Dow Double Diamond: Latest Wealth Building Tips

This month I'd like to share some wisdom from Dick Fabian, one of the great wealth-building teachers of the late twentieth century. Dick claimed he could teach anybody how to become wealthy, and in a moment you'll actually learn his method. But first, let me give you a little background...

After serving in the Navy during WWII, Dick Fabian attended Cornell University and graduated with a degree in economics. Soon after, he became a student of the stock market. And, even more important, an astute observer of investors.

Years later, when word got around that Dick Fabian had a fool-proof way to build wealth through investing, hundreds would pack into halls to hear him speak. But once there, audience members were often disappointed to hear him say, "The investor is more important than the investment."

Dick's words seemed cryptic. Where was the hot stock tip? His get-rich-quick stock market secret? Dick was something of a scold and he made it clear that investors were putting the cart before the horse in their blind pursuit of the "best investments."

You see, while working with investors, Dick discovered a fascinating fact: most of them made no money over a ten-year period. They did often make money over 3, 5 or 7 years, but eventually gave it all back (and sometimes more), and then repeated the pattern. Often they would lament, "If only I had my original investments back!"

Intrigued, Dick began cataloguing the reasons investors failed...

He learned that investors followed advice from the financial media. They took advice from stock brokers and financial planners. They followed gurus who made predictions or gave stock tips. Some took advice from a brother-in-law, a friend, or neighbor. Many followed the buy-and-hold strategy and lost money in a bear market.

Quite a few got involved with investments they knew little or nothing about -- investments that were risky or involved difficult and time-consuming strategies. Some lost money because they became fearful or greedy and made emotional, often rash, decisions.

Some turned their money over to managers who lost it for them. Or to crooks who stole it. Others paid high fees for investments, on which the broker made money while they lost. And a great many were impatient, chasing returns, going from investment to investment, often jumping on last year's--or even last month's--hottest investment only to watch it fizzle once in their portfolio.

Time out. What's wrong with this picture? Did you notice Dick's "catalog of failure" includes just about everything investors do? And did you perhaps see something in there you've done, or are doing now? Remember, all these people failed to make any money.

To Dick, it was puzzling. Could all the most common things investors do lead to failure? It appeared so. But then he discovered the common thread: every one of these investors had failed to set a goal. Not one knew what he was trying to accomplish. And when Dick asked them what they wanted from their investing, the most common answer was, "To make a lot of money" or "To get rich."

But when Dick asked what specific dollar figure they had in mind, they were stumped, and even uncomfortable with the question. A few hastily said, "A million dollars" — but such an off-handed answer was hardly believable.

It's a startling revelation to discover you can't succeed with your investing until you've set a specific monetary goal. The reason is simple enough: you can't know which investment or investing plan to use until you know what you are trying to accomplish. And that inevitably leads to errors and losses.

Dick would say, You need to put yourself first, to think about what you want and need, and then set a wealth goal. Only when you have your goal can you look for an appropriate (not the best) investment to help you attain it. That's why "The investor is more important than the investment."

But there's one more step: once you do find an appropriate investment, you've got to monitor your progress, to make sure you remain on track to reach your goal on time. Dick used this analogy: If you want to drive from New York to Los Angeles, the first thing you'd do is get a roadmap, right? Sure. And once underway, you'd follow your map, and each night when you stopped to rest you'd check your progress.

If you saw you were in Pittsburgh the first night, Cincinnati the next, and St. Louis the third, you'd know you were on track to reach your destination in Los Angeles. But if on the fourth night you found yourself in Milwaukee, you'd know you veered off course and would have to make an adjustment.

Yes, I know, this sounds simplistic. And yet it's precisely the methodology you need for investing. For example, if you know you want $1.2 million and you have 40 years to get it, you need look no further than the CDs offered at your local bank. Or if you want $1.2 million in 35 years, you could buy U.S. Treasury bonds. For these goals and time frames, these are appropriate investments. They also have the advantage of being the safest investments that can potentially attain the goal. Dick always taught to use the safer of two investments that can attain the goal.

Of course, over the years, you'd have to check your progress, to make sure you remained on track. If you saw you were falling behind, you'd have to find an investment that could pay a little more. But the important thing is you'd have a structure in place that would not only enable you to succeed but would also prevent failure.

Set a goal with an attainment date. Find and use an investment that can potentially attain your goal on time. Monitor your progress. Make adjustments if necessary. That's Dick's famous wealth building method — the one he taught to countless investors, some of whom actually followed his advice and went on to accumulate millions of dollars. Many others dismissed Dick's method, believing they were smarter and could get wealth faster some other way. I'll give you one guess as to the kind of results most of these folks obtained.

The problem is that most investors don't know what they want. Do you? If you don't know where you want to go, any road will do. And so it is with investing. If you don't know specifically the amount of money you want and when, any investment will do.

If you hear some guy on CNBC say he likes Merck, you can buy Merck. Another guy likes Apple. Okay, buy Apple. And then your broker calls and recommends gold. Sure. And then you get a pitch for soybean futures. Why not? What's your goal? To make a lot of money? To get rich? Merck, Apple, gold and soybeans might do that. Whatever that is.

But then next month you might be tempted by another set of investment recommendations. Common headlines scream "The 10 best stocks to buy now!" Are they better? Should you sell yours and buy the new ones? Without a goal, you can't know. Are you checking your progress? Against what? You have no roadmap. And thus, like most investors, you're headed for failure.

