Building wealth is a tricky thing. It takes discipline, consistency, a trusted advisor, patience, and sometimes even a little luck.
As an investor, you may find yourself wondering:
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Where should I invest my money?
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How can I hit a home run and boost my returns?
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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. Utilizing a fee-based financial planner can help mitigate losses, yet there are still things you must be keenly aware of to create long-term gains and build financial security.
That said, the truth of the matter is this: You can be wrong half the time and still make a fortune.
In his ground-breaking 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.”
Most 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.”
As investors, we often focus too much attention on losses while ignoring the tail ends of our diversified portfolio — the investments that will boost our overall returns.
Here are a few key takeaways investors can use from Disney’s example:
1. Learn to take the good with the bad. Index fund investing can be very similar to our Disney example. Within an index of stocks, there’ll be companies that thrive and companies that close their doors for good. Unfortunately, there’s no reliable way to tell who is who from the outset. The companies that go out of business are just like Disney’s 400 cartoons before Snow White; they lost a fortune. The companies that thrive — Amazon, Netflix, and Apple — are the investor’s Snow White; they are all that mattered.
2. 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 said, this is not an easy task. Many investors get spooked during a market correction and often wind up selling their investments at steep losses.
3. A guide can help. A trusted financial advisor can be essential to help guide you on your financial journey. An advisor is there to help you understand when to stick to the plan and weather the storm and when you’ll need to make adjustments to achieve your goals.
That’s where TrueNorth Wealth can help.
Here at TrueNorth Wealth, one of Salt Lake City’s best wealth management firms, our team focuses on assisting our clients in creating long-term wealth while maximizing the enjoyment they gain from their money. We achieve this by matching our clients with a dedicated CFP® professional backed by an incredible team. We understand that money decisions can be challenging, which is precisely why we outline defined milestones for all of our customers based on their age, income, and life goals.
For our team at TrueNorth, it’s about so much more than money. It’s about serving families in Salt Lake City, St. George, and all across Utah (and the United States) and helping them achieve freedom and flexibility in their lives.
To learn more about TrueNorth Wealth or schedule a no-cost consultation, take a moment to visit our website at TrueNorth Wealth or call (801) 316-1875.
