Before you entrust your hard-earned money to an investment manager who professes to be able to "beat the markets," you need to understand the difference between random chance and provable expertise. A close look at the data indicates that fund managers who claim to beat the market are no more skilled than a lucky coin flipper.
Bad news sells. Good news is boring. Inside media types will tell you that they are guided by this basic rule: If it bleeds, it leads. The financial media is no exception. If all of today's negative headlines are making you think America is going to ruin, think again. Rich people understand that just because the news is bad, doesn't mean that the market won't eventually turn up or that you should ditch your long-term investing strategy.
It's simple: The higher the risk, the greater the potential for returns -- or for losses. When you hear about outsized returns, ask about outsized risk. The problem with investments that are truly "risk free" is that they generate low returns. For higher returns, you need to invest in domestic or foreign stock markets (preferably both) and in bonds, which can vary in terms of safety.
Information about publicly traded investments is widely and instantly disseminated. This information is studied by millions of investors who establish the price of a stock or bond based on this data. Are you really smarter than the millions of investors looking at the same data? Rich people don't try to predict the future when they invest. They try to reduce risk and capture market returns using diversified portfolios or, better yet, broad-based, low-cost index funds.
The headline needs a caveat: some rich people did invest in complex instruments they didn't understand. They are no longer rich. Hedge funds are one example. The dizzying complexities of derivatives, collateralized debt obligations and credit swaps are the poster children of the problem. These investments promised high returns with relative safety. You know what happened next.
Rich people can afford the best education and great health care. Education and good health positions rich people to get richer. Rich people can also start and grow businesses. When these businesses succeed, they can plow the profits back into their ventures. It's not easy for poor people -- or even for people of moderate means -- to emulate these habits of rich people. But being frugal and believing and investing in yourself is a good start.
Six months ago, the investment du jour was oil. Clearly, it had no where to go but up. Right? Wrong. Oil tanked and investors who bet it would only go up got slammed. I bet you can think of lots of other examples of sure-thing investments that tanked. Don't look for the hot sector. Rich people try to capture returns of global markets by remaining diversified. Some emphasize areas where they are betting on stronger growth, but when they do, they place small bets. ' More on This Secret Next: Rich Secret No. 8
Rich people get richer by buying assets that increase in value slowly over time. They build up businesses. They buy and hold real estate. Even when it comes to gifts, they buy jewelry, art, antiques. Sure, they buy some depreciating assets, like fancy cars, trendy electronics and fine clothes, but not at the expense of investing in appreciating assets.
Rich people understand that money can't buy health or happiness. It also can't buy strong relationships with family and friends. Studies have shown that people who are isolated from society, without meaningful relationships, have a risk of death comparable to cigarette smokers. Wealthy people are deeply concerned about their physical, spiritual, intellectual and emotional health and their community. This kind of "wealth" is worthy of your best efforts.