There's a better way to go about this. And Dick found it. So, think carefully about what you're going to need in 5, 10, 15, or 20 years. Then, once you have your wealth goal, you can look for an appropriate investment that's capable of attaining your goal on time. And once you start using that investment, you can monitor your progress.

But don't just rush into the first investment that sounds good or be pulled willy-nilly from investment to investment. Set some standards. That's what Dick did. Dick was smart enough to realize he needed a simple investing plan. If it were difficult he might screw it up. He also wanted something that wouldn't take up too much time. He understood that if he couldn't keep up with it, he would fail.

Knowing that the key to wealth is "compounded growth" Dick also wanted a plan that would be safe over time. Obviously, losses would defeat the power of compounding. What's more, he wanted liquidity — no sense in tying up your money for a long period. What if you checked your progress and discovered you were falling behind? How would you make an adjustment?

Dick also wanted an investment free of predictions, human judgment, and emotional decision-making, all things he knew from experience could lead to error and losses. In short, he wanted something he could really count on year after year, something that would carry him safely and reliably to his goal on time.

Easier said than done. What investment or investing plan can meet all these criteria? Dick actually set his standards so high he couldn't find an investment.

What did he do? He invented his own investment -- a mechanical investing plan using growth mutual funds that, not only met the above requirements, but could safely generate 20% compound annual growth (the growth rate he determined he would need to reach his wealth goal on time). Using this investing plan, he went on to accumulate the wealth that was specifically his goal.

Rule #1: Set a specific wealth goal. And along with your goal set a date for having all the money. For example, $1.3 million in 7 years. Or $3.4 million in 10 years. Or $5.2 million in 15 years. Those are real goals.

Rule #2: Look for an appropriate investment. And let me be specific with Dick's instructions here: An appropriate investment (or investing plan) is one that is capable of attaining your goal and will also be comfortable for you to use over time. What's more, it must also eliminate all of the common problems that can cause investors to fail.

Rule #3: Monitor your progress on an annual basis. If you remain on track for success, just keep doing what you're doing.

Rule #4: Make adjustments. If through your monitoring you find you are falling behind, make some changes to your investing plan or find another appropriate investment.

Okay, now consider that the DDD plan has the same desirable qualities that Dick Fabian required for his wealth-building plan. We can all thank Jim Patterson for that. And if you've tried the plan, you know it's pretty easy to follow. Of course, you can have a broker make the trades for you, and that makes it even easier.

You also know that, over the past 4 years, the DDD plan has shown back-tested and live-trading results of 34%, 52%, and 86% compounded annually, for the 2x, 3x, and 5x investments respectively. If you're comfortable with the DDD plan, then by all means use these numbers to set a goal, and then use the DDD plan to work toward the attainment of your goal.

Please be aware that back-tested and past results are not necessarily indicative of future returns, and also that there is risk of loss in all trading, but as you proceed with the DDD plan, you can check your progress. If it's not doing the job, you can find something else. Or you can make adjustments to the plan itself, simply by changing your allocations to the 2x, 3x, and 5x approaches.

Here's how to set your goal: First determine how much wealth you want and when you want it. Once you have the dollar figure and the date, try out the various goal setting numbers at 2x, 3x and 5x to see which one (or allocation to two) gets the job done in your allotted time. Get your calculator out and I'll show you how to do this...

For targeting 34% compound annual growth (2x investing), multiply your available investment capital by 1.34 for each year you'll be building wealth. For targeting 52% compound annual growth (3x investing), multiply by 1.52 for each year. For targeting 86% compound annual growth (5x investing), multiply by 1.86 for each year.

Now, once you know the specific wealth you want, and the time you have to get it, you can play around with these numbers to see which annual growth rate you'll need to reach your goal on time.

For example, if you have $40,000 to invest today, and you want $1.7 million in 8 years, then you'll need 60% annual growth to reach your goal on time. No guarantees, but based on the DDD plan's compound annual growth rates over the past 4 years, you would need to allocate about 75% of your capital to the 3x program (52%) and about 25% to the 5x program (86%), to target approximately 60% compound annual growth.

Naturally, each person's goal, time frame, and allocation plan will be different. And to be conservative with your plans, you might also use numbers a little lower than the ones above (especially to account for trading fees and slippage). But here's the advantage: Once you have a specific wealth goal, have adopted an investing plan that has shown it can potentially attain your goal on time, and are also monitoring your progress...you will have removed yourself from the category of "investors headed for failure."

Simply put, you'll no longer need to chase after the next best investment. You'll no longer need to listen to the latest hot investment sales pitch. And you'll no longer be pulled willy-nilly from one investment to another. All recipes for failure.

There's another benefit, too. Once you adopt a proven methodology like this, it'll give you peace of mind. How? By giving you a structure that enables success and prevents failure. You see, when you know you have a plan for success, along with a procedure to both monitor and adjust that plan, you can relax and actually enjoy your investing. Most people find that to be a big relief.

Okay, based on what you've learned today, what's the first thing you're going to do? Good. Now do it!

In closing, let me say that if you'd like to learn more of what's behind Dick's successful methodology, you can read the articles I've done on his recommended books. From the Home page click on Archives and then WealthBuilding Tips. Then click on the following titles: You can literally think and grow rich, as long as you move your feet too; Are you using your creative power to manifest wealth?; Here's how to become the richest person in your city.

Dow Double Diamond

The most important investing lesson you'll ever learn