In our endeavors, we should position ourselves for the best chance of success.
This concept applies to investing as well, as it is vital to make a prudent and informed decision based on proven principles that historically have shown excellent results. Moreover, if we want to stack the odds in our favor, there is no more critical belief than to “pay ourselves first” and then allow our money to work for us (hopefully grow) for the next 10, 20 or 30 years.
Unlike life, stock market returns—measured by the S&P 500—have been shown to be less volatile when viewing results from a long-term perspective than when witnessed from a short-term view. Of course, life works just the opposite, as the present is much more predictable than the future. This dichotomy is the primary reason that investors cannot hang onto stocks for the long-term. In other words, they allow their present emotions to wreak havoc with their investment decisions.
Of course, short-term, gut wrenching volatility of the stock market can be scary even for seasoned investors. However, when we gaze at the same information over a long period of 10, 20 or 30 years, the unpredictability is not as frightening, which is why I believe the foundation of successful investing is “time.” We need to understand that time is our friend!
Furthermore, if we are a “pay you first” investor that automates our decision making process and then gets out of the way, bear markets (extended decline in stock prices) are good for us! That is correct because bear markets can be a wonderful opportunity to buy stocks at a lower price, which can help us build wealth quicker.
Regrettably, long-term investing is not sexy enough for many investors. Instead, there are too many eager beavers hyperventilating with excitement while watching shows with talking heads that make endless predictions about the economy and the next great hot stock. We need to get rid of the noise and nonsense because if we do not, the chances are high that we will fall prey to the dynamic duo of fear and greed, which repeatedly creates remarkable chaos for one’s portfolio.
Paying yourself first and getting out of the way is a simple principle in theory but an incredibly difficult one in application. Because of the difficulty to remain disciplined to pay ourselves first is why we should automate. Automation relieves us of the burden of having to write checks repeatedly.
Unconsciously investing monthly, quarterly or yearly essentially eliminates our need for will power. In other words, our goal is to remove the temptation of not paying ourselves first! Sadly, the way I see it is that most folks pay everyone first and whatever is left, they “invest” in themselves. Paying yourself last has usually not been a realistic strategy for building wealth. Not only is this methodology arguably a poor way for you to become independently wealthy, but it flies directly in the face of another vital principal: keep expenses relatively low, reduce liabilities and here is the key, diligently build a base of solid assets.
The secret to building wealth is not the strategy itself, but rather the execution. Without question, the biggest risk to my long-term wealth creation is me! Guess who the biggest risk is to your long-term wealth creation? You!
There is simply no escaping the fact that managing human behavior is the keystone to being a successful investor because our emotion and short-term thinking make us strangers to common sense. In the end, psychology trumps financial education! To build wealth over the long haul, we must have the desire, discipline and willingness to do what so many others simply will not or cannot do.
In the final analysis, building wealth is simple but not easy. The primary roadblock for most folks is their tendency to seek complexity and ignore simplicity, which has been alive and well for years, and it shows no sign of slowing down. I will allow Leonardo da Vinci to provide me with my closing remark: “Simplicity is the ultimate sophistication.” Pay yourself first ... automate ... get out of the way!
Harry Pappas Jr. CFP®
Managing Director-Investments
Master of Science Degree Personal Financial Planning
Certified Estate & Trust Specialist ™
Certified Divorce Financial Analyst™
Pappas Wealth Management Group of Wells Fargo Advisors
818 North Highway A1A, Ste 200
Ponte Vedra, Florida 32082
904-273-7955
harry.pappas@wellsfargoadvisors.com
The use of the CDFA™ designation does not permit Wells Fargo Advisors or its Financial Advisors to provide legal advice, nor is it meant to imply that the firm or its associates are acting as experts in this field.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a Registered Broker-Dealer and a non-bank affiliate of Wells Fargo & Company.
The opinions expressed in this report are those of the author(s) and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.