Growing your Wealth
In today’s financial media, sometimes wealth management and investing are made to seem overly complicated. The truth is, it doesn’t have to be complicated. Let’s take a moment to think about what investing really is and how you can grow your wealth. To start, you must understand the difference between money and wealth.
Money is a medium of exchange. That means that someone who has money can exchange it for a product or service at a specific price. A dollar has no value in and of itself – it has no “intrinsic” value. In Canada, the loonie is made mostly of nickel which, at current prices, might be worth a few cents. We have all implicitly agreed, however, that we will accept dollars in exchange for our products or services, confident that we in turn, can exchange them for other products or services.
Wealth, on the other hand, is the ownership of an asset or ability that has the capacity to produce more wealth. If you own a cookie-making machine and you produce cookies that can be exchanged for more money than you spent to produce them, and you can continue to do that, you have created wealth. The value of your wealth is measured by the money you will receive for all the cookies you produce before the machine wears out. If you want to maintain or even increase your wealth, some of the money you receive for your cookies must be re-invested to maintain your existing machine or to acquire more cookie-making machines.
The fundamental advantage that wealth has over money is the ability of wealth to be self-sustaining and to grow. If you own baskets full of apples you can eat one whenever you wish and may be able to trade some for other necessities. Eventually though, you’ll run out of apples. However, if you own apple trees you will never go hungry.
In order to keep the wealth you have and to create more of it, it is necessary to own productive assets – to own a business. As entrepreneurs, you intuitively know that a business results from the application of labour and capital to an enterprise with a view to profit (“profit” being the new wealth created). Of course, by investing in a business with the opportunity for profit also brings with it the risk of loss. When looking to build a wealth-producing portfolio, that risk of loss can and should be reduced by introducing a degree of diversification obtained by investing in multiple businesses (the appropriate amount of diversification is a topic for another day).
Fortunately, our system of public stock markets provides a mechanism for investors to take the wealth they have generated and invest those funds into the acquisition of shares of a wide variety of productive businesses. The only labour required to make these investments is the ability to analyze the underlying businesses, to assess the business risks against the potential rewards, to determine a fair price, and to monitor the progress of the business against expectations. If an investor doesn’t have the time, skills or interest in applying his or her labour in that way, the expertise can be purchased.
Although the availability of the public stock markets is tremendously advantageous, it also has the attribute of being an open auction system, whereby varying prices are applied to shares every day. Sometimes the price reflects a rational assessment of the value of the underlying business, but often the price reflects an overconfidence or fear (sometimes based on geopolitical or macroeconomic factors) that is only indirectly related to the actual value of the company. While the public markets provide liquidity for an investor, and the inherent price volatility can be an advantage when trying to buy or sell specific shares, it can also be disconcerting when prices are in broad decline. The stock market does not tell you the value of a company’s share, only its price.
When making an investment to grow your wealth, it is important to remember that you are investing as an owner in the underlying business, not as a trader of stock certificates. It is important to keep in mind that it is the productive capacity that you own through the shares you hold, which defines the wealth that you have. As we head toward the end of year, now is a great time to review your portfolio to make sure you own assets that will continue to be productive even if the stock price has changed. Remember that the success of your portfolio is ultimately driven by the success of the underlying businesses you own, not the quoted price of the shares on any given day.
Jennifer A. Dewling is a Principal of Genova Private Management, the family firm that helps Canadians prosper. Her is focus on helping clients grow their wealth and gain piece of mind. Jennifer is a Certified Financial Planner and holds the Chartered Investment Manager designation.
Married with two young children, Jennifer knows the importance and challenges of trying to find balance and focusing on what matters most. For Jennifer, that is spending time with her family, helping her clients, and her ongoing involvement with Casey House, Canada’s only HIV/AIDS specialty hospital where she is Vice-Chair of the Board and is a member of the governance and finance committee.