Friday, December 14, 2007

Never Spend Your Capital

Back in the 1980's I read a very funny book called "The Preppy Handbook." It was poking fun at the habits of people who lived the Preppy lifestyle. One thing I read from this book that really stuck with me was the rule that you "never touch your capital." The whole point was, once you committed a certain amount of money to your investment portfolio, you should never take it out again. It should always stay there, providing you with income in perpetuity. You may at times wish to redeploy the money into different investments, but it should never be spent. Once you start spending your capital you not only lose that money, you also lose all the future earnings from it. So I make it one of my cardinal rules that, if for any reason, I have to pull money from my investment accounts, it cannot be more than money I've earned in the form of dividends, interest or capital gains. My original investment capital remains intact. I like to think of it as my own personal money machine. It works for me 24/7, constantly earning whether I'm doing any work or not. You can work until you drop, but you're still only going to make so much from personal effort. The real money is in the compounding from your investments. Putting your money to work for you.

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