The Two Essential Elements of Wealth Accumulation : Quotes from John P. Hussman, Ph.D.

“Wealth is not acquired through addition. It is acquired through multiplication. Very few fortunes have been made by adding up paychecks and overtime. Nor are they made through a huge one-time killing in the markets. Unfortunately, this is the path that many investors try to follow in achieving financial security. While a high annual income is certainly helpful in achieving great wealth, it is not the primary determinant,” according to John P Hussman, Ph.D. a former economics professor and present mutual fund owner.

Here is more information on his research on wealth accumulation:

According to statistical studies, two factors are most important in achieving wealth:

  1. The number of years that an individual has been consistently saving and investing
  2. The proportion of funds, on average, allocated to higher return investments such as stocks.

Most have achieved their fortunes by compounding a moderate but consistent rate of return over a long period. There is a simple mathematical explanation for why these two factors are most important in building wealth:

Future Wealth = Current Wealth x (1+k)T

Where k is the annual rate of return earned on current wealth, and T is the number of years that wealth is allowed to compound in value. Wealth accumulation is exponential. At a 10% annual rate of return, $100 compounds to $259 over 10 years, and to $673 over 20 years. At a 15% annual rate of return, $100 compounds to $405 over 10 years, and to $1637 over 20 years. So both the rate of return, and the length of compounding have enormous leverage in creating future wealth. Simply stated, if your goal is to accumulate a significant amount of wealth during your lifetime, you must first save something and then exercise some amount of control over one of two factors: your long-term rate of return, or the time horizon T over which you compound your wealth.

Here’s his advice and conclusion:

While risk-taking is essential to generate long-term returns, it is important to understand that market risk is typically rewarded much better in some Market Climates than in others.

The best way to increase the time horizon T over which you compound wealth is simply to start saving and investing as early and consistently as possible.

The key rule of saving is this. Don’t let your savings adjust to your spending needs. Let your spending adjust to your savings needs.

Financial security requires, first and foremost, that you start saving and investing early, and add to your investments consistently.

Actionable idea

  1. Before spending determine your savings
  2. Start saving and investing early
  3. And do Step 2 consistently.
  4. Be aware:
  • Investing involves risk taking.
  • High Rate of return and compounding accelerates the process of wealth accumulation.
  • Take investment decisions according to your risk appetite.




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