Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it. Compound interest is the most powerful force in the universe – Albert Einstein. How much do you think just one cent (0.01¢) would be worth today if we invested it from the birth of Jesus over two thousand years ago at an average annual return of just 5% compounded Yearly? The answer is, brace yourself…, over Nine Billion Trillion Trillion Dollars ($9,038,054,016,000,000,000,000,000,000,000,000,000,000). If we should divide that money among the 7.5 billion people in the world today, each person would get, brace yourself again…, One Million Trillion Dollars (1,000,000,000,000,000,000). Take a second to let that sink in for a while. Ok, welcome back. We don’t have two thousand years but we have ThirdWorldSuccessGuide (TWSG) to help you along. By now you have read and followed steps #1, #2, #3, #4 and #5, which is the foundation and ground floor of our financial mansion. We are now ready to build the top floor of our metaphorical two-story financial mansion. Step #6 is the beginning of that second floor, read on if you are ready to start building your second floor. If not, go back to steps #1 thru #5 to build your foundation first.
Step #6 – Invest
What is investing or to invest? – To invest is simply to commit something of value (usually money) in order to earn a financial return. Investing is the act of studying, learning and adapting your financial knowledge to choose the right investment vehicles for you that will produce a positive return and allow you to grow your wealth.
I have a decent job already why do I need to invest? – Apart from opening a successful business and real estate investments, investing in financial instruments is the next best thing for building real wealth. Sure, you can have a high paying and decent job, but if you don’t save and invest you won’t be able to build long-term wealth. Suppose you had invested USD $1000 in Warren Buffett’s company Berkshire Hathaway in 1964, how much would it be worth today in 2018? It would be worth over twenty eight million US dollars ($28,000,000). If that initial sum was $10,000, it would be worth over two hundred and eighty million dollars ($280,000,000). That is the power of compound interest and why we are missing out if we don’t invest. The average annual rate of return if you had invested with Warren Buffett is 20.9% which is twice the United States’ S&P 500 which returns an annual average of 9.7%. Therefore even if you missed the Warren Buffett ‘boat’, simply investing in the S&P 500 index with $10,000 USD in 1964 would be worth almost one and a half million dollars ($1,483,057). Compounded Monthly that same $10,000 investment would be worth almost two million dollars. That’s a tidy sum to have at retirement assuming you never invested a dollar more since you put that initial sum of $10,000. Suppose you put $100 in every month (step#4), that same $10,000 investment would be worth over four million dollars $(4,130,525). At today’s exchange rate (September 2018), that’s over five hundred and sixty five million Jamaican dollars ($565,000,000) – A tidy sum for any Jamaican to retire on in 2018. The percentage growth in the Jamaican stock market index is even greater than the S&P 500 with double digit growth on average. The Jamaican stock market was the best performing stock market in the world in 2015, with over 91% growth. We can find many opportunities in the stock exchanges of the developing (third world) countries. Think about it, by its very definition a developing country is still growing. Therefore there is much opportunities to invest in the stock markets of those countries that is not yet as mature as the stock markets in the Developed countries.
So TWSG, which financial instruments should I invest in? – The answer to that question is, it depends. It depends on your level of knowledge about financial instruments and your risk appetite and your willingness to learn. Since you have made it this far in our TWSG guide, we know you are willing to learn and improve your financial situation. I will tell you about some of the most common financial instruments and tell you what I would personally do. The main types of instruments available for investing are A) Stocks, B) Bonds, C) Mutual Funds, D) ETFs and E) REITS.
- Stocks – To put simply, Stocks are shares in a company that entitles you to part of that company’s earnings and assets. Stocks are listed on the Stock Exchange, where you can buy and sell some or all of your shares in that company. If you buy enough of these shares you can actually take over ownership of the particular company.
- Bonds – Bonds are simply you lending money to a company or government. These are usually for a set period of time, say five years for example. You received a (usually low) fixed or variable interest usually annually or quarterly. At the end of the loan period, say five years, you get back your money and some interest. In between those five years you may sell or buy your Bonds for a lower or higher price than you bought it for. Bonds are usually considered ‘safer’ than stocks. However your returns are usually much, much lower for Bonds. It’s a great place to put some money especially if you have a lot and you want it to work in a less risky environment.
- Mutual Funds – Are basically you giving your money to a portfolio manager or group of managers to invest it for you. They usually invest in a variety of stocks or bonds or other financial instruments or a combination of some or all the financial instruments. They ask you questions to determine your risk appetite to determine how aggressive or how passive of a mutual fund they will invest your money in. That particular mutual fund is in itself a financial instrument that you can buy or sell to another investor.
- ETFs (Exchange Traded Funds) – An ETF trade on the stock market just like stocks. However it is also like Mutual Funds, because instead of being a business that you invest in like stocks, it may group several stocks or financial instruments together and pool it together in one basket. This ‘basket’ is what is traded on the stock exchange and not the individual stocks or instruments in the basket. It’s like a gift basket. If you go to the pharmacy to buy a gift basket, they won’t unwrap the gift basket and sell you the items in it individually, they will only sell you the gift basket with all the items in it as a package. That’s what ETF is, it’s a package of stocks or other instruments all wrapped up in one basket and sold as a stock on the stock market. What you buy is ‘shares’ or part ownership of the basket of goods.
- REITS – REITS (Real Estate Investment Trusts) may trade on the stock market just like a regular stock. It is also like an ETF except it has most of the assets it invests in, into real estate. So therefore it’s basically a company that trades mostly in real estate and you can buy and sell shares in that company, so whatever real estate the company owns, you own a piece of that real estate too indirectly. REITS usually also pay out a minimum mandated amount of dividends per year.
