7 Core Tenets of Investing Successful Wealth-Builders Know to Be True

by | BiggerPockets.com

Many chase the allure of being labeled an “investor”—but a good amount don’t succeed because they fail to understand the basic principles surrounding wealth-building through smart investing. As with many endeavors, knowledge is power when it comes to investing, and by expanding your knowledge of tried-and-true tenets, you’ll massively increase your odds of successful long-term returns.

The title says it all—we’ll just jump right in.

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7 Core Tenets of Investing Successful Wealth-Builders Know to Be True

Tenet #1: Investors never spend the principal.

Investors understand this fundamental concept to the core. It is the root of capitalism—and the great divide between the 1% and everyone else. If I could sum up the key to wealth preservation in one phrase it would be this.

Never, ever spend the principal.

If you abide by this rule, you, your children, and your children’s children will be taken care of financially until the end of time.

This is a concept that goes over a lot of newer investors’ heads. Let’s dive into what I mean by never spend the principal.

When you invest a dollar, you need to think of that dollar as gone. Out of your life. Forever. You never use it to buy coffee, a house, pay for Junior’s college, your retirement expenses, or anything else. That dollar is to be put to work generating returns for you, forever.

Let’s use this (too simplistic) example to demonstrate the part of the investment you never touch:

I have $100,000 and buy a rental property for the same amount. A year goes by, and the property generates $1,000 per month for 12 months, and the property is now worth $110,000, as it appreciated in value. I sell the property, collect my cash, and walk away.

My situation a year from now is this—I have $122,000 in the bank. Not accounting for tax, my return includes the $12,000 in rental income and the $10,000 in appreciation—a total gain of $22,000 or a 22% return on investment (ROI). The other $100,000 of that money in the bank is the principal I used to invest in the first place.

Here are the results boiled down:

Starting Dollar Amount: $100,000

Appreciation: $10,000

Rental Net Income: $12,000

Ending Dollar Amount: $122,000

I can spend the $22,000 I generated from this property without depleting my wealth, but if I spend more than that, then I have less than I started with. I would not even for a second consider spending anything beyond that $22,000. The original $100,000 is not to be touched and instead should be reinvested in the next property. To spend that money would violate a core tenant of investing—and instead of building wealth, I’d destroy it.

Related: 6 Easy-to-Acquire Habits That Will Help You Build Wealth

True investors don’t get into that situation.


Tenet #2: Investors must reinvest most of the investment returns.

Investors also understand this fundamental concept to the core. It is the root of true wealth and the great divide between the 0.01% and everyone else. If I could sum up the key to becoming truly wealth in one phrase it would be this:

Reinvest both the principal AND the majority of your investment returns.

If you abide by this rule, you, your children, and your children’s children will not only be wealthy, but exponentially richer, more impactful, and more powerful until the end of time.

Let’s be real—we’re here to build wealth, not to break even.

If you want to build wealth, you can’t just spend all of the returns you get from your investments. Instead, you need to reinvest them.

Back to the example of the rental property above. If you’ve gone from $100,000 to $122,000 in wealth as a result of your investment, you can’t expect to get any richer by spending that $22K!

Instead, you need to reinvest that $22K and buy a $122,000 property. The larger, nicer house will generate more rent and perhaps more dollar gain in appreciation than the first one, and your wealth will grow faster and faster as you repeat this each and every year, buying more and more properties.

Every dollar that you spend on luxuries or life obviously cannot then be used to invest. The key to remember is that you can spend some of the return. In the case of the house in the example above, I could still get rich by spending $10,000 of the return and reinvesting the balance. I’ll just need to make sure that I never spend too much money generated by my investments such that I dip into the principal or initial amount invested.

The point of investing is to build wealth and improve the quality of your life or the lives of others, so make sure to enjoy the benefits. But, be careful not to spend the principal and to reinvest the majority of the returns. If you do this right, your principal should produce wealth for you and your heirs to enjoy forever and ever.


Tenet #3: To invest, one must have capital.

