How to Start Investing for Financial Independence, Part 2
By Chris Anderson, PhD
By Chris Anderson, PhD
Last week we started a mini-part series about how to go from beginning investor to being "financilly independent" in a steady and predictable way. Many, many people want to overly complicate this process so let's recap that discussion.
The bottom line steps that I suggested in the last week article (Click here for Article) was :
Before we get to step 2, let's take a step back. For a lot of people, if I told them that somebody made $43,000 on a quick investment, they would think these people had "struck it rich". Kind of like winning the lottery, right? NO! In the grand scheme of things, this investment will do very littleto impact their financial independence. That is, it will take discipline to now use these profits to go into the next investment, and then use those new profits to go into the 3rd investment, ect. So, in our opinion, the first investment was merely a stepping stone towards a much bigger objective.
In step 2, most savvy investors will now realize they have just been given some monopoly money, or money that was not originally theors, to work with. In the investment and trading world, this is referred to as the "markets money; i.e., money that you got from the market that you can now use to generate revenues above and beyond what was possible with your original investment. Quality traders can use this concept to produce huge % returns in a year while risking no more than 10% of their original portfolio.
So let's say the investor now decides to repeat the process and buy two preconstruction lots in a differant development. In the two years since the first investment was made, suppose now that property has escalated. In addition, the investor finds a good deal on two more lots and each is $250,000 to purchase.
Now, the investors visit their check list to see if this makes sinse:
Now let's ask the question are they finacilly free? Well, I doubt it. The investor could probably now survive for 2-3 years on the nest egg but only if they did not reinvest it. However, if the family and friends find out about this gain, then they will think the investor is now "rich" and living like the Vanderbilts..... For anybody that has made it to Step 2, you know they are far from rich because now they want to invest to go to Step 3 and this will likely consume most of thir money. Frequently you will find people in the $0.5 - $2Miillion dollar net worth in this category where they are doing great on paper but they don't have ant more "extra" money to spend than they did a few years ago. After Step 3-4 however, this can change dramatically.
Before we conclude this week's article, let's talk about a very common and deadly mistake. In the language of Texas Hold'em poker, it is the ALL IN mentality. Frequently, after a first success, people now feel bulletproof and decide they want this process to go faster. they leverage everything they have and take on as much risk as the banks will allow them. If things work out for them, they explode their wealth with that step. However, if something slips up, they are in trouble.
Most people believe nothing like that can happen to them they are too smart. I mean everybody knows that real estate does not go down, Right? I know a gentlemen who is extremely smart, extremely business savvy, and grew his net worth to well over a BILLION dollars. Within a few yaers of that mark, his net worth was NEGATIVE and had to declare bankruptcy because of real estate. The process of building wealth in a controlled fashion over 6-10 years is so straight forward that I cannot see taking those kind of risks to make it happen in a much shorter time frame.
The bottom line steps that I suggested in the last week article (Click here for Article) was :
- Look for an opportunity that will return at least 150% in 2 yrs or less;
- Be mentally and finacially prepared if the investment does not work out;
- Have VERY good reasons why you don't think you will lose money.....You may not make as much as expected, but you would rather not lose money at this stage.
- Be patient. This single result should not either make or break you but it is crucial to a longer term plan.
Before we get to step 2, let's take a step back. For a lot of people, if I told them that somebody made $43,000 on a quick investment, they would think these people had "struck it rich". Kind of like winning the lottery, right? NO! In the grand scheme of things, this investment will do very littleto impact their financial independence. That is, it will take discipline to now use these profits to go into the next investment, and then use those new profits to go into the 3rd investment, ect. So, in our opinion, the first investment was merely a stepping stone towards a much bigger objective.
In step 2, most savvy investors will now realize they have just been given some monopoly money, or money that was not originally theors, to work with. In the investment and trading world, this is referred to as the "markets money; i.e., money that you got from the market that you can now use to generate revenues above and beyond what was possible with your original investment. Quality traders can use this concept to produce huge % returns in a year while risking no more than 10% of their original portfolio.
So let's say the investor now decides to repeat the process and buy two preconstruction lots in a differant development. In the two years since the first investment was made, suppose now that property has escalated. In addition, the investor finds a good deal on two more lots and each is $250,000 to purchase.
Now, the investors visit their check list to see if this makes sinse:
- Look for an opportunity that will return at least 150% in 2 years ofr less --yes, they have reason to believe this will occur for their down payment amount;
- Be mentally and financially prepared if the investment does not work out --yes, they don't think it will happen but if they lose their entire 10% down payment, they are ok with this.
- Have VERY good reasons why you don't think you will lose money..... You may not make as much as expected but you would rather not lose money at this stage -- They have done their due diligence and feel strongly about the investment.
- Be patient. This single result should not either make or break you but it is crucial to a longer term plan-- they are not swinging for the fences but rather patiently using the previous market's money to increase their investment.
Now let's ask the question are they finacilly free? Well, I doubt it. The investor could probably now survive for 2-3 years on the nest egg but only if they did not reinvest it. However, if the family and friends find out about this gain, then they will think the investor is now "rich" and living like the Vanderbilts..... For anybody that has made it to Step 2, you know they are far from rich because now they want to invest to go to Step 3 and this will likely consume most of thir money. Frequently you will find people in the $0.5 - $2Miillion dollar net worth in this category where they are doing great on paper but they don't have ant more "extra" money to spend than they did a few years ago. After Step 3-4 however, this can change dramatically.
Before we conclude this week's article, let's talk about a very common and deadly mistake. In the language of Texas Hold'em poker, it is the ALL IN mentality. Frequently, after a first success, people now feel bulletproof and decide they want this process to go faster. they leverage everything they have and take on as much risk as the banks will allow them. If things work out for them, they explode their wealth with that step. However, if something slips up, they are in trouble.
Most people believe nothing like that can happen to them they are too smart. I mean everybody knows that real estate does not go down, Right? I know a gentlemen who is extremely smart, extremely business savvy, and grew his net worth to well over a BILLION dollars. Within a few yaers of that mark, his net worth was NEGATIVE and had to declare bankruptcy because of real estate. The process of building wealth in a controlled fashion over 6-10 years is so straight forward that I cannot see taking those kind of risks to make it happen in a much shorter time frame.
