Sahil Bloom is one of the world’s most powerful social influencers. Although he had a very successful career in the private equity industry, he realised that his financial wealth didn’t bring him happiness.
So he turned his attention to learning how we can focus our energy on activities that make us feel genuinely fulfilled, and how we can use what money we have to help us lead the lives we really want.
In his newsletter, The Curiosity Chronicle, Bloom shares his insights on business, finance and life with hundreds of thousands of people around the globe. And he has just written a book, The 5 Types of Wealth, which sets out his philosophy.
Although it’s only part of his overall message, Bloom explains in the book that investing is a crucial component of building financial security. Here are nine essential tips he urges all investors to bear in mind.
Money is only a means to an end
It’s easy to fall into the trap of seeing money and financial wealth as the be-all and end-all. Bloom admits he’s spent most of his working life accumulating wealth for the sake of it. The problem is that, although money can buy happiness for those at the lower level of the income range, there comes a point when the relentless quest for more money becomes self-defeating.
"Money is a contributor to time, people, purpose, and health,” he writes, “but it’s not an end in and of itself.” It’s the same with investing. There’s no point in having a huge portfolio if it doesn’t make you any more contented. As investors, Bloom says, we need to work out what really matters to us, what we’re investing for, and what having enough money looks like.
Step outside the amusement park
Throughout history, Bloom explains, wealth has been tied to something of tangible value — barley, salt, silk or metals for example. The decision by the UK and US to move away from the Gold Standard in the early 1930s paved the way for what he calls “a seemingly infinite variety of financial instruments and tools”. It was a trend that accelerated with the advent of computers and the internet.
Today, Bloom writes, “money exists merely as numbers on a screen,” and investing “looks more like an amusement park with an almost unlimited variety of rides”. It is, he says, “a creation of the human imagination, designed to draw you in.”
In a financial world that tempts your imagination, you have to focus on what is real and stick to “simple boring basics”.
Save or invest all surplus cash
One of those simple boring basics is to save and invest the difference between your income and your expenses.
The danger is that, as their salaries increase, young people in particular tend to spend more — a trap known as lifestyle creep. To build your financial security, Sahil Bloom says, you should make it a rule to save a specific percentage, and to invest a specific percentage, of your gross annual income.
“Never let your expenses grow in line with your income,” he warns. “Live below your means for a period of time in your early years and you will reap the rewards in the future.
“This doesn’t mean giving up on everything fun. It just means being disciplined and making sure there’s a growing gap between your income and expenses.”
Set it, automate it, and let it compound
Yes, saving and investing is a sacrifice, but it’s one you have to make if you want to become financially wealthy, and you're far more likely to stick to it if you do it automatically.
So, once you've determined how much to put away, Bloom recommends that you set up your savings and investments, so that the amounts you’ve decided on go into the relevant accounts automatically, on the same day each month, without you having to do anything.
Once you’re up and running, the author suggests you simply stay invested. “It's very easy to panic and sell stocks whenever there's a big drop in the markets,” he writes. “However, selling your stocks at the slightest fall or when they are down could be the worst financial decision you can make.”
Bloom also cautions against timing the market. Ideally, he says,
you should “never look at your account (or) pay any attention to it… Let it compound.”
Ignore whatever seems too good to be true
Let’s return to that analogy of the investing industry as an amusement arcade or fairground. The arcade or the stall owners make their money by persuading us to have a go on their ride. So, inevitably, they will try to make it seem as exciting as they possible can — an opportunity not to be missed.
That’s why financial marketers tend to emphasise the potential for outsized gains, while glossing over the downsides — for example, the additional cost or risk entailed in using a particular product.
Sahil Bloom writes: “If an investment or financial opportunity seems too good to be true, assume that it is.” What’s more, he says, “if someone uses a bunch of fancy words and jargon to try to sell you an investment, don’t buy it. Run in the other direction, fast.”
Index funds are the only free lunch
But does that mean there is no such thing as a free lunch in investing? Actually, says Bloom, there is a notable exception to the rule, and that’s passively managed index funds that simply track markets cheaply and efficiently without trying to outperform.
“Index funds really are a free lunch: lower costs, better returns, no effort, less risk. I recommend making index funds at least 90% of your portfolio.”
What’s particularly interesting about this advice is that Bloom made his own fortune working in private equity. You might have expected him to recommend private equity funds, but he doesn’t. Indeed, he invests almost entirely passively himself. “90% of my investable assets are in diversified index funds,” he writes.
Think about the hassle factor
The traditional way to decide on whether or not to invest in something is to consider its risk-adjusted return; in other words, what return do you expect to receive for the level of risk you're taking?
Although Sahil Bloom agrees that return on investment is an important consideration, another factor he suggests you consider is what has been called “return on hassle”. In other words, investors need to consider the time, effort and stress associated with managing their investments, as well as expected returns.
Having your own business, for example, can be hugely financially rewarding. But as well as the risk entailed, there are usually large personal costs to pay as well. The same applies to managing buy-to-let property investments.
Bloom writes: “Buying and holding a well-diversified, low-cost market index fund will provide the most attractive balance of returns and energy requirement.”
Focus on increasing your income, not returns
The final tip Bloom gives to investors might seem a surprising one: don’t focus on maximizing your investment returns. So why shouldn’t you?
The reason, the author says, is that, even if you think you have an edge — some unique insight or information that puts you at an advantage over other market participants — you almost certainly don’t. Finding an investment professional who genuinely has an edge is also very challenging. Beating the market is very hard to do, whether you’re a professional or not.
So instead of spending time and energy trying to outperform other investors, apply that time and energy instead to investing in yourself. Invest in acquiring marketable skills that will allow you to build strong primary employment income and establish secondary income streams in the future.
Ultimately, says Bloom, even if you were able to increase your investment returns, increasing your income will have a much bigger impact on your financial wealth in the long run.
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