You cannot invest capital unless you have it. And you cannot get capital without earning/inheriting it and keeping it.

This is why there is such a great divide in wealth in America. In spite of the fact that America has a relatively low cost of living and that we have one of the highest median incomes in the world, just about everyone in the country fails to accumulate significant capital in their lifetimes.

Want to get into investing, building wealth, or achieving financial freedom? Keep they money you earn. Don’t spend it.

This is also a hard pill to swallow for a lot of people who take pride in calling themselves “investors” but don’t actually have any of their own money to put into deals, businesses, or other ventures.

If you are one of those people who invests Other People’s Money (OPM), then you are not an investor in that enterprise. You may be a businessman, you may be wealthy, and you may be successful, but make no mistake about it—you are being paid for your skills, business acumen, and your efforts in managing the investment for your investors.

Sometimes, this payment is in the form of equity in the business or investment opportunity. And sometimes that type of payment can be exponentially greater than a W2 salary. But never forget that so long as you are bound to serve the interests of the investors, you are a manager of the investment.  

You are serving the investors, not that there is anything wrong with that. It can be great to do this to get started, as managing other people’s money can expose you to knowledge that will help you to serve yourself as an investor down the line.

But the only way to accumulate capital with which to then truly invest is to either earn or receive it as a gift—and subsequently not to spend it.


Tenet #4: Investment returns do not correlate with effort expended.

You know that guy at the office who spends all day talking about his stock picks and portfolio? The guy who meticulously studies the market, looking for undervalued stocks?

That guy puts in a lot of effort. And enthusiasm. And he’s got this righteous attitude about how he’s doing it better than you.

Unfortunately for him, he’s wasting his time.

His efforts picking stocks, one at a time, timing markets, and otherwise trying to outperform Wall Street are utterly wasted, as he could simply invest in an index fund and almost certainly earn better long-term returns. I find it interesting to write about this topic because many investors get riled up when they hear that something that they put a lot of time and effort into is statistically worthless.

Of course, keep in mind that any investment that at least outpaces inflation can make one wealthy. Even poor investors can become wealthy so long as they reinvest most of their returns. This fools some folks into thinking that their efforts are producing wealth for them, when they would really be better off doing nothing!

Related: Americans: If You Can’t Build Wealth Today, You Should Be Scared. Here’s Why.

Luckily, you won’t be one of those guys because you recognize that unless you want to devote a career to Wall Street and learn to live and breathe the nuances of the public markets, or alternatively, spend a lifetime finding, managing, and systematically buying and improving excellent companies, you’d be better off investing in index funds.

Far too many amateur investors with net worth below $1M attempt to pick stocks and beat the experts in public markets. And there is simply no correlation between their efforts and their returns.


Tenet #5: Investment returns are impacted by knowledge.

Interestingly, one of the reasons why folks attempt to pick stocks is because they haven’t bothered to read dozens of books on investing. They are ignorant of the math and philosophy behind why successful investors suggest not picking stocks. Thus, it is their lack of knowledge that leads to worthless efforts.

This is sad news for those of us who have devoured countless amounts of material on the subject. We know that knowledge can be incredibly powerful to our long-term financial positions and investment returns—if applied correctly to businesses that we have some control over.

For example, my knowledge of the Denver real estate market and real estate investing fundamentals have produced excellent returns on my first few properties here. Similar knowledge could not have helped me earn higher returns in the stock market, as I do not have control over the companies one can publicly invest in.

Here in Denver, the returns I generated from real estate were fairly predictable, if my prediction from last year is at all credible. While I did put in some effort, most of my efforts involved becoming deeply familiar with as many fundamentals of real estate investing as humanly possible. Everything from how to analyze a property and market to how to screen tenants, protect the property, do due diligence, and read and study contracts.

That type of effort involved accumulating knowledge.

The physical exertions and time spent actually “working” on the investment—my efforts—were relatively small and can be almost entirely outsourced to property managers, handymen, and contractors for the most part. In fact, my time was probably more valuable than the time spent actually doing the labor on the project—or in other words, my efforts actually negatively impacted the return!

