Wealth Wisdom
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Wealth Wisdom

How Ordinary Australians Can Create Extraordinary Wealth

Julian Dawson

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eBook - ePub

Wealth Wisdom

How Ordinary Australians Can Create Extraordinary Wealth

Julian Dawson

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About This Book

In Wealth Wisdom, Julian Dawson will show you step by step how you too can invest your way to financial freedom, no matter what you earn. Inside you'll discover:

  • the 6 steps to financial independence
  • inspiring tips to help you on your journey to extraordinary wealth
  • a killer wealth-creation strategy that combines share and property investing
  • how to enjoy your investment riches and live the life you dream of

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Information

Publisher
Wiley
Year
2011
ISBN
9781742468129
Subtopic
Finanza
Edition
1
Part I: Where areyou now?
The first part of this book is the reality check. First we look at the various financial delusions that keep you poor. These are money myths that are all too often accepted as fact and hold us back from financial independence. We will also look at the various ways to make money that are currently open to you — whoever you are. It’s also important to understand what your financial goals are and, perhaps more importantly, exactly where you are right now! And, finally, we will expose the tried and tested steps towards wealth creation that you must accept and follow if you are to achieve your financial dreams.
Chapter 1: The six financial delusions that keep you poor
There are certain financial delusions that act as road blocks to wealth. They are assumptions (or excuses) that you use to justify your current financial situation. In short — these delusions are keeping you poor! By the end of this chapter you will see how inaccurate these myths really are so you can choose a different future. Following are the six financial delusions:
1 It’s better to leave it to the experts.
2 I don’t have time.
3 Investing is as good as gambling.
4 It’s too complicated.
5 I’m too young (or old) to worry about that.
6 I don’t have the money to invest.
1. It’s better to leave it to the experts
This is what the experts would like you to think. And even if you thought it to be true a few years ago, you’d have to have been living under a rock to still consider this one accurate. The ‘experts’ have cumulatively brought the financial world to its knees, while many were receiving eye-watering bonuses that were paid regardless of performance.
If you look at the sharemarket, there are brokers, analysts and fund managers. The brokers are nothing more than order takers and they are paid every time you buy or sell, so their incentive is activity, not necessarily getting you results.
The analysts are supposed to be a bit smarter — they study the companies and understand the market in a more detailed manner, so you’d think they’d get it right more often, but mostly they don’t. Did you know, for example, that weeks, even days before Enron’s collapse in 2001, 11 out of 16 Wall Street analysts covering Enron were still recommending the shares to investors as a ‘buy’ or ‘strong buy’.
Or what about the fund managers? Surely when you invest in a fund, you have a better chance of benefiting from their considerable expertise. Again, that’s not what the evidence suggests.
Economist and author Burton Malkiel studied the performance of fund managers and published his conclusions in his book A Random Walk Down Wall Street. In it Malkiel writes:
While the index may not win every single year, decade after decade two-thirds or more of professional funds are beaten by (the) index. Similar results can be shown for different time periods and by using different indexes for comparisons. Results are also the same for international markets as well as for different asset classes such as bonds and real estate ... The same result holds for professional pension fund managers, and even for highly compensated hedge fund managers ... Those funds that do produce excess returns in one period are not likely to do so in the next.
In other words, by the time you take into consideration the management fees, most people would be better off passively investing in an index fund and not paying for expert advice in actively managed funds at all!
Remember, all of these ‘experts’ are being paid regardless of whether they choose wisely or not. Say, for example, you were a fund manager managing a large portfolio. There is no added incentive to stick your neck out and seek better returns for your clients. If you do and you are right, you probably won’t get any additional bonuses, yet if you get it wrong, you will be hounded by your clients. So, instead, most fund managers just watch each other — not the market. They do what everyone else does. That way they are guaranteed a bonus and a hassle-free existence. If the fund does well — great! If not, they can just blame it on the economy or on the market.
What other industry do you know of where you can make a complete hash of your job and still get paid a big fat bonus?
And real estate is no better. It’s always good to find a great agent and build a relationship with that same agent over time, but to blindly trust that every agent knows what they are talking about is a mistake. They are not always working towards your best interests.
There was a great insight made in the book Freakonomics that highlighted the vested interests that play out in real estate. Authors Steven Levitt and Stephen Dubner drew attention to real estate commission structures. In Australia, at the time of writing, commission is around 4 per cent of the sale price. Say after reading this book you decide that you really love property. You already have one investment property but realise that it’s probably not a great location, so you decide to sell and buy something else that meets your investment criteria. You sell your apartment for $450 000. The agent makes $18 000. You really wanted $475 000 for the property but were urged to sell at $450 000. Why? Because that extra $25 000 to you was only worth an additional $1000 to them! The commission structure of real estate agents virtually guarantees that the seller won’t get the best price.
