dreams are met. Wealth is an important topic to discuss, even if it makes you feel uncomfortable. But what is true wealth? Well, there can be many types of wealth by definition, health, relationships, spiritual, but for todays Blog we will focus on investment wealth. I have discovered not all assets are created equal to achieve wealth objectives. Often people put all their wealth in one or two baskets, and not realizing the danger of this. So, there are many things to consider when we discuss building wealth.
Financial wealth is the ability to sustain your lifestyle over time. Meaning, if you need $50,000 a year income for 30 years you will need to accumulate 1.5 million in cash-flowing assets to fulfill your goal. Another important factor to understand, is there is thief in the room that will rob your wealth and your purchasing power called inflation. So, your assets and wealth either needs to outpace inflation or at least keep up with it so you are not going backwards and diminishing your goal.
By the way, the second enemy to your wealth is called taxation. So, to achieve your $50,000 income in after tax dollars means you need to create $67,500 based on a 26% tax rate. This also means you need to accumulate over 2 million dollars, sorry for the bad news. Both taxation and inflation need to be a part of an honest wealth conversation.
Another important point is, you cannot take too many big hits to your assets in the accumulation phase. This is no easy feat based on history with boom and bust cycles. It is even more dangerous to your dreams in the income phase, if you have a crash in the value of your portfolio. If you are 80 years old, how do your recapture a 30 to 50% loss to your wealth? As mentioned, there are a lot of things to consider when building and maintaining wealth.
The next consideration is market and asset cycles on how they impact your wealth. The illusion is that all asset prices inflate over time. The truth, based on hard facts and observing history this is not the case. No asset class is immune to correction, crashes and devaluing in price. Whether it is owning a business, real-estate, precious metals, stock and bond portfolio’s or cryptocurrency. It took me a long time to fully grasp how important this is to protecting one’s wealth. We all have a tendency fall in love with certain asset classes and this is where the danger lies.
We all need to have the courage to rotate in and out of asset classes based on evaluating their current price to historic norms. As an example, Warren Buffet uses the Wilshire Index as a key factor to determine when the stock market is overvalued. Historically, when the total stock market value is between 60 to 70% of the USA GDP…this would be considered a fair and reasonable value. Today, the value of the US stock market (June 1, 2020) is 156.3%…meaning “Run Forest Run!” and in a massive bubble. As a point of interest, Mr. Buffet has his largest cash position in the history of his company and he can’t find fair value in the market to buy companies…maybe we should pay attention?
I have been concerned as I observe so many people blindly put their hard-earned money into the stock market and real-estate markets here in Canada without understanding both are in massive bubbles based on historic norms. But this time it is different! Really? Let me be clear, I am not against real-estate or the stock market as I have invested in both for decades. But currently I have limited exposure in the stock market except in undervalued assets and very little exposure in real-estate.
In conclusion, one needs to be honest with evaluating their portfolio and ask am I properly diversified in multiple baskets of different asset classes…especially in undervalued assets and one’s that have the potential of significant appreciation. I haven’t discussed DEBT or leverage in this Blog, but it is another extremely important topic relating to your wealth that I will cover in a future Blog. I will only point out that debt will not be your friend in this current economic cycle.
If you would like to discuss with me personally your wealth or have me speak at your business or organization on this important topic “Understanding Wealth and How to Grow and Protect it. Please reach out to me and we can set a date. www.fivefoldfinancial.ca or bill@fivefoldfinancial.ca