Unlocking Wealth: 5 Steps to Achieve and Sustain Financial Success
Lehman Brothers and JPMorgan Chase were both prominent financial institutions that experienced the global financial crisis of 2008. However, one went bankrupt and the other went on to become the largest bank in the world (Source: ForbesIndia.com)
We can learn from failure and success.
Lehman Brothers existed for 164 years prior to going out of business (Source: Investopedia.com) and at their peak they were worth nearly $60 billion (Source: corporatefinanceinstitute.com).
The fact that a 164-year-old company worth $60 billion can go extinct highlights the importance of understanding financial strategies.
JPMorgan, just like the rest of the world, was impacted by the crisis, however, they were able to mitigate the effects. So, what were the major things these companies did differently?
Lehman Brothers
- Lack of oversight — the CEO was also the Chairman of the Board.
- The audit committee had only one expert.
- Embarked on an aggressive growth strategy, increasing leverage and risk in 2007.
- Disregarded warnings that mortgage brokers were issuing loans to people who could never afford them.
- Massively invested in mortgage-backed securities.
(Source: Lewis, 2015) (Source: Harvard Business School)
JPMorgan Chase
- Had a long-term vision.
- Diverse portfolio.
- Acknowledged missteps and changed course.
- Had significant risk management procedures in place.
(Source: Na, 2020) (Source: CNBC.com)
Lehman’s downfall serves as a stark reminder of the dangers of unchecked risk, lack of oversight, and failure to adapt, whereas JPMorgan’s resilience highlights the importance of strategic foresight, diversification, and robust risk management.
These differences offer valuable lessons for anyone looking to build and sustain wealth in an uncertain world. By understanding the key strategies that distinguished JPMorgan’s success from Lehman’s failure, you can apply these principles to your own financial journey.
Let’s explore five essential steps to achieving and sustaining financial success that can help you navigate challenges and unlock lasting wealth.
1. Strategic Planning and Goal Setting
This is foundational to any successful financial strategy. It involves creating a clear, long-term vision of where you want your wealth to go and identifying the specific goals needed to achieve that vision. Lehman Brothers, however, adopted a shortsighted financial strategy, aggressively chasing short-term profits at the expense of long-term stability.
Effective strategic planning includes:
- Defining Clear Objectives: Setting measurable, achievable goals helps guide decision-making and keeps your financial activities aligned with your broader vision.
- Time Horizons and Milestones: Establishing timeframes for each goal, whether short, medium, or long-term, provides a roadmap for progress. Milestones help track achievements and make necessary adjustments along the way.
- Resource Allocation: Determining how to allocate financial resources efficiently, ensuring that investments, savings, and expenditures are in line with your objectives.
Contribution to Financial Success: By having a strategic plan, you create a structured path to follow, reducing the likelihood of reactive decisions driven by market volatility or short-term trends. It also allows for continuous monitoring and adjustment, keeping you on track to meet your financial goals. JPMorgan’s strategic planning included preparing for potential downturns, which allowed them to navigate the crisis effectively.
2: Emphasis on Risk Management
Risk management is crucial in protecting and preserving wealth. You put in all that hard work to earn that money. You don’t want to lose it! Nobody has a crystal ball, and investing is full of uncertainties. Effectively managing risk can make the difference between sustained success and financial ruin.
Key components include:
- Identifying Risks: This involves understanding both market-related risks (such as economic downturns, inflation, and interest rate fluctuations) and personal risks (such as health issues or changes in income).
- Mitigation Strategies: Employing strategies like diversification, insurance, and hedging to minimize potential losses. Example: using options or futures contracts to hedge against market volatility. However, while they can insulate a portfolio during a crisis, they also carry their own risks like potentially reducing overall increase (Source: Schwab.com).
- Regular Reviews and Adjustments: Risk management isn’t static. It requires ongoing assessment and adjustment as circumstances change.
Contribution to Financial Success: Effective risk management ensures that even in the face of unexpected events, your wealth is protected. It prevents significant losses and provides peace of mind, allowing you to focus on growth and long-term success.
3: Diversification of Investments
Building on the concept of risk management, diversifying your investments is essential. You’ve probably heard the saying, “don’t put all your eggs in one basket.” Diversification involves spreading investments across a range of asset classes, industries, and geographic regions to reduce exposure to any single risk.
