Visions Needed for the Poor Investors Only
The investment philosophy might be different for investors with different perspectives. If investors consider themselves to be poor, the main goal of investing might be for growth. Conversely, if investors consider themselves to be rich, the main goal of investing might be for not loosing money. The absolute amount of money they have might not play an important role in this.
Now the question is how these investors can achieve their respective goals. I was thinking about this question. I feel I have some clues about this question.
Now let’s first define the poor investors. The poor investors are those investors who think that the amount of money they have are too limited in their views. Their absolute amount of money does not play an important role here. We further assume that their goals of investing are for rapid growth of capital.
My view is that there are not poor investors in the world. Therefore, no investors should need to have rapid growth for their capital. In the following paragraphs, I am trying to prove my point of view.
There are about 60 trillion dollars of wealth in the United States. There are about 300 million people live in this country. The average wealth per person is approximately 200,000 dollars. Let’s further assume that the average number of people in a typical household is 4 people. Then the typical family wealth is about 800,000 dollars. Let’s assume the typical family has about 200,000 dollars of mortgage or other types of loans. Then the net wealth is about $600,000
Further let’s assume that only one person in this household makes all the investment decisions about what to invest in daily operations of the investment portfolio. This assumption is very critical because that two people might have opposite views about investing. If opposite views about investing are moderated into an actual investing strategy, all other assumptions about the poor investors might not be valid.
Let’s assume that the return for the risk-less investment is 6%. One choice for the poor investors is to invest 100% of their net wealth in such risk-free investments. They can get about 36,000 dollars per year. One has to notice that this $36,000 is very close to the average family income of the United States.
Now let’s assume that a family with an income of 100,000 dollars will have a nice living standard in a very typical suburban neighborhood. So apparently most people in the United States feel they are not wealthy. In order to obtain a risk-free income over 100,000 dollars, the typical family might need approximately 2 million dollars (3 x 600,000 = 1,800,000).
How can the poor investors grow their capital three times from $600,000 (a typical family) to $1.8 million in a short time? Now let’s calculate the required rate of returns for this growth.
If the short time is five years, the required rate of return is 25%. This rate can be achievable if one can invest like Warren Buffett. How can any poor investors reach such a high rate of returns? The only way to reach this high rate of returns consecutively for five years might be the investors who have visions.
If the short time is 10 years, the required rate of return is 12%. This rate is achievable if the poor investors invest 100% of their money in the stock market. In many 10-year periods, the stock market return is close to 12% annually. As long as the investors choose the right index funds, they are very likely to achieve their goals.
If the short time is 20 years, the required rate of return is 6%. This rate can be achieved as long as the poor investors invest wisely in combinations of risky and risk-free investments. One can see how easily the long-term views are critical in managing money. I would think the most conservative investors with the right balanced funds could achieve this goal easily. One minor note here is that the risk-free investments might not serve this purpose because the inflation might reduce the available inflation-adjusted capital.
If the short time is 40 years, the required rate of return is 3%. This rate can be achieved as long as the poor investors invest only risk-free investments. This is why the rich is getting richer and the poor is getting poorer. The rich does not need to do anything to transfer their money from generations to generations because they can always invest their money in the US treasuries to obtain the required rate of returns. If the poor investors take such a long time view about investing their money, I think the poor investors will not feel poor for too long.
In summary, I do not think there should be any poor investors in the world. If you want to reach your goal in five years, you might need visions. If you want to get there in ten years, you can rely on the index funds to move you there. If you can wait for twenty years to reach there, you can easily achieve your goal by conservatively investing your money in any balanced funds. If you have an investment horizon of forty years, it is very hard for you not to reach your goal.
Conversely, if the poor investors do not think they have visions about the future, they just need to extend their investment horizon a little bit longer, say from five years to ten years.
Now the question is how these investors can achieve their respective goals. I was thinking about this question. I feel I have some clues about this question.
Now let’s first define the poor investors. The poor investors are those investors who think that the amount of money they have are too limited in their views. Their absolute amount of money does not play an important role here. We further assume that their goals of investing are for rapid growth of capital.
My view is that there are not poor investors in the world. Therefore, no investors should need to have rapid growth for their capital. In the following paragraphs, I am trying to prove my point of view.
There are about 60 trillion dollars of wealth in the United States. There are about 300 million people live in this country. The average wealth per person is approximately 200,000 dollars. Let’s further assume that the average number of people in a typical household is 4 people. Then the typical family wealth is about 800,000 dollars. Let’s assume the typical family has about 200,000 dollars of mortgage or other types of loans. Then the net wealth is about $600,000
Further let’s assume that only one person in this household makes all the investment decisions about what to invest in daily operations of the investment portfolio. This assumption is very critical because that two people might have opposite views about investing. If opposite views about investing are moderated into an actual investing strategy, all other assumptions about the poor investors might not be valid.
Let’s assume that the return for the risk-less investment is 6%. One choice for the poor investors is to invest 100% of their net wealth in such risk-free investments. They can get about 36,000 dollars per year. One has to notice that this $36,000 is very close to the average family income of the United States.
Now let’s assume that a family with an income of 100,000 dollars will have a nice living standard in a very typical suburban neighborhood. So apparently most people in the United States feel they are not wealthy. In order to obtain a risk-free income over 100,000 dollars, the typical family might need approximately 2 million dollars (3 x 600,000 = 1,800,000).
How can the poor investors grow their capital three times from $600,000 (a typical family) to $1.8 million in a short time? Now let’s calculate the required rate of returns for this growth.
If the short time is five years, the required rate of return is 25%. This rate can be achievable if one can invest like Warren Buffett. How can any poor investors reach such a high rate of returns? The only way to reach this high rate of returns consecutively for five years might be the investors who have visions.
If the short time is 10 years, the required rate of return is 12%. This rate is achievable if the poor investors invest 100% of their money in the stock market. In many 10-year periods, the stock market return is close to 12% annually. As long as the investors choose the right index funds, they are very likely to achieve their goals.
If the short time is 20 years, the required rate of return is 6%. This rate can be achieved as long as the poor investors invest wisely in combinations of risky and risk-free investments. One can see how easily the long-term views are critical in managing money. I would think the most conservative investors with the right balanced funds could achieve this goal easily. One minor note here is that the risk-free investments might not serve this purpose because the inflation might reduce the available inflation-adjusted capital.
If the short time is 40 years, the required rate of return is 3%. This rate can be achieved as long as the poor investors invest only risk-free investments. This is why the rich is getting richer and the poor is getting poorer. The rich does not need to do anything to transfer their money from generations to generations because they can always invest their money in the US treasuries to obtain the required rate of returns. If the poor investors take such a long time view about investing their money, I think the poor investors will not feel poor for too long.
In summary, I do not think there should be any poor investors in the world. If you want to reach your goal in five years, you might need visions. If you want to get there in ten years, you can rely on the index funds to move you there. If you can wait for twenty years to reach there, you can easily achieve your goal by conservatively investing your money in any balanced funds. If you have an investment horizon of forty years, it is very hard for you not to reach your goal.
Conversely, if the poor investors do not think they have visions about the future, they just need to extend their investment horizon a little bit longer, say from five years to ten years.
posted by Unknown at 8:00 PM
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