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Building wealth is a tricky thing. It takes discipline, consistency, patience, and a trusted advisor.
As an investor, you may find yourself wondering:
- Where should I invest my money?
- How can I hit a home run and boost my returns?
- What happens if I choose the wrong investment and lose money? How will that affect me?
These are all legitimate concerns for investors. It can take years to recover when too much of your portfolio is tied up in an investment that goes bad.
That said, the truth of the matter is this: You can be wrong half the time and still make a fortune.
In his book "The Psychology of Money," Morgan Housel points out that there will always be losing investments over long periods. These losers have the potential of dragging down your overall returns. However, there will also be some big winners that account for the majority of your investment gains.
These big wins, the ones that make up the majority of the gains, are called "long tails."
Sam Watkins, CFP® TrueNorth Wealth
TrueNorth Wealth is a zero commission, fee-only, financial planning firm. TrueNorth Wealth specializes in high-net-worth individuals. We offer academically sound financial planning, and we educate each client on what our investment philosophy is, and why. We take an active role in helping each client examine their tax bill each year and creating meaningful strategy to manage that tax liability. If you are looking for an exceptional advisor, call TrueNorth Wealth for a no-cost consultation, today! 801-274-1820Most people aren't familiar with the concept of long tails — the farthest ends of a distribution of outcomes — so let's explore an example from Housel's book.
Housel writes:
"By the mid-1930s, Disney had produced more than 400 cartoons. Most of them were short, most of them were beloved by viewers, and most of them lost a fortune. Snow White and the Seven Dwarfs changed everything. The $8 million it earned was an order of magnitude higher than anything the company earned previously. It transformed Disney Studios."
Disney had found its long tail.
Snow White made enough money to pull the company entirely out of debt, provide bonuses for key employees, and make the company profitable for years to come.
During that same period, however, Disney continued to put money into many projects that were not profitable, and the company invested in resources that had only modest returns.
Housel goes on to explain the impact of this tail event on Walt Disney's career:"By 1938, he had produced several hundred hours of film. But in business terms, the 83 minutes of Snow White were all that mattered."
Investors often focus too much attention on losses while ignoring the tail ends of a diversified portfolio — the investments that will boost overall returns.
Here are a few key takeaways investors can use from Disney's example:
Learn to take the good with the bad.
Diversified investing can be very similar to the Disney example. Within a marketplace, there'll be companies that thrive and companies that close their doors. Unfortunately, there's no reliable way to tell who is who in real-time. The companies that go out of business are like Disney's 400 cartoons before Snow White; they lost a fortune, whether they are a startup or a huge company like Kodak. The companies that thrive — Amazon, Nvidia or Apple — are the investor's Snow White; they are what matters in the end.
Patience is a virtue.
Like many worthwhile endeavors, building wealth takes time. The excellent news for investors is that you will be rewarded for staying invested through the inevitable ups and downs of the market. Investing consistently over long periods is a proven method to build wealth. That doesn't mean it is always easy. Many investors get spooked during a market correction and often wind up selling their investments at steep losses. The steady hand and unbiased eye of a skilled advisor can help considerably here.
Choose a strategy you can stick with.
David Booth, founder of Dimensional Fund Advisors, often says "One of the key principles of investing is to develop an investment philosophy that you can stick with through thick and thin." Committing to the long haul can be hard but can be made easier. Work with an advisor you trust. Make sure your strategy is based around robust data and research and doesn't require anyone to successfully outguess the market.
By diversifying your investments and sticking to your strategy for the long term, you can ensure that just like Walt Disney, long tails in the market work in your favor and ensure your financial success.
TrueNorth Wealth is here to help.
If you're interested in working with a fiduciary CFP® professional to help outline your unique investment plan, complete with a custom investment portfolio to deliver your financial goals, then TrueNorth Wealth is here to help. To learn more or schedule a no-cost consultation, visit the website at TrueNorthWealth.com or call (801) 316-1875.
