How to Create Wealth, How to Keep Wealth
A friend recently transitioned from his safe but standing-still job into a promising but “risky” career as a creative professional. So I thought I’d offer some thoughts on how he and readers like him can best ensure that they create and keep wealth.
Many of us aspire to act on our dreams as my friend is doing. And like him, many face the prospect with a mix of hope and excited apprehension. It’s no easy matter to abandon a steady job in favor of an uncertain income.
I once came to this juncture in my own life. What I learned was, there’s no better time to put all your eggs in one basket. Or, in financial advisorspeak, “Wealth is made in concentration.”
My friend mentioned the possibility of supplementing his new career earnings with computer consulting and other work. As one who’s been down that path before, I offered one word of advice.
Focusing time, energy, and capital single-mindedly on your core competency is what builds wealth. Remember The Millionaire Next Door? Most of the people featured in that book became millionaires by devoting themselves wholeheartedly to small businesses. Whether they ran car repair shops, operated restaurants, or flipped rebuilt houses, they poured their time, talent, and cash into one thing. They didn’t hedge their bets by trying to supplement their incomes with peripheral projects. They concentrated with laser intensity on what they did best, and stuck with it over time. We should all do the same. Wealth is made in concentration.
My friend is a talented professional with a deservedly large and growing following. He’s on his way to wealth. So here’s the second of two crucial secrets: “Wealth is made in concentration—and maintained in diversification.” In other words, once you’ve accumulated some wealth, start diversifying away from your concentration.
For example, you’d be wise to invest in at least two uncorrelated asset classes, such as U.S. real estate and overseas stocks. Keep some cash in higher-yield money market funds. Pay off your mortgage (after selling my first company, I paid off three, each on different properties, then kept a vow to buy everything with cash going forward, including real estate).
In recent years, people who became rich on paper by accumulating employer stock in their pension plans learned the hard way that wealth is, indeed, made in concentration—in their cases, in the form of employer stock. But when share prices crashed, those who failed to diversify away from excessive concentration in their own company’s equity paid a dear price.
Remember: Wealth is made in concentration—and maintained in diversification.
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