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Six Golden Rules for Building Wealth That Took Me Thirty Years to Discover: Rules One and Two

Geofrey J. Greenleaf
Greenleaf Investment Management and Counsel, Cleveland, Ohio

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This article grew out of talks given over the years to investment clubs and seminars, college and university classes and area prep schools.  

I believe there are six golden rules for building wealth that every investor ought to take into account, if not follow.  Fortunately, a mnemonic device for them is each letter of WEALTH:

• Write yourself a check to pay yourself first
• Emphasize diversification
• Accumulate and compound income and capital gains
• Lock in ownership of value stocks
• Trim taxes
• Hew to statistics, but not slavishly

1. Write a check to pay yourself first

The Automatic Millionaire, by David Bach, was a best-seller last year with this primary thesis:  Pay yourself first. You’ll be able to save more if you pay yourself on a regular basis out of each paycheck you earn. You will save far more than if you save what is just left over each month after you pay all of your bills.

Still a better way to save is to have your checking account debited just after pay day and invest it into your custodial bank or brokerage account, or a mutual fund. This way you won’t be tempted to spend it on something else.

Incidentally, a further way to keep down spending is to use currency rather than credit cards. It has been found that there’s a tendency to spend 14 percent more with a credit card in a store than by paying with currency and coin.

2. Emphasize diversification

Of course, we’re not saying this just to be politically correct. Think “what is the penalty if I’m wrong”. The idea about “putting all your eggs in one basket and watching that basket” can make sense for someone who wants to become rich quickly and understands the risk of a possible big loss. 

On the other hand, if you have a conservative approach to building future wealth, it is safer to participate in various asset classes including stocks, bonds, master limited partnerships, real estate investment trusts and money market funds. In the stock market this includes market sectors such as energy, financial services and healthcare.

Foreign investments, since they tend to have a lower correlation of movement with the U.S. stock prices, can make sense on a targeted basis. Additionally, investing in other securities that do not move in tandem with the S&P 500 stock index, namely precious metals stocks, help reduce volatility and thus risk in the portfolio.

Or, to quote another investment adage, “bet not thy whole wad”.

Continue to rules three through six