Without knowledge, so much can go wrong for those that seek to invest and build businesses. And the problems that can result won’t just reduce your return, but can destroy the principal that you’ve invested, too!


Tenet #6: Investors do not confuse volatility with risk.

“Aren’t stocks risky!?”

Whether or not an investment is risky depends on what you mean by “risk.” I’m here to tell you that stock investing (or at least the stock market in aggregate) is not risky. Folks who tell you that stocks are risky do not understand the definition of risk very well.

Now, stocks as a group ARE volatile. Bonds, as a group, are less volatile. This is an important distinction that many people who refer to themselves as investors (but lack fundamental knowledge of investing) fail to understand.

While we do see that stocks are more volatile than bonds, they are not more risky. It annoys me that financial advisors, major media outlets, and consequently, your average investor have it drilled into their heads that stocks are riskier than bonds.

Let’s pull out a graph to demonstrate this point.


This chart shows the total compounded value of an investment in treasury bonds versus an equivalent starting investment in stocks. You can get this data for yourself from NYU’s Stern School of Business.

Now, the very first thing we see in this graph is that the treasury bonds produced far less total return than stocks in this chart over the time period we are looking at. This same scenario plays out across virtually every 30-year period that we have data for.

But an adherent to the “stocks are riskier than bonds” school of thought would counter that observation with the second most noticeable characteristic of the graph—the Treasury bills also didn’t suffer any huge losses (the dips) in the graph above.

And they’re right!

But here’s the thing. We are investors, so we understand the core concept of investing, the one described right off the bat:

Never, ever spend the principal.

Folks, forever (think “never, ever”) is a long time. We as investors only live off of a minority of the cash flows and/or returns from our investments. Therefore, we care only about how investments will perform over the very long-term.

Thus, we only care about the first observation in the graph! The investment that will help us build the most wealth, relative to its alternative.

In the short-run, yes, you will likely suffer some big drops in the market value of your stocks. But since you are investing forever, you cannot avoid the inescapable fact that given the choice between stocks and bonds, stocks are clearly less risky over the long-run.

This is because we as investors sensibly define “risk” as “the probability of having less wealth over time.” With this correct definition, bonds are statistically more risky over the long run than stocks. Stocks will be more volatile in the short-run, but over virtually every 30-year period in history, equity markets outperform debt markets!

This advantage to equities increases as your time time horizon expands. Because I plan to live to be 100, my time horizon is 75 years. If you are 50, your time horizon should probably be at least 50 years. Probably, we should both plan to live forever, giving us a time horizon of infinity.

But even if you don’t agree on infinity, 50-75 years is such an extraordinarily long time horizon that there is virtually no chance that a bond investment outperforms equities.

And because you have such a long time horizon, there should be no reason that by the time you retire (everyone under 50, that is) you can’t live off of just the interest and just the cash flows from your investments, even if your assets lose half their value!

Related: The Surprising Lesson a Six-Figure Salary in My 20s Taught Me About Wealth

This type of thinking should be applied to every investment that you make.

Note: If you plan to spend the principal of an investment, then do NOT use this definition of risk. You aren’t investing in that case. You’re “saving up” and in violation of the very first tenet listed here.

Understand risk, folks—risk must be considered in relation to your time horizon. Volatility in the short-run is tolerable. A voluntary, statistically certain long-term reduction in wealth is not.


Tenant #7: The best investments are specific to the investor’s personal situation.

Most people, especially those with low net worth, fail to understand that great investment returns do not come from typical investments in the stock market, bond markets, or even in passive rental property investing.

Instead, the greatest investments I’ve made (financially speaking) have been in things that reduce my monthly personal expenses. Yes, reducing your monthly cash outflows counts as an increase in wealth and an investment return. If it allows you to accumulate more wealth faster than any other investment, then do itand do it first!

