How to Get Rich? Stop Trying!

Last Updated Jan 3, 2011 11:03 AM EST

We all know that this is the season for holiday celebrating, with all the accompanying gifts and goodies and eggnog, but not too many people know that it is also the season for articles on how to get rich in the coming year. You'll see the top ten stocks to buy, market timing newsletters, and other get rich quickly schemes that, in reality, will only be helping others to get rich. Unfortunately, the odds are virtually certain that following the advice in these articles is more likely a "get poor quick" plan.

Flawed Logic

First, allow me to state the obvious by saying that if I truly knew how to get rich in 2011, I wouldn't be writing about it, and I wouldn't be selling subscriptions to newsletters at $299 a pop. I would take that rich-making knowledge and apply it to becoming rich, which would remove any necessity for peddling my wares. And even if I were a saintly, altruistic sort who was willing to share my secrets, the fact remains that telling others my secrets would make it that much harder for me to continue making a fortune. More competition means less profit.

2 Non-Secrets to Financial Riches

I wish those Rich Dad seminars actually did work, and that I really could make a million dollars a year working four hours a week from my yacht in the Caribbean. The fantasy of investing the fortune I've made from my real estate empire, earning the upside of the market without downside risk, would also be good. Life would be sweet under either of those scenarios.

Unfortunately, one must accomplish two things in order to be rich, and neither of these things are quick or glamorous.

  • Number 1: Spend less than you earn

Unless you are a card-carrying member of the lucky gene pool and born rich, or unless you are in possession of a winning lottery ticket, there is only one path to follow.

To build wealth, you must save. This means spending less than you earn. Obvious as that seems, it's not always an easy philosophy to apply. It means deferring the gratification of the latest consumer toys, it means realizing that the Ford gets you from points A to B just as fast as the Lexus. It also means you must stop spending your hard earned cash on schemes that claim they will make your rich. With the recession, remember that frugality is now cool, at least in my mind.

  • Number 2: Invest to get rich slowly

However, saving is only the first step toward building wealth. I see people do a great job in saving, only to make others rich by buying annuities or unknowingly paying two to three percent annually to their financial helpers. To invest wisely, one must keep expenses and emotions in check.

A good way to keep expenses under control is by owning the very lowest cost and most diversified index funds. These funds own thousands of stocks and bonds with annual expenses as low as 0.07 percent annually. With only two funds, you can own the entire US and international stock markets, with far less risk and higher returns than you would get by paying helpers to pick stocks like BP. With only one additional fund, you can own the entire US investment grade bond market.

But controlling expenses is only half the battle. The other half is controlling emotions, and an excellent way to accomplish that is to decide on an allocation between stocks and bonds, and stick to it like glue. Doing so means you must rebalance the portfolio to get back to your target allocation. If stocks go up, as they did between 2003 and 2007, you must sell some of your stock index funds to get back to your target allocation. If markets plummet as they did through March 2009, you must buy stocks.

Picking the allocation is important, but sticking to it is even more important. It's the only way I know to systematically sell assets after they have done well and buy others after a decline. Here are three examples of different allocations from my book, How a Second Grader Beats Wall Street.

Why This Formula Will Make You Rich

Albert Einstein once said that the power of compounding was the most powerful force in the universe. By my calculations, the above "Dare to Be Dull" investing formula will increase returns by an average of four percent annually. That extra four percent annual return on average translates to about 16 years of earned income. Think of it as a "get rich not-so-quick" plan.

How to Get Rich

So if you really want to prosper in 2011, ignore those lists such as SmartMoney's list of where to invest in 2011. If for no other reason, ignore it because their 2010 list turned in half the return of the market. Instead, try using the boring strategy that will get you to your retirement goals roughly 16 years earlier. That should give you an immediate rich feeling that you will be able to pursue your passions and dreams a decade and a half earlier than others.

That's what I call striking it rich in 2011.

More on MoneyWatch:

  • Allan Roth - feature On Twitter»

    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month. His goal is to never be confused with Mad Money's Jim Cramer.