Ken Fisher is one of the most successful and most respected money managers in the world. His firm has $54 billion in assets under management, he's written 10 personal finance books (including several best-sellers), and he makes regular contributions to Forbes magazine and other publications. Plus, his stock picks consistently beat the S&P 500. Now, while his $2.8 billion net worth is beyond what most of us are likely to achieve in our lifetimes, there are several valuable lessons we can learn from how Ken Fisher built his net worth (and how he's made money for thousands of other people as well).
Start as soon as possible
Not only does Fisher emphasize the importance of this in his books, such as "Plan Your Prosperity: The Only Retirement Guide You'll Ever Need...", but Fisher did this himself. He started his firm, Fisher Investments, in 1979 with just $250 and it has steadily grown into one of the premier money management firms in the world, with more than $50 million under management.
One thing Fisher tries to make people aware of is the power of compound returns. Let's say, for instance, that you're 30 and you invest $5,000 this year, and do the same every year until you turn 65. So, you'll end up investing $175,000 over a 35-year period. Based on the S&P's historical average return of approximately 9.5% per year, how much do you think you could end up with? $300,000? $500,000 maybe?
Actually, thanks to the power of compound returns, those $5,000 annual investments could grow to more than $1.3 million by the time you turn 65. In fact, of the 10 most common ways people become rich, simply investing and saving wisely is what Fisher refers to as "the road most traveled." In other words, this is how the majority of rich people got that way.
To further illustrate this critical point, consider how $5,000 annual investments could grow over different lengths of time at various rates of returns.
|Years of investing||6% average return||8% average return||10% average return||12% average return|
Use OPM to your advantage -- but do it wisely
OPM stands for "other people's money" and is another of Fisher's 10 most common ways to build wealth that I referred to previously. Obviously, in Fisher's case, as a money manager, most of his profits over the years have come from managing and investing other people's money, but the same principle can apply to your financial life as well.
Using other people's money to your advantage can be as simple as borrowing money to finance an investment property instead of paying cash, which can dramatically increase your returns as a percentage of your original investment. Just take a look at how using OPM can boost your returns on a hypothetical $100,000 investment property.
|Income/Expense||Property purchased in cash||Financed with 25% down|
|Reserves (maintenance, vacancy)||$150||$150|
|Total cash flow (monthly)||$825||$352|
|Annualized return on original investment||9.9%||16.9%|
Another common use of OPM is to borrow money from a "silent partner" or lending institution to start or grow your own business. For example, you might borrow $50,000 from a friend to start a business, and agree to give them half of your profits. Sure, you're only making half of the money your business generates, but this revenue stream didn't cost you a nickel out of pocket.
If you're going to use OPM to finance your investments and businesses, it's important that you do so in a responsible manner, in order to ensure that you'll continue to have access to OPM as new opportunities present themselves. This means maintaining a top-notch credit score, and limiting your borrowing to responsible amounts. In my investment property example above, the best financing terms are usually offered to borrowers who put 25% down or more. It may be possible to buy a property with less down, but you'll pay more, and you'll increase your risk of ending up underwater if the market takes a turn for the worse.
There is no one-size-fits-all approach to investing
Like all good money managers, Fisher realizes that there is no one-size-fits-all approach to personal finance, and his firm takes many variables into consideration before deciding how to invest clients' money. You should take these factors into consideration as well:
- Time horizon -- If you are planning to retire in the next few years, your priorities should be generating income and investing more cautiously. On the other hand, if you have decades until retirement, growth should be your goal.
- Investment objectives -- What do you want to do with your money? Do you want to send kids to college, generate a current income stream, or build up a large enough portfolio to retire early? These can determine how to allocate your money, and what account types you should use. For example, it's probably a good idea to invest money your child will need for college in two years in a much more conservative manner than the money you'll need for retirement in two decades.
- Outside assets -- If you have, say, a multi-million dollar real estate portfolio to fall back on, you could probably afford to take on more risk with your stock investing than someone who is fully invested in the stock market. The same can be said if you have an outside income source, such as a legal settlement.
- Tax liability -- Investors in high tax brackets have concerns that don't necessarily apply to everyone else, and these need to be taken into account when buying and selling investments. For example, selling an investment with a $10,000 short-term capital gain could result in a $3,960 federal tax bill for someone in the highest tax bracket, but could cost the average taxpayer thousands less.
How Ken Fisher made his money
Ken Fisher is an interesting case among billionaires, because he didn't need to "reinvent the wheel" to make his billions. He didn't invent a new product, make one big "home run" investment, or get rich from a tech start-up. What he did is actually rather simple -- use time-tested investment principles to grow his business and his fortune. These are the same principles you can use in your own financial life.
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