10 rules for building wealth through good times and bad

10 rules for building wealth through good times and bad


An old saying goes, "You can't build wealth by buying things you don't need, with money you don't have, to impress people you don't like." So how do you build wealth? Read on...

There are basically only four roads to wealth:

• You can marry it (don't laugh, some do);

• You can inherit it (others do that);

• You can get a windfall (from a lawsuit settlement, lottery, or some other unexpected good fortune); or

• You can accumulate it.

Most of us are stuck with option #4 -- accumulate it. To do so, you need to understand how to manage cash flow.

First, look at your annual earnings and multiply that figure by your working years. Not counting inflation (that is, pay raises along the way), the result may total several million dollars.

Whether you will have that several million dollars by retirement, though, depends on how you manage your cash flow - and how you answer the following questions: What do you need now, what do you want now, and what can you save and invest for the future?

Rule #1: Live within your means

This includes managing debt and learning to budget. Such boring topics may not be the most exciting things about becoming wealthy, but they may be the most critical.

Consumer-driven economies relentlessly hammer away at why we must buy this item or that gadget so we can have the appearance of being successful, happy, and altogether "with it". So it takes financial discipline and sensible behavior to successfully accumulate money and grow wealthy.

Possibly the biggest trap out there is easy credit, which lets us buy numerous things we might not need. Comedians have pointed out the foolishness: "You buy something that's 10 per cent off and charge it on a 20 per cent interest credit card!" And US newspaper columnist Earl Wilson opined, "Nowadays there are three classes of people - the Haves, the Have-Nots, and the Have-Not-Paid-For-What-They-Haves."

Learning to live within your means leads to a freer life - debt can be a mean master instead of a worthy servant. Save first, spend second. If you do so, building wealth will be a lot easier for you.

Rule #2: Save aggressively

This does not "invest aggressively". Rather, it means making it an absolute priority to set aside 10 per cent of your income right off the top, and even more if your goals tell you to do that.

The longer you wait to start saving, the larger the percentage of your current pay you will have to save to reach your goal.

If you can save aggressively, you will be surprised how that "nest egg" will start to compound. Look at any chart of compounding. It has been said that it's the last compounding that makes you wealthy.

In other words, $20,000 becoming $40,000 doesn't seem like a lot of headway, but when the $40,000 compounds to $80,000, and the $80,000 to $160,000, and finally the $160,000 to $320,000, we're now talking about some serious money.

Two more "doublings" and this account will be worth over $1.2 million. Those who spend first and save later inevitably end up working for those who have learned to save first, spend second.

Rule #3: Dollar-cost average

When buying shares, remove emotions from your investing by automatically buying more shares or equity mutual fund units when they are cheap. Emotional investing gets too many people in trouble.

Statistics continue to show that we tend to buy when things are going up and sell when they are going down - in other words, we tend to buy high and sell low. Dollar-cost averaging not only removes emotions from investing, but it helps you buy low. Here's how:

By putting a constant amount into the market, as the price slips, you buy more and more number of cheaper shares or fund units and thereby reduce your average cost. For example, let's say you are investing $100 a month into a fund.

In the first month, the price of the fund is $10 per share and you buy 10 shares. The next month, the price has dropped to $8 per share, so your $100 buys you 12.5 shares. The next month, the price has fallen again, to $5 a share, and you buy 20 shares. Click NEXT check out the 4th rule. . .

In the fourth month, the price ticks back up to $7 per share. Your total investment so far is $400. If you're like most people, though, when you look at your statement and see that by the end of the third month the price has fallen in half, you would probably think you were losing money hand over fist.

Especially after a fund continues to decline month after month, investors lose patience and start to bail. They're looking for "better returns", but they don't understand what's going on with the math.

At $5 a share, it feels as though you're down 50 per cent (because the price started at $10 per share). However, you own 42.5 shares, which, when multiplied by $5 a share, equals $212.50 - and you've invested $300. In the fourth month, the price gets back up to $7 per share.

Although it might feel as though you're still down because the price started at $10 per share, you're actually within a couple of dollars of your break-even point. You own 56.79 shares, which when multiplied by $7 equals $397.53, on an investment of $400.

Of course, if the fund or market continues to go down and never comes back up, you can't be guaranteed a profit. But this would happen rarely, if ever.

Dollar-cost averaging - by investing a fixed amount in regular intervals - is the best way to make money in a variable market over time. The most difficult part is having the discipline to keep doing it. Investors should be willing to consider their ability to invest over an extended period of time.

Remember, you need a longer time horizon when investing in the stock market.

Rule #4: Diversify

No investment is risk free; only a diversified portfolio can mitigate the risks of market cycles. We've all been warned against putting all our eggs in one basket; even Warren Buffett said, "It's better to be approximately right than definitely wrong." By "approximately right", he was referring to diversification.

If one piece of your portfolio is doing substantially better than other parts, the natural inclination is to load up on the part doing the best and forsake those not doing well. But the result will be an under-diversified portfolio that will probably be much more volatile - and the risks may be on the downward side.

