Investing To Become Wealthy
Investing to become wealthy is different than investing to preserve wealth. A lot of financial articles are written for those who want to preserve wealth. If your investment objective is to become wealthy, here's what you need to know.
For the last 10 years, the risk-free interest rate has been less than the inflation rate. If your objective is to become wealthy, you need a better return than the risk-free interest rate which means you have accept some risks. However, you have a choice of which risks to take.
Broadly speaking, it is useful to divide risks into two buckets; market risks, and company risks.
Market risks are those that affect all stocks. Two good examples are monetary and fiscal policy. When monetary and fiscal policy is conducive to a strong economy, the market can deliver excellent returns. However, the opposite is also true. When monetary and fiscal policy is headed in the wrong direction, the economy shrinks, and the market falls.
Company risks are those that affect only one company. A biotech company's clinical trial is a good example. Depending on the trial's outcome, the company's stock can double or lose half its value overnight. Whatever the outcome, however, the value of other stocks will be unaffected.
At this point, let me ask you a question. Are you comfortable that today's fiscal and monetary policies are conducive to a strong economy?