As I have just written about educating yourself financially, I thought a good follow up would be to briefly present a set of principles outlined in one of the older works I mentioned, “The Richest Man in Babylon” by George S. Clayson. They are presented as the five laws of gold, and they still hold true today. If you follow just these five laws and ignore all the other advice I give in these columns, I am sure you will leave a nice estate behind to your loved ones.
1.Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.
The first law is very simple, and that is simply to make saving a habit. Many who fail to realize the importance of this simple technique usually fail to realize financial independence. Delayed gratification is the core of building wealth, yet in the modern world of consumer credit the most common practice is to do the exact opposite.
2.Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
The power of compounding, even at low rates of return, will eventually lead to an upward spiral. This is mathematically certain. Yet many people place large amounts of their earned income into depreciating assets, such as motor vehicles, grown up toys such as boats, and keeping up with the latest consumer trends. Again this is also a trade-off between consumption now or later, and the more you delay gratification the more you ought to get net in the long run.
3.Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.
Unfortunately this is much more difficult in the modern world, where there are an increasing ways to lose money in very “sophisticated” ways. Yet at the end of the day, the force which controls the financial markets still boils down to a never ending pendulum, swinging from greed to fear. This is what makes the masses pile into and out of asset classes and it will never change. A money manager with a good long term track record (meaning surviving at least one full bull and bear cycle) is likely to continue to do well in coming cycles despite any short term difficulties. An up and comer with a good story to tell is a wildcard to be avoided. Also avoid any stock market fund like the plague if their performance started after the crash of 2008, as they most likely have started anew after being devastated.
4.Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.
Rules three and four are simply counterparts of each other. However, it is never wise to invest in anything you can’t completely understand. There are plenty of simple strategies that make money in the long run. Don’t overcomplicate it or all of the benefits of following the first two rules can be lost. These two are obviously the most difficult in times of low interest and scams and fund collapses abounding, but with a little caution you can avoid most of the landmines. With diversification you can make sure any speed bumps you do hit are easy to recover from.
5.Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.
This one is fairly straightforward. Obviously going after astronomical returns is a surefire way to lose money. This is not to mean a small portion of a portfolio can’t be allocated to higher risk asset classes, but you should never try to earn double digit returns on your entire estate as a strategy. You’d be amazed at what 15-20 years of 6-7% annual compounding can produce in total return.
David Mayes MBA provides wealth management services to expatriates throughout South East Asia, focusing on UK Pension Transfers. He can be reached at david.m@faramond.com. Faramond UK is regulated by the FCA and provides advice on pensions and taxation.