Also, proper diversification does not mean any old bunch of mutual funds or stocks, but a proper allocation among stocks, bonds, real estate, fixed assets, and other investments. It also means diversifying within those investment categories.

For example, your stocks should include a mix of midcap, large-, and small-cap stocks as well as growth, blend, and value stocks. You should have bonds that are long, medium, and short term, as well as high grade, mid grade, and low grade.

A mutual fund may offer more diversification than you could afford by owning the same stocks individually. But owning a handful of mutual funds may not offer the diversification you seek unless you research the funds' holdings carefully. That's because many funds have substantial "overlap".

In other words, fund A from mutual fund family X may have many of the same stocks as fund B from fund family Y

Rule #5: Be patient

Warren Buffet says, "The market has a very efficient way of transferring wealth from the impatient to the patient."

But waiting is very hard to do. How long are you willing to hold an asset that is not performing well? One year? Two, three, or four? If you look at the history of asset classes over time, you will see that an asset can be "out of favor" for several years in a row.

You have to be prepared to wait. Don't think you can time when bonds will perform and stocks will get hot. If someone really could do that, he would own the world by now. So remember: Time in the market is more important than timing the market.

Rule #6: Understand volatility

Very few people truly understand the risk and volatility inevitably baked into every investment portfolio. Without getting into its complexity, every variable investment has produced a range of returns over its lifetime, and this range, or deviation, can be plotted on a chart.

So, it's important to understand what the investment category's "average" annual return means in order to prepare yourself for its volatility. For example, does a 10 per cent average mean the investment was up 73 per cent and down 30 per cent and happened to average 10 per cent? Or was it up 15 per cent, and then down 5 per cent to average 10 percent?

Many investors are fooled by averages - they chase the 70 percent return after it has happened, when the likelihood of a repeat performance is. slim (which we'll discuss more in Rule #7).

Yogi Berra is rumoUred to have said, "Averages don't mean nuthin". If they did, you could have one foot in the oven and the other in a bucket of ice and feel perfectly comfortable."

Over time, returns from investments regress to a mean. "Regression to the mean" simply means that highs and lows will average out so that your return regresses to a certain number or range. Understand an investment's range of returns so you know what to expect annually, and over time.

Markets move from fear to greed, and back to fear. So there are times when the market is "overvalued" and other times when it is "undervalued". Warren Buffett said of the stock buying and selling decisions made at his company, Berkshire Hathaway, "We strive to be fearful when others are greedy, and greedy only when others are fearful."

Rule #7: Don't chase returns

If we know from Rule #6 that a 10 per cent average annual return does not really mean a 10 per cent return each year, why do we still fall for an ad touting a fund that produces 20 per cent annually or some other phenomenal return?

Human nature. And maybe we even convince ourselves that for the chance to experience a year or two of 70 per cent gains, we're willing to stomach the years of 30 per cent losses that also fall within the fund's range of returns.

So, before chasing that incredible return, find out how the investment did during the last bad market for that asset class. Find out its risk, and ask yourself whether you can stomach a bumpy ride over the long term.

Another Buffettism: "The dumbest reason in the world to buy a stock is because it is going up."

So before chasing a return, always consider how likely it is that the investment will continue to produce that return - and whether it's really worth the cost of cashing out of another, perhaps only temporarily depressed, investment to do so.

Rule #8: Periodically rebalance your portfolio

You may decide that your investment mix should be, for example, 50 per cent growth stocks, 20 per cent value stocks, and 30 per cent bonds.

But asset classes vary in performance over time, so after a year or so, the portfolio balance will start to shift as one asset "overperforms" and another one "underperforms".

Emotions would tell you to sell the underperformers and buy the overachievers. If you want to remain adequately diversified, however, you would rebalance by selling some of the overperformers and buying some of the underachievers - probably just the opposite of what your emotions will tell you.

So, if you strive to put your portfolio back to its original allocations from time to time (annually, semi-annually, or possibly even quarterly), you will be taking gains from the best-performing assets (selling high) and buying those temporarily out of favor (buying low). But it takes discipline to keep your emotions in check.

Rule #9: Manage your taxes

Have you ever considered how taxes are your biggest expense in life - more than mortgage expense, education expense, or any other expense? So, you must take advantage of all tax breaks available - each and every single one of them

Rule #10: Get advice

Never underestimate the value of good advice. Someone who manages investments full time certainly will find things you have overlooked or done wrong. A good financial adviser is like a personal trainer for your finances and can get you on track and keep you there until your goals are met.

And even more critical than getting the advice is being sure you consistently follow your game plan. The greatest problem for most people is procrastination and erratic investment behavior. So get started, get advice, and get going down the road to wealth - and steadfastly follow through

I Cannot Change

I cannot change the way I am,
I never really try,
God made me different and unique,
I never ask him why.




If I appear peculiar,
There's nothing I can do,
You must accept me as I am,
As I've accepted you.



God made a casting of each life,
Then threw the old away,
Each child is different from the rest,
Unlike as night from day.



So often we will criticize,
The things that others do,
But, do you know, they do not think,
The same as me and you.



So God in all his wisdom,
Who knows us all by name,
He didn't want us to be bored,
That's why we're not the same.

