Wealth creation via long-term investments

Wealth creation is crucial to ensure future financial security. See my articles on early retirement and forward thinking for more details.

One of the most effective ways to generate wealth is via long-term investments.

It is important to have a long-term focus and balanced approach. To ensure your investments are exposed to a good mix of asset classes, as well as domestic and international opportunities.

Don’t lose sight of the big picture. Think long-term, think global.

Wealth Creation - Long term investments

In recognition of an aging population and diminishing resources, the Norwegian government started a very interesting venture in 1990. It is an investment fund set up to save for future generations in Norway. With great foresight, the government takes a long-term investment approach. The fund was established “…to manage the financial challenges of an ageing population and an expected drop in petroleum revenue”. “One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population.”

The value of the fund is at 7,684 billion Nok (approx. 1,231 billion AUD). It includes a mix of asset types across 77 countries in the world.

Wealth creation via long-term investments can be as beneficial to you and your family as it is to a nation such as Norway.

There are several ways to invest. The simplest is to invest directly using your own knowledge, skills and resources. You can pick and choose whichever asset you see fit. DIY investments with your superannuation can be done through a Self Managed Superannuation Fund (SMSF). See my article An Easy Guide to Self Managed Super Funds for more details.

Here are the results from the ATO on SMSF returns:

Source: ATO

Alternatively, you can make use of professional active investment managers. Warren Buffet has achieved significant long-term results with his company Berkshire. See my coffee talk post on Berkshire versus S&P 500 for more details.

Some of Berkshire’s investments:

As at 31-Dec-2016   
Company% ownedPurchase Price $mMarket Value $m
American Express16.81,28711,231
Apple1.16,7477,093
Charter Communications2.51,2101,955
Coca-Cola9.31,29916,584
Delta Airlines7.52,2992,702
Goldman Sachs2.96542,727
IBM8.513,81513,484
Moody’s12.92482,326
Phillips 6614.45,8416,445
Sanofi1.71,6921,791
Southwest Airlines71,7572,153
US Bancorp63,2395,233
United Continental8.41,4771,940
USG29.78361,253
Wells Fargo1012,73027,555

Source: Warren Buffett’s letter to shareholders 2016

Even with his outstanding track record, Warren Buffett openly admits that he is not perfect. He has made “…serious blunders… in my job of capital allocation – produce very poor returns.” He also admitted “I will commit more errors; you can count on that.” Warren Buffett’s letter to shareholders 2016.

Another active manager, Peter Lynch produced annual compound returns of 29% (1977 – 1990) when he ran the Fidelity Magellan fund (Financial Post). Despite long-term success, he claims that picking individual stocks is difficult even for the professional. He reportedly missed out on several prominent stocks including Apple, Starbucks and Netflix.

From the above examples, we can achieve significant long-term gains with active investment managers. However, investment results are not guaranteed and even professionals make mistakes.

According to Peter Lynch as per the The Wall Street Journal:

In general, doubt and distrust of fund managers are unwarranted.

If professional active managers are not your cup of tea, there are index passive investment managers. The aim of this is not to beat the market but broadly mirror general market returns. For example, the S&P 500.

Ultimately the decision is yours to make. Whether it is through direct investment, use of active or passive investment managers, you are the master of your own destiny.

There is no magic bullet to wealth creation. The key is to start investing.

“The only way to avoid mistakes is not to invest — which is the biggest mistake of all.” Sir John Templeton.

Feature Photo by Caitlin Oriel on Unsplash