Put all of your eggs in one wealth-building basket or not?
That is the question posed by Bill, who says:
I guess you are trying to espouse that one must FOCUS on ONE thing which creates the abundance of ACTIVE income and then leverage further to create PASSIVE incomes via real estates…
And, he would be correct – except that it doesn’t need to be real-estate for either creating or maintaining wealth: it can be whatever turns YOU on.
Because you will only make money where your passion lies … not where anybody else’s lies.
As to my views on focusing on just one thing to create wealth, I am also ambivalent to that – although, I would highly recommend a single wealth building focus to most people.
Generally, to build wealth, do exactly as Bill suggests: “FOCUS on ONE thing which creates the abundance of ACTIVE income” … that way you give a positive variance the greatest chance to kick your wealth into high gear.
Look at it this way; if you split your time and money evenly between two activities:
– one with a solid entrepreneurial 35% compound growth rate
– the other with a slightly-above-market 15% compound growth rate
Then for every $100,000 you ‘invest’ over 20 years, you have the following outcomes:
All @ 35% Split 15% / 35% All @ 15%
$29,946,192 $15,684,684 $1,423,177
Significant or not? Try it at 50% v 15% …
Well?
I can tell you this; looking at these numbers will tell you an awful lot about your likelihood of even launching your ‘financial career’:
1. The Job-for-Lifers will be looking at the 15% returns and saying “well if I can turn $100k into $1 million just by investing it in an index fund what the hell am I wasting my time here for?”
… and, they will be right.
2. The ‘wannabes’ amongst you will look at the difference between the passive-style returns over 20 years of the All-or-Nothing approach and the Spread-My-Risks-A-Little split approach and say “well if I’m not sure of the ‘next big thing’ I should put some of it in to the Big Venture and the rest into something a little safer or another venture just to be sure”
… and, they will be right.
3. The true Millionaires … In Training! amongst you will be looking at one number: the one that matches most closely (or exceeds) their Number … the amount that they simply MUST have in their nest egg. And, they will (usually) be saying “I have to go for gold – the highest possible return in my chosen field …. but, if I give it a good try and it doesn’t seem capable of producing the return that I expect, I will quickly abort mission and try again”.
… and, they will be right.
It depends on how serious you are …
My vote is definitely for focusing. Anything I ever accomplished well and at a high level of success, whether it was playing an instrument well, achieving a difficult degree, obtaining a specific fitness goal, etc.. was done by focusing my attention on the ever finer details of the thing in question that I wanted. Whenever I ‘diversified’ my attention and presence and did things as my father would say ‘half-@ssed’, those are exactly the kind of results I got, mediocre at best.
The key to accomplishing or acquiring anything great is to first develop a crystal clear vision of exactly what you want and focus on it and master the ever-finer details of that thing, and it is yours.
I completely agree Scott, it’s always been the same for me.
If you have read the “Zurich Axioms”, you will know that the only way to get wealthy is to “specialize”. Diversification is how you protect your money, not how you make it.
Swiss Bankers obviously know a thing or two.
@ Caprica – Thanks. For anybody who’s interested in reading this intriguing book, just google “zurich axioms” and the third or fourth entry in the search results should allow you to download a free .pdf version.
Speaking of “Zurich Axiom”, this article also echoes the same premise: Wealth is made in concentration—and maintained in diversification
sorry, the article link is http://www.soulshelter.com/2008/08/20/how-to-create-wealth-how-to-keep-wealth/
I’m going to be a contrarian here and advocate a middle ground. I agree that there are huge advantages to focusing your efforts- so am I crazy to go in 100% on the highest possible return?
No, the trick is that we are NOT considering the risks. There is no sure way of making 15% let alone 35%, so the question really is what is likely?
If the all 35% path only gave $29,946,192 5% of the time and $0 95% of the time it wouldn’t be nearly as promising would it? It’s not easy to predict the odds either- would Bear Sterns, AIG, Morgan Stanley, etc. be in such trouble if they had accurately assessed the risks of mortgage backed securities?
Of course if there is no other way in the universe you can reach your number maybe the 5% chance is a gamble you would be willing to take. However, I would be willing to sacrifice some of the upside for a higher overall chance of a good outcome.
-Rick Francis
@ Rick – My choice of numbers was poor in this article (hell, I’d settle for $15M).
But, if you had a 95% chance of reaching the stars – whereas the alternative is ‘comfortable mediocrity’ – would you be willing to go for it? What about 80%? 50%?
I would go for it even at 50% (give or take 25%) … why? Because I’m not committed to this course for life; if it looks like it’s failing I’m out early and trying again.
I had very mixed views of the Zurich Axioms. Some of the principles I agreed with. Others not. The rule to always play for meaningful stakes is a good one if you are in wealth creation mode (and not wealth preservation mode).
The real issues with risk taking is not that it is unavoidable, but (i) that there is no reliable way to measure the probability of success or failure and (ii) it is often difficult to both recognise and accept that you have got it wrong and bail out early enough to preserve at least some of your capital. This means that there is uncertainty over both the potential return, the risk being incurred and other factors. The uncertainty is a good thing for us as investors – it is the uncertainty that creates opportunities to invest with the possibility of achieving above average rates of return.
@ Scott – Well said and I totally agree.
Also agree with both points (Scott’s and Adrian’s), echoed elsewhere, that you have to also be willing to pick yourself up and figure out another way to attack the problem if persistence in one method is not working (i.e., sometimes persistence pays off and other tactics aren’t needed, but not always, just don’t give up or you’re guaranteed not to succeed — tho all bets are off if you’re trying to conceive :))
@ Diane – Agree! There’s a HUGE difference b/w persistence and merely perpetuating something that clearly doesn’t work …
@AJC –
You seem to talk about focus (as opposed to diversification) quite a bit, but in your newly added video for the why doctors aren’t rich post and in some of your comments, you have openly encouraged diversification into real estate. Have you changed your stance? How do you reconcile this contradiction?