My bicycle, which I now ride to work, cost me $250. My commute is 5 miles, and my cost of commuting is about $.50 per mile. Biking to work saves me $5 per day, or about $750 per year, assuming I bike 75% of the 200 workdays per year. That’s an annual return of 300%, not counting the added benefits to my health, and you had better believe this was a serious investment that I analyzed as such prior to thinking about real estate.

My home is filled with LED light bulbs, which burn far less energy than incandescent bulbs. I use a drying rack ($20) to save $1 per load and spend virtually no extra time folding laundry weekly. Also, instead of buying a true rental property “investment,” I bought a duplex to house-hack—enabling me to live for free.

These are investments, folks. You are killing your financial position if you refuse to believe that there are items you can purchase that will substantially reduce your monthly expenses at far greater returns (ROIs of 1000% plus) than stocks, bonds, and real estate.

It is foolish to even think about investing in any traditional sense if there is perfectly good money you are throwing away each month. Often, this money can be saved with far less sacrifice than the time spent working hard to earn it or the time spent acquiring the knowledge needed to be a successful investor.


Bonus: If It Doesn’t Produce Cash Flows, It’s Not an Investment

You ever heard anyone tell you to invest in gold?

*Snort of derision*

Yeah, right.

Gold is a rock (OK, it’s a metal, but come on). It sits there. It shines. It produces no value, saves no lives, and does nothing but look good. Even that part about “looking good” is debatable. Don’t take my word for it, though. Here’s Warren Buffet on gold:

“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side. […] Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion—that’s probably about a third of the value of all the stocks in the United States. […] For $7 trillion… you could have all the farmland in the United States, you could have about seven Exxon Mobils, and you could have a trillion dollars of walking-around money. […] And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally… Call me crazy, but I’ll take the farmland and the Exxon Mobils.”

Gold is not an investment. When you hoard gold, you produce no value. At best, you are gambling that its price will go up relative to the currency you traded for it.

This is called speculation. People can make money speculating, but do not fool yourself into thinking that you are investing. You might be a great businessman, a student of the market, or even quite wealthy as a speculator, but you are not investing. This is not a recipe for long-term wealth and financial success that will compound forever.

Investors understand that investments must produce cash flows. You can invest in a business, you can build a business, but you cannot buy something, let it rot for a couple of years, and then attempt to call it an investment.

We’re republishing this article to help out our newer readers.

Looking to set yourself up for life as early as possible and enjoy time on your terms? Scott Trench’s book Set for Life is now available! Whether you’d like to “retire” from wage-paying work, become less dependent on your demanding nine-to-five, or simply spend time doing what you love, Set for Life will give you a plan to get there. This isn’t about saving up a nest egg. It’s not about setting aside money for a “rainy day.” Set for Life is an actionable guide that helps readers build the accessible wealth they need to achieve early financial freedom.

To all the investors out there:

  • Have you found the above tenets to be true?
  • What would you add to this list?
  • What single investing principal has served you best thus far?

Let me know your thoughts with a comment.

About Author

Scott Trench

Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal development. He is CEO of BiggerPockets.com, a real estate investor, and author of the best-selling book Set for Life. He hopes to now share the knowledge he has acquired with others so that they will have the tools they need to repeat his results in just 3-5 years, giving them the option to go anywhere they want in the world, work any job, start any business, or finish out the journey to financial independence and retire young. Scott lives in Denver, Colorado and enjoys skiing, rugby, craft beers, and terrible punny jokes. Find out more about Scott’s story at JoeFairless.com, MadFientist, and ChooseFI.


  1. I have found all of the above to be true! My two favorites are “Investors must reinvest most of the investment returns” and “Investors never spend the principal.” If newcomers take only these two pieces of advice, they will be off to a solid start. I also liked your comparison of volatility to risk. I would add the following for defining risk.

    “Risk is the possibility of the loss of principal.”