So what would I invest in? – Personally, at this stage I would focus on investing in stocks on the stock market. They are riskier than the other four instruments that I have listed above however they also tend to have the higher rewards than the other four instruments listed above. I would caution that you seek advice from a qualified or experienced individual before engaging in any form of investing. Also you have made it this far in TWSG, you have made the difficult decision in steps #1 thru #5, now take the time out to learn about investing learn from someone who knows and is a successful investor or seek advice from your stock broker or wealth advisor. A good advisor can make you money, however a great advisor can make you wealthy. For example, I approached one of my wealth advisors Floyd Wilson of Mayberry investments Jamaica Limited. I gave him a challenge of turning One hundred thousand Jamaican Dollars ($100,000) into five hundred thousand dollars ($500,000) in two years. Without hesitation and without batting an eyelid he accepted the challenge. He would call me about stocks that may be trading below value and may have potential growth, as well as I would call if I see something that looks like a good buy. It was just a little under a year and a half when we realized that we had surpassed our target. You see some people buy one stock at one time in their life and expect that within a couple of months they are going to become wealthy. And when this does not happen they give up and say that ‘investing’ is not for them or that ‘investing’ does not work. But as I stated in previous steps of TWSG, time is the most important ingredient in building wealth and investing. Close to 100% of persons who invest wisely in the stock market over many decades are now wealthy. Also close 100% percent of persons who never invest never become wealthy or financial free. So you choose which boat you want to be in. Personally I choose to be financially free.
Be careful of investment scams or schemes! – Many persons ignore the time element of investing and seek to get rich quickly or without putting in the work and without making much effort. As I quoted before ‘a fool and his money soon part’. There seems to be many fools not only here in Jamaica but also around the world. In Jamaica, we had the Cash Plus and the Olint Saga, where many persons put all they had into these investment schemes not knowing fully what they were investing in. There were stories of persons actually selling their homes to put money in these schemes. They lost it all when these pyramids came crashing down in thunderous and spectacular fashion. Another form of pyramid scheme is Network Marketing or Multi-Level Marketing (MLM) schemes or companies. Imagine if you got a job at Burger King, but instead of paying you, you had to buy the burgers out of your own pocket at the regular price and then go out and sell those burgers at a very high price all the while trying to convince people that they are getting a better burger when they buy from you. Imagine the minimum amount of burgers you had to buy were 10 burgers per week, but each week you only manage to convince 5 idiots that they were getting a better burger. So therefore you had to consume the remaining five burgers for yourself. After a month of doing this how much money would you have made? My guess is close to zero, in fact you may have broken the cardinal rule of investing – don’t lose money! What’s worse you are encourage to go out and find other fools to join the scheme under you and you will earn a little of what the buy/sell. The problem is that most persons that you will recruit will give up when they realize that the only person really making money is the person manufacturing the burger; Burger King. According to a report published by the Federal Trade Commission in the US, 99% of people who join MLM schemes actually lose money. At this rate you stand a better chance playing the lottery.
Again, seek advice! – The best protection against risk is to learn about what you are doing. Some people say investing is risky, but in the words of Warren Buffett, the wealthiest investor, ‘risk comes from not knowing what you are doing – risk comes from ignorance’. As I said before seek out people who are already doing it successfully. Also seek professional advice. In Jamaica, we have several brokerage houses that you can open an account with. They have wealth advisors at each of these Brokerage Houses that can help to guide you along not matter if you are a newbie or a seasoned investor. I mentioned Floyd Wilson* already of the Brokerage house Mayberry Investments Limited (MIL), another excellent broker with great customer service that I use is Patrick Robbins**of M/VL Stock Brokers Limited. Other good and great investment/brokerage houses in Jamaica in no particular order are; GK Capital Management Limited, JMMB Securities Limited, JN Fund Managers Limited, NCB Capital Markets Limited, Proven Wealth Limited, Sagicor Investments Jamaica Limited, Scotia Investments Jamaica Limited, Stocks and Securities Limited (SSL), Victoria Mutual Wealth Management Limited.
“Investing is not about chasing a get rich quick scheme, it requires making wise decisions, being patient and consistently building wealth over time.” ~ Floyd Wilson
“The BOJ (Bank of Jamaica) has reduced their policy rate to within two percent. This makes investing in the stock market a viable alternative…The stock market offers a better rate of return year over year…There are two ways investors can benefit, namely from dividends as well as capital gains.. Companies will continue to generate greater profits as a result of the strong economy which will lead to increased dividend distribution… Opportunities also exists for investors who are interested in new companies coming to market via IPO listings…It is best to contact a stock broker to assist you in getting started..” ~ Patrick Robbins
So what does step #6 of TWSG wants me to do? – We want you to take advantage of the power of compound interest. The best way of doing that is by investing. My preferred instrument is stocks because it can typically grow faster than the others, however it is more risky. At the very least take advantage of the Mutual Funds, ETFs and REITS out there on the money market now. Bonds are slow but generally sure, it can be a great addition to your portfolio especially if you want to preserve a large sum of money. Now remember that this the top floor of our mansion. All the steps so far are not mutually exclusive. You can work on all of them at the same time. However if you try to build the top floor of your TWSG mansion without first building a strong foundation and ground floor, it may all come tumbling down not unlike an upside down pyramid scheme crashing to the ground. Work on steps #1 thru #5 before you dive deep into Investing. Type ‘i am ready to invest’ in the comments if you have read all the way to the end. It shows who are really ready to do the hard work and learn what is necessary to become a TWS. Also please share with a friend or family member who you wish to see succeed.
Stay tuned next week as I will publish step seven of the ten steps on how to make it in the third world.
Our actions now will determine future results.
*Floyd Wilson can be reached at: Cell: 876-579-9385 Email: firstname.lastname@example.org **Patrick Robins an be reached at: Cell: 876-926-4319 or 876-960-1570