Updated: Feb 12
Brian Feroldi showed us a beautiful example on the journey of wealth building. The bedrock of this journey is filled with uncertainty. It simply means, there is no one sure way of building our wealth - there are so many ways to reach the destination or may not reach at all, though the starting point is always certain.
In the above chart, Brian illustrates that early on you would need to have enough savings - surplus from work. Ding! Ding! Ding! Not savings means not able to build wealth. And that is CERTAIN!
At the early stage of your wealth building journey, the majority of your net wealth (after minus money you owe other people - liabilities) is in blue, which are made up of savings. When you look at your investment on capital, you will wonder why should you invest since the amount of capital gain is so small. This is one of the uncertainty I am talking about. There is so much doubt on whether are you saving the right amount (that is if you can afford at the expense of your lifestyle!). There is so much doubt on whether the strategy is correct!
That is why many are attracted towards investing in cryptos, high-growth business and some scams promising guaranteed capital and returns!
It is during this phase, handling your income from work or business, optimizing your expenses and investing your surplus is important. Of course the foundation of financial planning applies i.e. make sure you have set up emergency funds before you invest!
Question is how long is this first phase? On the average about 5 years. Getting to the second phase faster than this really depends on your savings rate. Are you willing to forgo your lifestyle to invest heavily without any visual certainty!
The second phase would be the phase where you start seeing greater return on your capital. This is illustrated by the more balanced blue/yellow pie chart.
Once you get to this stage, you will start to believe in your wealth building strategies. However, to reach this stage, it takes guts and believes to stay the course because there would be period whereby you may see your investments is in the loss territory. This big uncertainty to visualize is what makes many shy away from so-called non capital guaranteed investments. This is really understandable.
Most get to the second phase (where you see meaningful investment gains) at about 6 to 10 years.
If you are able to last till the last phase like Warren Buffett - who had been investing for 75 years! Yes! 75 years! What most of us do not know is a large portion of Buffett's wealth was accumulated after his 50th birthday. That is 35 years after he started his investing journey! Today he is 90 and is still investing!
Investing requires loads of patience. Buffett quoted as saying that the stock market is a device to transfer money from the impatience to the patience!
By this stage, the majority of your investment value is made up of the gains that grow overtime from your capital. Your capital is lesser than your gains. That is why Brian illustrates that at this stage, your wealth is equal to your investment gains.
The illustration lets us know that at certain point, saving is important but at some other point, managing your investment portfolio well becomes more important! Thus, acquiring your investment skills becomes essential, especially in tackling the emotional aspect!