  2. Jerry W.

    This is by far your best article yet. there are a few points I would modify somewhat though. On Tenet #5, your knowledge is more valuable than your ability to swing a hammer, however if you have limited funds; doing your own maintenance and even upgrades can accelerate your wealth. Just like saving money by not eating in restaurants, you can save money by doing work yourself. There will come a time when spending your time getting more deals gets you more money, but when you only have $1K in the bank you cut expenses by doing it yourself. When you get enough income to buy 10 houses a year you lose money by doing repair or maintenance yourself. Next on your Bonus. Cash flow is vitally important to investors, but true wealth can often be built more quickly by buying property that appreciates rapidly even if it loses money in the short run. Investors in California and Hawaii will make more money than I ever will by buying properties that appreciate rapidly but have negative cash flows initially. Even if I make a 10 cap on my rentals every year, a person who gets 10% appreciation each year on highly leveraged properties with 5% interest rates will make much more money in the long run. If I have a $250K property that generates a net profit of $25K per year, but has a $200K mortgage I will pay about $1075 per month on a 30 year note at 5% interest. That is $12,900 to take out the profit. I will gain about $2,200 on principal pay down so I improved $13,100 for the year. If the same property lost $500 per month but went up in value $25K then I would have a net $19K gain in wealth over the same period. That is almost a 50% increase from the first scenario.
    I think Tenets #1 and #5 are the most powerful basics to creating true wealth.

    • Scott Trench

      Thanks Jerry – I completely agree with your comments here. I do believe that working on the property myself saved a lot of money – and I believe that I in effect earned* money by doing the work myself. This was a great use of time in the sense that instead of watching netflix or spending Sunday watching the Broncos, I was building up my equity stake in the property.

      Also – I definitely combine good investing principles with a bit of speculation. I carefully research neighborhoods that I think are going to appreciate more rapidly than others here in Denver, and hope for the added benefits of appreciation on my rental properties. This type of speculation is still speculation, but just like buying a great oil company when oil prices are low, buying a great property before prices go up can add to your gain.

  3. Steve Vaughan

    Great article, Scott. My favorite is the investment tenet of reducing personal expenses. Every dollar you save takes about $1.30 to earn. Your bike example is excellent. I bike a lot as well (if not packing tools and materials around!). It not only saves gas and wear and tear on a vehicle, but keeps us grounded and realistic with out vehicle choices. A basic, functional vehicle tends to not have car payments. Talk about a wealth killer! Financing things that drop in value is one of the #1 no-no’s if you want to get to a better place. Most all of my renters are had by, I mean have, a nicer vehicle than me. They be goin’ nowhere soon!

    Scott, as a young person that works for this fine enterprise, I would like to share with you specifically something that’s been bothering me. This topic of living below our means to build wealth is perfect. Here goes:
    Why are all the people pictured in the BP blogs super young and perfectly dressed and accessorized? I have yet to meet an actual investor that looks like this! The pictured folks obviously place a lot of value in their looks, clothes, hair, nails, fashion glasses, macbook airs, skinny jeans, shoes, etc. The people pictured in your blogs contrast directly what you are saying in this article.
    Where I come from, we wear work boots and something we can paint in or inspect a crawl space. We drive vehicles with tools and spare parts for whatever in them. We brew our own coffee and brown bag our lunches. Having lots of capital to invest and a large balance sheet is far more important than how we ‘look’. Thanks for letting me vent!

    • Scott Trench

      Haha! Steve – thanks for the comment. The answer to the thing that’s bothering you is that our staff members are just so trendy and fabulous looking that we can’t help but get those types of images.

      Just kidding.

      Those are stock photos and are simply meant to break up the writing. While there are some really great readers like you that don’t need those breaks and fluff, we’ve found that breaking things up with images tends to make the posts more readable.

      I assure you that I too look extremely accessorized in everday life in my cheap sunglasses, and the same 4-5 flannels that I wear most days. I even mix things up quite frequently with my no-wrinkle Costco polos, often the very same ones that several other of my co-workers wear!

      • Steve Vaughan

        Thanks for replying, Scott! I figured you to be a true investor ‘accesorizor?” as well!
        I’ll be on the lookout for some stock photos of people actually doing work and send ’em along. Bring on the flannel and overalls!