In Freakonomics the authors even analysed sales data for houses that were owned by real estate agents against everyone else. What they discovered was that agent’s homes were kept on the market an average of 10 days longer and sold for an average of 3 per cent higher. So when real estate agents sell their own home they hold out for the best offer; when they sell your home, they will encourage you to take the first decent offer that comes along.
So, seriously, should we really trust the experts?
The simple fact is that no-one will care about your money the way you do. No-one will ever be more dedicated to its growth and wellbeing than you are. It’s time to take control of your financial future and become your own expert.
2. I don’t have time
Let me ask you one question and one question only … How much TV did you watch last week? Count up the hours that you spent watching everything from the news to your favourite soaps.
I’m not saying you have to give up what little relaxation time you have, but what about halving the amount of time you watch TV and using the rest of that time to increase your financial education? What is more exciting to you — finding out whether so and so is having an affair with her doctor, watching cars speed around a track really fast or working out how to make yourself rich? Besides, once you’re rich you can watch as much rubbish TV as you want, or buy a corporate box and watch your sport in style.
If you don’t watch that much TV, what about the internet — how much time do you spend on Facebook or Twitter? How many hours do you spend pouring over online shopping websites or counting down auction closes on eBay? The internet is fantastic but it can so easily gobble up several hours a day if you’re not careful. Or perhaps you’re a mobile phone junkie? Check your phone right now to see how many text messages you sent last week.
Australians spend 30 minutes a day sending text messages. According to a study done by the University of Queensland, text messaging is the most addictive digital service, and is equivalent in addictiveness to cigarette smoking. There is even a condition where people panic when they don’t have a connection! According to a recent Neilson study, the typical US teen sends 80 text messages a day! And considering Australia has a higher usage of text messaging than the United States, that’s a scary waste of time!
Whatever you do with your day, the real issue is not time, it is commitment. We all have busy lives, work, family and friends — sometimes it can be hard to put time aside for anything extra. But if your financial future is important to you, then you simply don’t have a choice. You have to find a big enough ‘why’ in order to rearrange your life a little and find the time.
Viktor Frankl, concentration camp survivor and author of the famous book Man’s Search for Meaning, said, ‘ Those that have a “why” to live, can bear almost any “how”’. If Frankl can find meaning in the desperate circumstances of a concentration camp and find a ‘why’ that would see him not only survive but go on to make a huge contribution to psychology, then you need to find a big enough ‘why’ to find the time necessary to take your financial future seriously.
Confucius said, ‘We are so busy doing the urgent that we don’t have time to do the important’. Unless we reverse that equation, we will never make the changes required to really create wealth and long-term prosperity. There will always be some urgent task that overshadows what you really want for your life. You are the only one who can make the changes so that you do find the time to be rich.
3. Investing is as good as gambling
Yes it is — if you don’t know what you are doing. Investing is the same as gambling if your investment choices are based on guess work, pot luck or my personal favourite — the ‘hot tip’. In those situations, investing and gambling is the same thing. You can’t control or predict the outcome — you can just cross your fingers and toes and hope that it’s your lucky day. It’s completely random. And, for the record, a recipe for disaster!
Australia has a huge gambling addiction. Did you realise, for example, that according to the NSW Lotteries Corporation, NSW residents alone spent $1.2 billion on lottery products in 2008? That is staggering and this is only one of the lotteries and only one state! And interestingly enough, this figure was higher than the previous year — obviously gambling is impervious to economic downturns or apparent financial difficulties! The mind boggles at what we spend on all forms of gambling in this country. And yet if we took that money and invested it over the long term, we would be able to create the wealth we crave.
True investing, on the other hand, is educated and calculated. The risks are minimised at every turn. Sure, investments go up and down, but over the long term smart investments always go up. In the past few years, the world has had a financial jolt and in Europe and the United States financial markets have been badly affected. According to Forbes magazine, there were 1125 billionaires in the world in 2008. A short one year later, there were only 793 billionaires as 332 were relegated to mere millionaires. Bill Gates saw his fortune plummet from $40 billion to $18 billion, Warren Buffett from $37 billion to $25 billion. So, yes, investing can go down as well as up. But I’d rather manage on $18 billion than lose nothing because I have nothing to start with!
These people know that, after taking a hit because of the global financial crisis, their investments will rally again. Nothing lasts forever — neither boom nor bust. Times of change offer the smart money an opportunity to cash in while everyone is a li...

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