FACTS TO MAKE EVERY INDIAN PROUD

Q. Who is the co-founder of Sun Microsystems?
A. Vinod Khosla

Q. Who is the creator of Pentium chip (needs no introduction as 90% of the today’s computers run on it)?
A. Vinod Dahm
Q. Who is the third richest man on the world?
A. According to the latest report on Fortune Magazine, it is Aziz Premji, who is the CEO of Wipro Industries. The Sultan of Brunei is at 6th position now.

Q. Who are the founder and creator of Hotmail (Hotmail is world’s No.1 web based email program)?
A. Sabeer Bhatia

Q. Who is the president of AT & T-Bell Labs (AT & T-Bell Labs is the creator of program languages such as C, C++, Unix to name a few)?
A. Arun Netravalli

Q. Who is the GM of Hewlett Packard?
A. Rajiv Gupta

Q. Who is the new MTD (Microsoft Testing Director) of Windows 2000, responsible to iron out all initial problems?
A. Sanjay Tejwrika
Q. Who are the Chief Executives of CitiBank, Mckensey & Stanchart?
A. Victor Menezes, Rajat Gupta, and Rana Talwar.
Q. We Indians are the wealthiest among all ethnic groups in America, even faring better than the whites and the natives.
There are 3.22 millions of Indians in USA (1.5% of population). YET,
38% of doctors in USA are Indians.
12% scientists in USA are Indians.
36% of NASA scientists are Indians.
34% of Microsoft employees are Indians.
28% of IBM employees are Indians.
17% of INTEL scientists are Indians.
13% of XEROX employees are Indians.


You may know some of the following facts. These facts were recently published in a German magazine, which deals with WORLD HISTORY FACTS ABOUT INDIA.
1. India never invaded any country in her last 1000 years of history.
2. India invented the Number system. Aryabhatta invented ‘zero.’
3. The world’s first University was established in Takshila in 700BC. More than 10,500 students from all over the world studied more than 60 subjects. The University of Nalanda built in the 4th century BC was one of the greatest achievements of ancient India in the field of education.
4. According to the Forbes magazine, Sanskrit is the most suitable language for computer software.

5. Ayurveda is the earliest school of medicine known to humans.
6. Although western media portray modern images of India as poverty striken and underdeveloped through political corruption, India was once the richest empire on earth.
The art of navigation was born in the river Sindh 5000 years ago. The very word "Navigation" is derived from the Sanskrit word NAVGATIH.
7. The value of pi was first calculated by Budhayana, and he explained the concept of what is now known as the Pythagorean Theorem. British scholars have last year (1999) officially published that Budhayan’s works dates to the 6th Century, which is long before the European mathematicians.
8. Algebra, trigonometry and calculus came from Inida. Quadratic equations were by Sridharacharya in the 11th Century; the largest numbers the Greeks and the Romans used were 106 whereas Indians used numbers as big as 1053.
9. According to the Gemological Institute of America, up until 1896, India was the only source of diamonds to the world.
10. USA based IEEE has proved what has been a century-old suspicion amongst academics that the pioneer of wireless communication was Professor Jagdeesh Bose and not Marconi.
11. The earliest reservoir and dam for irrigation was built in Saurashtra.

12. Chess was invented in India.
13. Sushruta is the father of surgery. 2600 years ago he and health scientists of his time conducted surgeries like cesareans, cataract, fractures and urinary stones. Usage of anaesthesia was well known in ancient India.
14. When many cultures in the world were only nomadic forest dwellers over 5000 years ago, Indians established Harappan culture in Sindhu Valley (Indus Valley Civilisation).
15. The place value system, the decimal system was developed in India in 100 BC.

Quotes about India.
We owe a lot to the Indians, who taught us how to count, without which no worthwhile scientific discovery could have been made.
rt Einstein.


India is the cradle of the human race, the birthplace of human speech, the mother of history, the grandmother of legend and the great grand mother of tradition. Mark Twain.

If there is one place on the face of earth where all dreams of living men have found a home from the very earliest days when man began the dream of existence, it is India.
Frech scholar Romain Rolland.


India conquered and dominated China culturally for 20 centuries without ever having to send a single soldier across her border.
Shih.
(Former Chinese ambassador to USA)


ALL OF THE ABOVE IS JUST THE TIP OF THE ICEBERG, THE LIST COULD BE ENDLESS.
BUT, if we don’t see even a glimpse of that great India in the India that we see today, it clearly means that we are not working up to our potential; and that if we do, we could once again be an evershining and inspiring country setting a bright path for rest of the world to follow.
I hope you enjoyed it and work towards the welfare of INDIA.
Say proudly, I AM AN INDIAN.

Six Ways to Make People Like You

Rule 1: Become genuinely interested in other people.

Rule 2: Smile.

Rule 3: Remember that a person’s name is to him or her
The sweetest and most important sound…

Rule 4: Be a good listener.
Encourage others to talk about themselves.

Rule 5: Talk in terms of the other person’s interests.

Rule 6: Make the other person feel important—
And do it sincerely.