  4. Ivan Rubio

    By far one of my favorite blog posts on BiggerPockets. I truly believe that #1 and #2 are essential in growing your business. So many people get the urge of spending all their cash flow and forget about the compound effect.

  5. Andrew Syrios

    Fantastic article! Number 1 and 2 are sort of prerequisites. They’re the fundamentals of deferring gratification, which is so hard for people, but it’s the key to becoming wealthy. And I love number 6 too. My brother always talks about that when it comes to poker. You play the odds. Sometimes you’ll lose, but you need to understand you still made the right play. (Or the wrong play if you don’t play the odds but still win). Same goes for real estate.

    • Scott Trench

      Andrew – I think that poker is an excellent example of playing the odds right over time, and have come across this concept referenced in many books. It’s true – it is NOT about the outcome of any particular situation, it is about the decision making process. Sometimes a longshot will pay off, but over time, wealth is built and kept through consistently excellent decisions, not lucky breaks.

    • Scott Trench

      Thanks Stephan – I’ve written quite extensively on point #7 and believe that I’m coming close to minimizing my footprint. I think that this first step really paved the way for me to buy my first property, comfortably save up a great cash cushion, quit my job and take a chance on this startup (BiggerPockets!) and begin to scale in many ways.

      I think it’s a great way to really internalize the way you think of investing – it’s a great investment if it produces excellent, low-effort returns for YOU!

  6. Alexander Ball

    My favorite was the reduction of expenses as a way to build wealth. A penny saved is not a penny earned. A penny saved is 1.3 pennies earned! I also bike to work, 16 miles one way, to save money. I do this in winter. I only eat out when my girlfriend starts to complain about eating my cooking (once a month or so). I don’t carry a note on my car, it depreciates slower because of the bike commute, and I am healthier for it. It is entertainment for me as well, so I spend less money on UFC pay per views or video games (my vices).

    That being said, I still am trying to move forward with a) generating capital and b)finding a vehicle for it to grow in.

    Great (article) Scott!

    • Scott Trench

      Alexander (the) – Great comment!

      You are super intense with that bike ride – great stuff. I completely agree with the fact that a penny saved is better than a penny earned. It’s not only because of that tax break – think about this, If you cut your spending by $1,000 per month, not only do you get to keep all of that after-tax money, but you also are that much closer to financial freedom! You need to achieve $1,000 per month LESS in passive cash flow to be financially free!

  7. Jiri Vetyska

    Great article Scott!

    All those seven points ring true. It must be a mentality that’s been nurtured for years. I see people that have to have the latest gadget and compare their accessories with other people (but in their defense, they usually tend to enjoy their jobs and are good at it) and then you have the savers/investors, who will own rather than rent and invest everything they can, sacrificing wherever possible.
    To build wealth, the second is a must. But to live a great life worth living, those who tend to save and save end up regretting their life in the end. Life is not about how much we make or how much wealth we have, it’s about us enjoying the life we have fulfilling our dreams our passions. Anything less is just an empty life.

    • Scott Trench

      Totally agree Jiri! I think that you can enjoy the fruits of your work and investing, and build wealth at the same time. It IS very important though to remember that it’s about more than just building wealth – it’s about enjoying the benefits of that wealth and helping others!

  8. Mark Spidell

    Well done Scott. It is always hard to get folks to talk about spending choices whether it is the day to day variety or the more irregular investing and reinvestment choices. Such discussions are always loaded with emotion. You did a nice job with this post of making this subject palatable and easy to understandable.

