Most investors do not think strategically about their investments. Many investment decisions are made randomly, perhaps as an opportunity arises, or as “impulse buys”. Or even “keeping up with the Joneses” as in “Honey, John next door has just bought another rental, maybe we should too…?”

The business cliché of working ON your business instead of IN your business applies to investments as well. We should be working ON our investments by thinking about them strategically, rather than just IN our investments (tenanting vacant houses, undertaking repairs, filing income tax returns and so on).

The first step is quantifying the lifestyle we are aspiring to. Most successful people utilise the power of visualisation. They can actually see themselves achieving their goal, taste the sweet taste of success, and understand how it will actually feel with full technicolour intensity. This is an important step – don’t skip it as it provides the drive and motivation to achieve that reality.

Dream the dream. Write the dream down in lots of colourful detail to make it seem very real. Visualise yourself there. Think about: 

• Where will you live?
• What car will you drive? 
• What will you wear? 
• How will you spend your time? 
• Where will you go on holiday? 
• What will you do with/for your loved ones? 
• How will you feel? 
• What contribution will you make? 
• When do you want all this by?

Now work out how much this lifestyle will cost per annum (in today’s dollars)?

You have now determined your desired lifestyle and quantified the annual passive income your investments need to generate to fund that lifestyle. Once you know the passive income you can calculate the expected capital investment required (we use a conservative 15-20 times which gives a return of between 5% and 6.67%) and the timeframe to achieve it.

Now comes the strategic part – how are we going to create that wealth?

To create wealth quickly we need to achieve a return of at least 15% pa. We usually also have to borrow substantial capital, at least initially. Borrowing increases the return (as well as the risk).

Let’s look at an example. We buy a $400,000 property renting for say $600 a week (a gross yield of 7.8%). We pay a 10% deposit of $40,000 and borrow $360,000, interest only at 7.8%. The rent covers the mortgage interest. Let’s assume we have a break-even situation and the annual tax refund covers all other expenses.

Let’s also assume that the property goes up in value by 5% a year for 5 years. In 5 years time the property is worth $486,000. Debt is still $360,000. Our equity is now $126,000, up from $40,000 5 years earlier – an increase of $86,000 or 215%, or 43% per annum.

(The same situation can of course go wrong – rents fall, interest rates rise, property values drop, tenants leave and trash the place, you get sick or lose your job and can’t afford to keep the property…)

To increase wealth quickly you have to get a return of more than 15% (which probably involves leveraging the investment through borrowing). This is risky and as already pointed out can go badly wrong. If it does go wrong you need to have an exit strategy, and ensure your other assets are protected and out of harms way (usually by way of companies and/or trusts) so that you can rebuild again if necessary.

We believe in the power of focus. Despite the hype about multi-tasking most of us can only focus properly on one thing at a time. Thinking strategically we need to decide what is the one venture we need to focus on to grow our wealth quickly (usually a business, property or equities/shares).

(For a business to be a wealth creation tool it needs to be leveraged, either by way of borrowing or employing others (or both). A business does not include the self employed, they really just have a job as they work for and often by themselves.)

If you are building wealth through a business then your other investments need to be less risky (either with low gearing or you have sufficient spare capital available if things do go wrong). Don’t risk your business which is your main wealth creation tool by over leveraging your property investments which in this case would be your secondary wealth creation tool.

As we grow our one main wealth creation tool (business, property, or equities/shares) we need to ensure that we regularly transfer capital out to build lower risk investments and perhaps reduce debt. This strategy increases our security assets.

For example, if you are growing your wealth through your business then you need to increase business income and progressively reinvest some of it back into the business (to fund future growth) whilst also channelling some business income into lower risk assets (such as lower geared property or shares/equities). If you get greedy and put all your income back into the business to grow your wealth faster then there is a very real risk that you could lose everything if the business falters and you have no other investments to fall back on.

While such a strategy means wealth may be created and accumulated more slowly, it also ensures that you are less likely to lose all your wealth before reaching your dream.

As we get closer to achieving our dream we should transfer wealth away from the high-risk wealth creation tool that has served us so well and into more passive and lower risk investments. This strategy will leave us truly wealthy – with capital providing sufficient income and enough time to enjoy our dream lifestyle.

The old adage “people don’t plan to fail, they just fail to plan” is worth remembering.