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The Two Essential Elements of Wealth Accumulation
How to make them work for you By John P. Hussman, Ph.D. Wealth is not acquired through addition. It is acquired through multiplication.Very few fortunes have been made by adding up paychecks and overtime. Nor are they made through a huge one-time killing in the markets. Unfortunately, this is the path that many investors try to follow in achieving financial security. While a high annual income is certainly helpful in achieving great wealth, it is not the primary determinant. And while a major move in the market can certainly have an impact, any single move is rarely an important determinant of sizeable fortunes (unless that major move is responsible for wiping an investor out and terminating the ability to continue investing in subsequent years).According to statistical studies, two factors are most important in achieving wealth:
1. The number of years that an individual has been consistently saving and investing 2. The proportion of funds, on average, allocated to higher return investments such as stocks. This does not mean that stocks should always be held regardless of price and risk levels. The historical evidence is clear that both the future return on stocks and their probable riskiness depends on the level of market valuation and the "uniformity" of market action (favorable trends across a wide range of indices). However, it is a fact that over time, very wealthy individuals have an average allocation to stocks which is above the norm. Most have achieved their fortunes by compounding a moderate but consistent rate of return over a long period of time.There is a simple mathematical explanation for why these two factors are most important in building wealth: Future Wealth = Current Wealth x (1+k)T Where k is the annual rate of return earned on current wealth, and T is the number of years that wealth is allowed to...