The key aspects include:
- Asset Allocation: Balancing your portfolio among various asset classes like equities, bonds, real estate, and alternative investments to minimize the impact of poor performance in any one area.
- Industry and Geographic Diversity: Investing in different industries and regions to protect against sector-specific downturns or geopolitical risks.
- Regular Portfolio Rebalancing: Adjusting your portfolio periodically to maintain your desired level of diversification as markets and personal circumstances change.
Contribution to Financial Success: Diversification reduces the risk of significant losses and stabilizes returns over time. By not putting all your eggs in one basket, you ensure that your wealth is more resilient to market fluctuations and unforeseen events.
4: Leveraging Expert Advice and Networks
Successful investors and Family Offices often rely on the expertise of financial advisors, consultants, and a strong professional network to guide their decisions. Especially when looking to diversify your investments, it’s not an efficient use of your time to be an expert at everything.
This step involves:
- Engaging Specialists: Working with financial planners, investment advisors, tax specialists, and legal experts who have deep knowledge of specific areas.
- Networking for Opportunities: Building and maintaining a network of professionals, peers, and industry leaders to stay informed about market trends, investment opportunities, and strategic partnerships.
- Collaborative Decision-Making: Leveraging the collective intelligence of your network to make more informed, confident decisions.
Contribution to Financial Success: Leveraging expert advice and networks ensures that you are making well-informed decisions, taking advantage of the latest opportunities, and avoiding common pitfalls. It also helps you stay ahead of the curve in an increasingly complex financial landscape.
In my previous article, Only 25% of Family Offices Survive to the 2nd Generation — Discover How to Beat the Odds! I discussed the importance of advisory committees and networking.
5: Innovation and Adaptability
Innovation and adaptability are critical in staying ahead of changing markets and economic conditions. I recently addressed the new industry disruptor for venture capital investments in my article: How Real-Time Data Empowers Family Offices in Venture Capital Investments.
This step includes:
- Embracing New Technologies: Using tools like real-time data analytics, artificial intelligence, and blockchain to gain a competitive edge and enhance investment strategies.
- Adapting to Market Changes: Being flexible and willing to adjust your strategies as market conditions evolve, such as shifting to safer assets during downturns or exploring emerging markets.
- Continuous Learning and Growth: Staying informed about the latest financial trends, technologies, and regulatory changes to remain competitive and proactive.
Contribution to Financial Success: Innovation and adaptability allow you to capitalize on new opportunities, mitigate risks, and maintain a dynamic approach to wealth management. This agility is essential for long-term success, especially in a rapidly changing global economy.
Conclusion
Finance can be a complicated topic, but these 5 steps will start you on the right path toward achieving and sustaining wealth. Plan for the long term, be mindful of risk, diversify your investments, consult experts, and be ready to adapt by leveraging innovative technology.
If Lehman Brothers implemented these strategies, they wouldn’t have invested so much of their portfolio in mortgage-backed securities. Perhaps then they could’ve weathered the financial storm like JPMorgan.
How InvestHub can Unlock Wealth
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Venture capital (VC) investments play a pivotal role in growing wealth. Of course, they are riskier investments which is why diversifying remains important. However, according to Harvard Business Review, “only 10% to 20% of the companies funded need to be real winners to achieve the targeted return rate of 25% to 30%. In fact, VC reputations are often built on one or two good investments.” (Source: HBR.org)
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What financial strategies have you found most effective in achieving and sustaining wealth in your own life? Share your experiences in the comments below!
About Konzortia Capital: Konzortia Capital is a pioneering holding company and FinTech consortium dedicated to transforming the Private Capital Markets industry. We offer solutions for matching issuers with allocators, digitizing securities, and trading over-the-counter securities. We aim to create a more efficient, transparent, and accessible market for all stakeholders.
At the forefront of our innovative efforts is InvestHub, our flagship product. InvestHub is a game-changer, leveraging cutting-edge technologies such as Artificial Intelligence (AI), Machine Learning (ML), and Distributed Ledger Technologies (DLT). Through InvestHub, we are reshaping the landscape of deal sourcing, evaluation, and execution processes within Venture Capital, Private Equity, and Mergers and Acquisitions (M&As). This transformative approach ensures a more efficient, accurate, and dynamic investment process for all stakeholders, enhancing the potential for successful investments.