  9. Darryl Bowman on

    Excellent topic and relevant to real investing, unfortunately the financial advisors out there do not understand these basic principals. Case in point, I rehabbed an apartment building and then sold for a nice profit. My wife had gone to several financial advisors which all told her to pay everything off, which she did, then took the rest of the capital and filed for divorce. To me money is a tool, to be used, to build, to help others, or to give it away, but if just left to rot, it is nothing more than the gold you spoke of. I’ve made a lot of money in my 55 years, I’ve spent a lot of money, and will make and spend much more before I’m gone. So although she left with my money, she left me with my most valuable asset, me!
    As for the gold, she can have all she wants, I consider gold asphalt, the Bible says the streets of heaven are paved with gold, why would I want to own asphalt?
    Thomas Edison once said “most people miss the opportunity because it looks like work and wears overalls. ”
    I believe this to be so true, especially in this business.
    Thanks for knowledge and insight, may we all be as fortunate and forthright in our endeavors.
    Darryl Bowman

  10. Sonia Spangenberg

    Love the wisdom. It pulls together all I have been learning in classes and reading in books and in BP , as well as in my implementation investing strategy. It’s in a coherent useful summary. We are in process implementing most of what you have described and I have evolved in my thinking as I have been digesting all of the learning. But if I had read this two years ago, I really wouldn’t have had a meaningful grasp on the words. The context really helps you digest this. It’s such a paradigm shift. Thanks for the excellent summary of real wealth accumulation. The not spending on non income producing doesn’t really sell so it gets left behind with all the gurus presentations. Funny thing.

    • Scott Trench

      haha well I have noticed that BiggerPockets tends to be a community of folks that really understand these points. The folks that don’t seem to come on, super excited about investing, ready to buy a million units, and vanish just as quickly.

      The good news is that 11 years in, we’ve got a great and solidly building community of the patient, truly knowldgeable folks that get it. Those are the folks that stay on and find real success in real estate, business, and likely in life.

  11. Anne Wallace

    Dear Scott,
    This was a wonderful article. I really enjoyed it.
    I think you asked for some feedback so here are a few comments:
    Re tenet 6 : in order for an investor to make the returns you referenced they MUST stay in the market. They, in my opinion, cannot jump ” in and out” and expect the returns you reference. Investor behavior is a large component of investor return.
    Also ” total return” is lumpy. I like the idea of having enough invested where interest and dividends will provide enough cash flow to allow the investor to be ” comfortable” in volatile market times which in turn allows for the possible appreciation of the assets.

    • Scott Trench

      Anne – I think that these are excellent additional points. I actually DO jump in and out of the market – all cash above and beyond the money that I use as reserves for business and day-to-day life expenses is invested in the market in index funds.

      I then sell out and use those funds to buy properties once or twice a year. I know that in doing this, I expose myself to the volatile times. In fact, I’m probably down about $2-3K below if I had just kept this money in the bank over my last two purchases. But, I believe that by keeping all of my money invested this way, I will statistically, over the long term, be parking my excess cash in the correct place, even though I will subject myself to volatility periodically.

  12. Anne Wallace

    Hi Scott,
    I get it. You are being ” opportunistic” or” strategic” in your moves in and out of the stock market. I see that as very different from building a long term portfolio of investments. My experience is that you have to be ” right” most of the time ( odds are against this) when you do short term trading in a taxable investment account. I.e. Buy low. Sell higher. Pay short term capital gains possibly as high as 44% .
    However , to quote long term average rates of return in the S & P 500 I think that assumes. The investor is in the market for 1, 5,10 years etc. to get that return.
    There is no ” right ” or ” wrong” way because each individual has a different set
    of circumstances .
    Thank you for your response.

  13. Jason V.

    Maybe I can add a little bit to the illustration of the risks of picking individual stocks:

    I work full-time for a company that designs and builds custom capital equipment. We quite often have the inside line on big companies who are doing expansions, launching new products or otherwise getting ready to make a splash in the market – and we know before just about anyone else, once we’re quoting the work. (We work using codenames and secure systems, but it always still ‘gets out’ who the customer is. We usually don’t care.)

    In one case, a huge new company with a proprietary process for manufacturing a critical material for the biggest, most profitable companies in the world contracted us to build them enough new equipment to fill their brand new, half a million square foot production facility. Some of the guys I work with, who knew that this company’s stock was going to absolutely take off once they hit their production stride and earnings went through the roof, bought quite a bit of that stock – some as much as $20,000.

