Kevin O’Leary, aka Mr. Wonderful, isn’t just the star of the hit show Shark Tank, he’s also a massively successful businessman with a net worth estimated to be over $400 million.
The bulk of his wealth was created when he built and sold SoftKey to Mattel for $3.65 billion.
Since then, he has gone on to create his very own exchange-traded funds, called O’Leary Funds, and imparted financial advice galore to those who listen closely.
So, what are the top financial lessons that Mr. Wonderful has shared which anyone can use to make money or save more?
1 – Best Way To Save For Retirement
Even if your salary is modest, Mr. Wonderful suggests that you take 10% of your after-tax earnings and invest it for the long-term.
According to O’Leary, the stock market has produced returns of approximately 7% annually.
If equivalent returns were to continue into the future, a 20-something year-old, he says, could hypothetically amass a nest-egg of about $1.2 million by retirement based on an average salary of $52,000 per year.
In typical Mr. Wonderful style, he bluntly states “stop buying all that crap you don’t need!”, meaning expensive lattes and stuff in storage you never use.
Even if it seems scary to invest, he encourages you to take the plunge because a more scary reality is having no savings nest-egg when you reach retirement.
Finally, he emphasizes that you can’t rely on government or someone else to take care of you during your retirement years – you must look out for yourself.
2 – Top Stock Picks For First Time Investors
Mr. Wonderful likes really big companies that are safe. Ideally they have big balance sheet, pay dividends and are in different sectors so you get the benefits of diversification.
“Diversification is the only free lunch in investing”, he says, but if he had to pick three top stocks, which ones would make the shortlist?
His top stock picks for first time investors include:
Johnson & Johnson is a healthcare company that owns dozens of well known brands, including Tylenol, Listerine, Band-Aid, and Benadryl. It was founded in 1885 and continues to go strong over a century later.
Home Depot is one of the best knowns brands in the Services sector and sells everything from building materials to lawn and garden products.
Home Depot has over 2,200 stores throughout the United States, Canada, and Mexico. And like Johnson & Johnson, it pays a healthy dividend.
Exxon has long held the distinguished title as the largest energy company in the United States but its operations span the entire globe, including Africa, Europe, Asia, and Australia.
It sells crude oil, natural, gas and petroleum products, and from an investor perspective, pays a generous dividend.
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3 – Invest In ETFs Not Active Managers
When Mr. Wonderful sold his business for a fortune, he set up trusts that would provide for him and his family for generations to come.
But he worried about investing his money with fund managers, even the great ones.
The risk of investing money with active managers is what he calls “style drift.” Even great managers are tempted to migrate to a different investing style over time.
By contrast, exchange-traded funds are rule-based and must invest money based on a rigid, fixed style always.
When you invest in ETFs, fund managers are not tempted to change investing methods over time because it’s prohibited.
The bottom line is if you have a choice between investing your money with active fund managers or exchange-traded funds, pick the latter.
4 – Credit Card Tips: The Rule Of Two
When your information is online these days, it is at risk.
Mr. Wonderful recommends that you always have two credit cards.
When you make purchases online, use a credit card with a low limit. For other purchases, use a credit card with a higher limit.
If your online information is one day compromised by a hacker, the financial damage is contained to the smaller amount.
In both cases, he recommends you pay off the full balances on each card each month. Otherwise, interest charges as high as 20% or more can be applied to your balances, making it very hard to pay off credit card debt.
By paying off your balances each month, you also get to build up your credit history and improve your credit score, which in turn can lead to better lending rates when taking out home loans, student loans, or personal loans.
5 – Mom’s Investing Tip:
Split Your Investments Evenly
In an interview with Forbes, Mr. Wonderful described his mother’s investing style, whereby she split her investments evenly between stocks and bonds.
But not just any old stocks or bonds. She selected large-cap dividend paying stocks and corporate credit.
Over a 50 year period, his Mom took 30% of her paychecks and invested half into dividend-paying stocks and half into corporate bonds.
When she passed away, her investments had grown to become a small fortune.
Moreover, Mr. Wonderful states that you can’t find any better combination of asset classes that beats the returns earned by his Mom’s portfolio.
The bottom line: split your investments evenly between corporate bonds and dividend-paying stocks.
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6 – Ignore New, Flashy Stocks
When Mr. Wonderful was researching how best to invest his fortune, he says he stumbled upon an extraordinary statistic.
Over a 40 year period, 70% of the stock market’s returns came from dividends not capital appreciation.
His golden rule after learning that investing lesson is to only own dividend-paying stocks.
In his book, Stocks For The Long Run, Professor Jeremy Siegel from the Wharton School of the University of Pennsylvania notes that over an even longer stretch of time, an even higher percentage of gains stem from dividends.
The lesson according to Mr. Wonderful: avoid new, flashy stocks that just went public as well as non-dividend paying stocks.
Until companies have proven themselves over the long haul and pay dividends, they are best avoided. Otherwise, the only way to make money is when someone else buys your stock at a higher price.
7 – No Stock or Bond Should Be
More Than 5% Of A Portfolio
The first generation of exchange-traded funds were market-cap weighted, meaning when one company does really well and grows its valuation significantly it becomes an inordinately large piece of the ETF.
But Mr. Wonderful has a philosophy that no position should be more than 5% of his portfolio.
As a result, most ETFs are a poor fit for his investing style. Instead, he says an equal weighted index is a better bet to reduce overall portfolio volatility and potentially risk.
Rather than one egg dominating the basket, your investments will be split more evenly across many holdings.
What financial lessons have you learned from Mr. Wonderful? Share your financial tips, we would love to hear from you.