A colleague of mine wrote a compelling piece I would like to share with you.
– Rob
“The Pyramid of Investment Success”
What is the secret to multi-decade, inter-generational wealth creation? Fortunately, it can be summed up in one easy illustration I call “The Pyramid of Investment Success”.
Once you have a handle on your behaviour and/or have a trusted advisor to help you through these periodic fire sales, (based on my experience, they occur about once every five years and take the markets down, on average, around 30%), then we can move on to the nextlevel of “The Pyramid of Investment Success”.
More specifically, an optimized asset allocation that is customized to your defined needs and goals. An overwhelming influence on your lifelong returns will be determined by what percentage of your net worth should be in real estate, GICs and other fixed income securities, Canadian, U.S., and international companies/stocks. As an example, if 5% of your portfolio is invested in a magical company whose stock goes up 20% every single year but the remaining 95% is sitting in a GIC earning 1%, then I’m afraid your fantasy stock is not going to move the needle very much on your portfolio’s overall return.
The next level of investment success focuses on owning a diversified collection of world class companies –it’s much better to be an investor in great businesses than a speculator in Bitcoin or GameStop Corp. Next, make sure you have done all you can do to minimize taxes and, finally, ensure you are receiving fair value for the fees that you are being charged for having your financial life professionally managed.
Paradoxically, the financial media tend to focus on the top levels of the pyramid. I believe this is because fees, taxes, and security selection are much easier to quantify. As important as these issues are,do not be fooled. One must remain ever vigilant in order to ensure one’s behaviour is helping and not hurting. Do this and 80% of long term investment success may inevitably ensue for you and your family.