How to be Rich

The title is a bit premature as I am not rich, YET. If the returns from my investments continue in their historical range I will be in the future. While there are many ways to get rich such as becoming an entertainment star or a star athlete or winning the lottery or having a rich relative leave you a fortune, most of us are going to have to do it by saving and investing. Now the big question is "Is it possible for the average person to save enough money to become rich."

Lets take some twenty year old people who save twenty dollars a week. Now you may not be twenty, most of us just wish we were. At the end of a year they have each got one thousand dollars. What can that grow to by the time they are sixty-five. Some invest in GIC's, average return, four percent a year. This money will double about every eighteen years. In forty-five years, it will grow to less than $6,000. These twenty year old group will not be rich unless they save a lot more.

The second group invests in stocks. The return on stocks is about nine percent. This rate of return doubles money in eight years. In forty-five years this will grow to about $50,000. They are not going to be rich, but if if they continue to save one thousand dollars every year, They will end up with well over half a million for retirement. Unless here is higher inflation than currently is the case, they will at least have a nice boost to their retirement income.

The third group invests in stocks, but through good management of their investments, gets an average return of about twelve percent. This is about my estimate of what the average long term yield of trusts would have been. The first year's $1000 would grow to around $160,000. This would make them millionaires when they retire. Unfortunately inflation would mean that they would not be millionaires in terms of today's dollars. Thus, if you are twenty, you need to save twenty dollars a week and get about a 12% return plus inflation to retire as a millionaire in today's dollars.

Most of us are not twenty, we just wish we were. We will either have to save more or get a higher rate of return, or both, if we plan to be millionaires when we retire. You'll have to decide whether you can save more, however you can get a higher return.

Should you go out and put any money you have saved into the stock market? Now is probably not a good time to do that. Far too many people start to invest in the stock market at the wrong time. There were many who listened to the stories of huge returns through 98 and 99, then finally decide to take the plunge into tech stocks just before the bubble burst, and thus lost a lot of hard earned money. If you lose some of your profits in a market correction, it's one thing, but if your are just getting into the market when the market is going into a nosedive, it's another.

I think the likelihood of the stock market being considerably lower than the current levels in the future is quite high. Later on today I will be taking out some insurance against this possibility by using options. If you are not in the market, now might be a good time to set up a practice account, where you manage a pretend investment portfolio. If you are in the market you might consider doing some selling. If you want to use my strategy of options, you should get a copy of Options as a Strategic Investment, by Lawrence McMillan before you do anything with options. It is not a complete compendium of all option strategies, but it is invaluable as a basic resource. If you don't understand it you shouldn't be dabbling in options(yes you can skip the arbitrage chapters.)