Written by Erich M. Imphong, CFP®
Ronald Read has been in the headlines this year as the Vermont gas station attendant and janitor that amassed an $8 million fortune before passing away at 92. How did he do it? The answer is living within his means, buy-and-hold investing in companies he understood, and compounding growth. Sure, everyone’s circumstance are different, whether they are supporting a family or paying for graduate school, but the undeniable truth is that investing consistently for the long-term can yield significant results even with limited means. Yes, our time here is finite and we should enjoy the company of others and partake in passions and interests, but we should also understand self-reliance in our finances. The art of self-reliance in finance requires consistent, prudent, and unemotional investing. As kids, we were all taught that “perfect practice makes perfect,” well it is no different in investing, because it requires discipline and the habitual ritual of doing it the right way.
What Is Perfect Investing?
So what is perfect investing? Perfect investing starts with understanding your cash flow, expenses and the resources you have available. If you are investing beyond your means inevitably you will have to sell your investments to meet liabilities and living expenses. Once you determine a monthly amount you feel comfortable investing, start automatically transferring these funds from your checking to an investment account so that your investment bucket is funded on autopilot
The next part is investing your savings, and this can be in an all stock portfolio or a combination of stocks, mutual funds, and index funds and etf’s. The key here is to be diversified. The more diversified your holdings, the less firm and headline risk you are exposed. If you would like to have an all equity portfolio research each positions’ market capitalization, industry, business, cash flow and risks. If you would rather not take the time to research this, you can also buy the entire market via an S&P 500 index fund, or you can pay a mutual fund manager to invest in companies he or she has researched.
The last part of this process is not riding the market highs too high nor taking the market low’s too low. In other words, remain unemotional in your investments by continuing to hold and invest in them. Ronald Read held certificates of the stocks he held, so selling with an iPad app or clicking “sell all shares” wasn’t an option for him. Thus, his sells were more labor intensive and done by paper filing so it was easier for him to stay invested because it was significantly harder to sell even if he wanted.
Lastly, when you have stopped accumulating assets or are retired, you will now need the income from your portfolio you have invested over your working career. Besides asset growth, asset income is the second pillar for significant long-term returns. That said, you can engineer a diversified portfolio that can generate both income and growth. This is where the value of working with a financial advisor comes to play. You and your advisor can determine what your income need will be in retirement and then can allocate a portfolio that will have a high probability of meeting your income and growth needs.
The other important part of having a financial advisor is that he or she can help you realize your goals whether they be philanthropic, giving to family, or pursuing passions. Ronald Read did not have an advisor. If Ronald worked with an advisor would he have lived differently? Regardless, we can all learn from Ronald Read!