In “Simple Wealth, Inevitable Wealth”, Nick Murray presents a simple plan for building real wealth – “an income one doesn’t outlive and a significant legacy to one’s heirs”. These are the most important points I have taken from the book:
You can build and preserve wealth through a program of lifetime equity investing:
Why equities over bonds?
The real long-term return of equities is so much greater than bonds. When you invest in stocks, you’re an owner of businesses. When you invest in bonds, you’re a lender to businesses. Loaners get paid back with a small interest but, the sky is the limit for owners.
In the book, Nick Murray uses a lot of graphs/ examples to explain this and he shows that historically, bonds have had virtually no net return at all. He looks at the period from 1926-2006 (81 incredibly varied years) and it turns out that during this time, real returns to stock owners net of inflation have been 3 times what the bond owners received.
Why a lifetime/ long-term program?
It is true that stocks are a lot more volatile than bonds but, the passage of time eliminates the risk out of stocks. Or, put this way: volatility isn’t a risk because historically, it has been shown that it passes away.
Actually, the real risk is deciding not to own equities at all. This is because we live in a rising-cost world. Investing in bonds might seem safe right now because you preserve your money (/the amount of money that you have in your hands). But, this doesn’t guarantee that your money will be preserved in the long-run (because the costs are slowly rising).
Stocks, however, preserve and enhance purchasing power because their value and dividends increase at a much faster rate than inflation. So, what would you rather have: financial security right now but insecurity in the future (bonds)? Or, the opposite (stocks)?
Should you diversify or not? How should you invest?
Yes!! “The fewer stocks you own the greater are the opportunities to outperform – and to underperform – the market as a whole”.
You should also invest the same dollar/euro amount each month (in the same investments). This allows you to buy larger numbers of shares when the market gets bad. And, as the market rises again and the prices are higher, you buy fewer shares. You end up with the largest amount of shares at low prices and the smallest amount of them at high ones. Automatically, this will lead to above-average returns. This process is called dollar-cost averaging (DCA) and is a really powerful tool that enables you to let go of trying to “time” the market. (How cool!!!)
Your behavior as an investor is more important than your investment “performance”:
Nick Murray outlines several mistakes that you can make as an investor. According to him, the most important one is succumbing to fear: It is “not what the market is doing, but how you are reacting to how the market is doing” (…) “If you do not give in to fear, you probably won’t sell. Failing to sell, you will remain fully invested in your equity portfolio for the long run. Holding a diversified, high-quality equity portfolio for the long run, you will – simply, inevitably – build real wealth as we’ve defined it”.
Finally, it is also worth noting that Nick Murray suggests a maximum of 6% systematic withdrawal of your equity account balance at retirement. This allows your money to keep growing.