    I was on a business trip with him not long after that, eating breakfast at the hotel. He was thumbing through his phone, and his face went white as a ghost: the company had not only lost it’s contract to produce the material – the company that loaned them their capital for this massive expansion also decided it was a good time to call the note due, since they knew it was never going to get paid now anyway. All that news broke in the matter of a couple of hours, and by the time he saw what his stock was worth, he had lost about 85% of his money.

    This very much reaffirmed my stance that I won’t ever buy individual stocks, no matter what I think I know.

  14. lee Jackson

    So many great methods to follow! I know I am not the best at putting the cash back into my investments… other than up keep or replacements/ repairs…. Time to do, and turn things around and build my investments!! Great motivation! Thanks so much!

  15. Casey Murray

    Excellent article, Scott. One subject I associate with wealth accumulation are the tax ramifications of your investments. The 1% do an excellent job amassing wealthy portfolios (stocks, real estate etc.) but recognizing little earned income come tax time. This allows them to reinvest their savings into additional income producing assets.

  16. Lisa DuFaux

    Wow! Scott, you are wise far beyond your years. There is too much good advice in this article to even try to comment on except to say that I have learned many of these lessons the hard way. Everyone needs to read and re-read this until it becomes second nature!

  17. Great article, Scott! However, I disagree about speculation as an investment technique. There’s certain level of risk in all investments. You mentioned that buying a property might bring you relatively high ROI. Yes it might, but only in a booming property market. Tell me though, what will happen when the bubble bursts? Not only your will your property depreciate, but you can also loose it. On the other hand gold is pretty stable asset – the electronic industry, which is widely using it is in a constant growth. Also buying gold is a MUST DO for every Indian (1.1 billion people). So tell me which asset would you prefer to invest in – the most popular metal on Earth or some house that might slip away when the property market collapses?

    • Matt Wrigley

      Hi Dean,

      I myself am a goldbug and a percentage of my networth is tied up in gold mining stocks. You are correct that gold is extremely popular. You are also correct that it has industrial uses. You didn’t mention that its physical properties i.e. readily and easily divisible, the inability to tarnish, global acceptance, and store of value properties make it the most logical choice for money globally, especially when connected to a banking system through bills of credit.

      However I believe what Scott was saying, and which I believe is correct, is that gold is not a cash-flowing asset. Whether real estate is in a bubble or not is arguable (seeing how rises in prices have far outstripped rises in income it more then likely is), however if purchased correctly , a declining market in real estate has little to no effect on cashflow of a property.

      Gold is money. Plain and unarguably true. That said, the portion of your wealth in gold should be treated like cash. Like USD. Like GBP. Like EUR. Like JPY. They are physical, non-interest bearing currencies. Gold may perhaps be the King Currency (I certainly think so since it is globally accepted and has no counterparty, but as Scott so brilliantly points out,that for an investment (not a cash holding) real estate, purchased for cashflow is a significantly better choice. If the investment is the goose, cashflow are the eggs it lays.

      Gold as an investment is foolish. It is a global (paper) currency hedge. IF gold goes up, it is merely measuring the decrease in currency purchasing power and the best you can hope for is that portion of your wealth in gold retains the majority of its purchasing power. Nevertheless owning businesses that generate free cashflow is the winning choice in the game of wealth.

      Real estate done right is a cashflow generating business.

  18. Juan Rango

    Loved the article! There is a lot of great stuff on it! At my initial meeting with my financial planner (fee only fiduciary) mentioned that I should be 100% in stocks I was taken back a bit. But when you look at long term returns and not short term it does make sense breaking down in terms of volatility vs. risk.

    • Matt R.

      One is going to need a pretty serious well thought out REI investment to keep up with the facebooks , netflixs type stocks or even index averages. Consider100k last five years is 600k in facebook or 2 mil netflix return. A random sfr rental (99.9%) have exactly zero chance to beat that.

  19. Dillon Reilly

    Love tenet #7!

    A great tip that doesn’t require any capital for those who drive: keep your highway speed at 60mph. Above that and your car’s engine burns so much more gas to fight the wind resistance. Easily saves hundreds in gas each year.

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