One of the biggest delusions in investing is the goal to become 'rich'.
It is understandable. All our lives we were raised to believe that having a lot of money makes us rich. But a recent article by Motley Fool writer Morgan Housel reminded me how as investors we should be sassy enough to know the difference between 'rich' and 'wealthy'.
And let me tell you now – being wealthy is our end-game goal.
I'm talkin' bout wealth
To put it plain and simple; rich is working for a lot of money, while being wealthy is having money working for you to produce income so you can enjoy life.
A lot of people are rich. They have jobs that pay them a lot of money, or receive a windfall of some kind. But stop them from working and you'll quickly see the money pool starts to run dry. The bills keep coming, but spending stays high as people try to maintain the lifestyle they are used to.
Wealth is created by investing to grow your money and earn passive income. As Chris Rock hilariously puts it in his (R-rated) comedy piece; "I'm not talkin' bout rich, I'm talkin' bout wealth. Wealth will set us free."
Robert Kiyosaki, author of the Rich Dad series of books, calls this being 'financially free', putting money to work and having cash flowing into your pocket without the worry of day-to-day work.
Why 'wealth' is the way
Being wealthy involves more than just money. It also means having the time and peace of mind to enjoy life. You can also be wealthy without being rich. Good health and a strong network of family and friends are what many people think of as wealth.
But in the financial sense, wealth is having your money do the heavy lifting, so you can focus on the things you love to do, the things that get you out of bed each morning. This wealth, notes Chris Rock, is empowering.
Why 'rich' is a risk
Investing with the aim to 'get rich' often leads to accepting higher than average investing risk and poor decision making. When the focus is solely on making money the fear of missing out and emotions of greed make it easy to get caught out chasing investing hype and fads.
Remember Maverick Drilling and Exploration Ltd (ASX: MAD)? Or perhaps Buru Energy Limited (ASX: BRU)? Both companies were hyped as being the next big thing in oil and gas, but shares soon plummeted, dragging shareholders' wealth with them.
This is an easy mistake to make as new investors. I fell into the same trap when I started investing, but it ultimately destroys wealth.
How to invest for wealth
Unfortunately, there are no short-cuts to 'wealthy'. It takes time, hard work and persistence to build. To keep you on the right path here are five important tips to help you invest for wealth:
- Avoid fads, hot-stocks and hyped up IPOs. Two of the biggest recent IPOs; Orion Health Group Ltd (ASX: OHE) and Medibank Private Ltd (ASX: MPL) turned out to be relative flops.
- Focus on the performance of the business not the share price. A company that grows earnings will automatically see its share price rise.
- Start by invest in boring companies with existing earnings supported by long-term trends, for example ResMed Inc. (CHESS) (ASX: RMD) or Fisher & Paykel Healthcare Corp Ltd (ASX: FPH).
- Remember that not all wealth comes from money.
