What I recently learned about how to become wealthy
Bear markets can be an advantage for the next bull run as long as you don’t lose money in it
The current bear market is really getting on my nerves. In principle, I follow the rule of buying assets in tranches, as they are cheap at the moment. The reason for this is the difficulty in timing the market. Hopefully, this strategy will pay off later. Nevertheless, now you need patience and, above all, mental strength when you see that the downturn continues, and the previously invested capital is worth less again.
In this context, I have been wondering at what point an effect of investing becomes visible at all in terms of prosperity. The sad truth is: Starting from an invested sum of approx. 100,000 euro. This can be illustrated in a simple calculation example:
We assume a market that is not in a downtrend, but one in which the typical return per year is around 10%.
Let’s further assume that person A has 1,000 euros to invest, and person B has 100,000 euros.
If both make a 10% increase in their portfolios, person A will see very little change. A 100 Euro return in one year does not have a significant impact on wealth. For person B it looks quite different. Having 10,000 euros more to invest after one year has an impact on wealth. In addition, for person B, the increase in wealth will be faster from year to year when reinvesting. This effect is also called compound interest effect and can be represented in an exponential curve.
In principle, this effect will be known to most people. I am not so much interested in explaining the effect, but rather in the fact that you need quite a large capital stock to achieve a noticeable change in prosperity through profits from investments.
This realization leads to the question whether investing with small amounts of money like 1,000 euros is purposeful at all. For me the answer is not clear. By investing 1,000 Euro with 10% interest, I need much longer to reach 100,000 euros investment capital than by saving my salary. Of course, there is nothing wrong with investing your salary to shorten the time it takes to get to the first 100,000 euros. This works very well for a bull market.
But now let’s return to the bear market. Here, the principle does not apply. Instead, the focus should be more on the rule of not losing money. Because if I lose money, the duration to the first 100,000 euros is extended.
For myself, this does not mean that I do not invest and buy assets in a bear market. On the contrary, as soon as we switch back to a bull market, I can shorten the time to the first 100,000 euros. However, the choice of assets to invest in is thinned out in a bear market. Value-preserving and stable assets that one can assume will still exist after the bear market are the better choice. Another way to reach the 100,000 euro mark faster and to generate more investment capital in a bear market would be to build a second mainstay which generates an additional income, for instance.
For me, this means that it makes little sense to try to squeeze the last few percentage points out of every asset in a bear market and thus take a higher risk of loss. Instead, one should focus on the essentials — wealth preservation. That will save you stress and, in the end, you’ll succeed faster, whether you’re investing or building a new foothold.
I appreciate your feedback, whether you agree with me or not, so please comment, highlight or clap.
If you’re interested in the books I’m reading, check them out here (I update the list regularly):
Follow me on Twitter: https://twitter.com/shimy_yay
Follow me on Gettr: https://gettr.com/user/shimy_yay
Disclaimer: The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial, legal or tax advice. The content of this text is solely the opinions of the speaker who is not a licensed financial advisor or registered investment advisor. The author does not guarantee any particular outcome.
