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The five indisputable lessons for building wealth

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At this time of the year, my colleagues dig deep to look back at the year that has passed to see if there were lessons we should learn. Then they have a shot at making predictions for 2012. And while I’ve played this same game in the past, I don’t think 2011 gave us any more insight than the years before it.

In fact, after over 26 years of business and finance commentary and decades of metering out financial education, as well as advice to clients, I think the best lessons are timeless, indisputable and worth burning onto your mental hard disks.

Lesson 1

The first lesson is never be long on only one kind of asset – diversification is the name of the game. Sure, some high-flyers will go long on shares only and I’ve done this in my self-managed super fund, but I’ve a good exposure to property as well. As your age, circumstances and appetite for risk change, you can change how you hold your wealth, but having a nice mix makes a lot of sense. 

Lesson 2

The second lesson applies to shares. If you want to be a thrill seeker and make lots of money from shares in a short time, you might do it but you could also end up with the arse out of your strides!

Shares are not just financial products that you can make or lose money on. They’re also proof that you own a part of publicly listed company. That’s why you need to buy companies you want to own if you’re a long-term wealth-builder, as opposed to a short-term trader or speculator. 

Lesson 3

My advice is for the long-term wealth builder and the unforgettable lesson is to become an owner of great companies that have a history of paying good to great dividends. History shows that over a 10-, 15- and 20-year period, shares return around 10 to 12 per cent and half of those returns come from dividends!

Cash and bank deposits might average five to six per cent but there’s no chance of capital gains for people who buy and hold these assets. And that’s why I recommend anyone wanting to create a good portfolio of shares to think about 20 great companies that pay dividends.

Buying 20 companies means you’ll only have a five per cent exposure to any one company, provided your money is allocated evenly. Some people might buy an ETF for the S&P/ASX 200 and that can be a good way to get exposure to both capital gain and dividends.

That said, I like a portfolio that is heavily skewed to great dividend payers. Sure, when the stock market takes off when the European concerns start to ease, their share prices won’t rise as rapidly as others that have been beaten up over the past few years – but they still will go up with the rising tide. 

Lesson 4

The next lesson is that most fund managers – experts – don’t beat the S&P/ASX 200 index. So if you create a portfolio of shares that closely matches the index, then you’ll outperform most managers!

How does that happen? Well, it’s hard to get the market right and so managers can have good and bad years. As an economist and long-term market watcher, I know many really smart people often get it wrong. That’s why I like to take the decision process out of my investing and rely on what history tells me works.

Generally, I invest at regular intervals as my super money from my firm comes due. I buy shares that conform with my quality dividend-payers distinction. I don’t hold more than 20 stocks and I do hold the likes of BHP-Billiton and Rio Tinto, which aren’t great dividend payers but I think they’ll do well as China grows.

If I like the company and the share price is falling with a weakening market, I keep buying as this lowers my average price per share. When the price is rising, I buy because I like the company but when I stop liking the company, I do sell.

Last year I took risks by not buying at regular intervals; instead I waited for the terrible days on the market as I thought buying the dips was a good strategy for a long-term investor. So when a company I like, such as CBA, fell to around $43 I couldn’t resist adding to my ownership. 

Lesson 5

To break my investment strategy was a risky play as I think it’s generally very hard to time the market – and this is my final lesson, which has stood the test of time.

Once you have great dividend paying companies that are returning 10 to 12 per cent per annum over a ten-year period, then your money doubles every six to seven years! And while we can have some shocker years like we saw after the GFC, history tells us that good shares will deliver.

And when you add time to the compounding effect from dividend-paying shares, which can also bring capital gains as well, your money doubles and doubles and doubles!

When it comes to building a good nest egg, as Rod Stewart’s ex-wife – Rachel Hunter – once said of a shampoo: “It won’t happen overnight, but it will happen.”

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Tuesday, January 10, 2012

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