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Introduction: What is the Flywheel Concept?
The flywheel concept, as described by Jim Collins in his book "Good to Great," refers to a powerful metaphor for the process of building momentum in a business or any organizational endeavor. According to Collins, the flywheel represents the cumulative effect of many small initiatives that, when applied consistently over time, achieve a critical mass that leads to a breakthrough in performance.
Collins illustrates the flywheel concept by imagining a huge, heavy flywheel—a massive metal disk mounted horizontally on an axle, requiring a great deal of effort to get it moving. At first, pushing the flywheel is extremely difficult, and it turns only very slowly. However, with persistent pushing in a consistent direction over a long period of time, the flywheel begins to move faster and with increasing ease. Eventually, the momentum of the wheel builds to a point where it propels itself forward with almost unstoppable force.
This metaphor is used to describe how successful transformations in business (or really anything in life) are not the result of one big push or a single revolutionary innovation, but rather the result of hard work, diligence, and perseverance in pushing many small initiatives that eventually add up to significant success. Collins emphasizes that this process requires discipline, effort, and commitment to long-term goals, rather than seeking quick fixes or dramatic leaps.
Connecting the Flywheel Concept and Investing
The flywheel concept can be seamlessly adapted to personal investing strategies by emphasizing the power of consistency and gradual momentum. Initially, investments might seem to yield minimal visible gains, much like the slow initial turns of a heavy flywheel. However, by consistently investing in a diverse portfolio over time, even small contributions can begin to compound, setting the stage for more substantial growth. The key is persistence and regularity, where regular contributions to one's investment accounts can be akin to pushing the flywheel, gradually accelerating its speed and the resulting financial growth.
Over time, the compounding effect – often referred to as the eighth wonder of the world by investors – begins to manifest strongly. As reinvested earnings generate their own earnings, the growth of the investment portfolio can start to accelerate. This acceleration mirrors the flywheel gaining momentum, where past efforts start paying off at an increasing rate, making the initial hard work and patience worthwhile. Sticking to a well-thought-out investing plan, despite market volatility, can help maintain the push needed to keep the flywheel moving, leveraging the power of compounding to build wealth.
Furthermore, applying the flywheel concept to personal investing also means continuously learning and adjusting one's strategy based on performance and changing market conditions. This adaptive approach ensures that the investment flywheel does not slow down or stall. It involves staying informed, making informed decisions, and occasionally rebalancing the portfolio to align with long-term financial goals. This disciplined and methodical approach helps in maintaining momentum in the investment flywheel, ensuring that it spins faster and more efficiently, ultimately leading to greater and more sustainable financial success.
Practical Application: the Flywheel Concept and Cash Flowing Assets
Building Momentum with Reinvestment
The essence of the flywheel concept, as articulated above, is the relentless, consistent force applied in a singular direction to achieve and sustain momentum. When applied to investing in cash flowing assets—such as rental properties, REIT dividends, dividend stocks, credit card rewards, high-interest savings accounts, peer-to-peer lending, and digital products sales—the principle remains strikingly effective.
Each of these assets can generate regular, predictable cash flow. However, the temptation often lies in using these earnings for immediate personal spending. What if, instead, these funds were continuously reinvested? The potential for compounded growth could mimic the accelerating turn of a flywheel, generating increasing wealth over time.
Compounding Cash Flows: A Strategic Approach
Take, for example, the monthly gains from rental properties or dividends from REIT platforms like RealtyMogul.com and Fundrise.com. By reinvesting these earnings back into similar or more diversified assets, you not only increase your total investment capital but also enhance the potential monthly returns.
This strategy applies equally to dividend stocks, where reinvesting dividends can purchase more shares, amplifying the effect of compound growth. I use this strategy at M1.com.
Similarly, the modest returns from high-yield savings accounts (such as M1 Savings) or cash rewards from credit cards (such as Chase), if reinvested wisely, can transform into significant sums.
Peer-to-peer lending platforms such as Prosper.com and Groundfloor.us offer the opportunity to reinvest returns into new loans, thus continuously cycling capital and gains.
Digital product sales, like eBooks and audiobooks on platforms such as Amazon.com, present a unique reinvestment opportunity—reinvesting profits into marketing or creating additional content can exponentially increase sales and, by extension, profits.
The Flywheel in Full Swing
Imagine each reinvestment as another push on the flywheel, each incrementally increasing its speed and stability. Over time, these consistent reinvestments add up, much like compound interest, where the returns themselves start to generate further returns. This is the flywheel effect in action, where your initial and reinvested capital begins to work harder, turning initial modest gains into a significant portfolio.
As your assets grow, they reach a point where the returns are sufficient not just for reinvestment but also to support personal cash needs. Thus, patience and discipline in the early stages of investment can lead to a stage where the financial flywheel spins freely, providing both substantial reinvestment funds and personal spending cash.
Embracing the Flywheel for Financial Independence
By viewing each cash flowing asset as part of a larger, cohesive strategy for financial growth, you can effectively apply the flywheel concept to build and maintain wealth momentum. This approach is not just about saving or making money; it’s about strategically positioning your earnings to fuel further earnings, thereby accelerating your journey towards financial independence.
Continuous reinvestment ensures that each segment of your portfolio contributes to an ever-growing financial force, culminating in a robust, self-sustaining financial flywheel that powers your long-term wealth objectives and personal spending goals. Therefore, embracing the disciplined, persistent reinvestment of returns in line with the flywheel concept isn’t merely a suggestion—it’s an essential strategy for anyone serious about building lasting wealth.
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Conclusion: Hockey Stick (or J-Curve) Growth Through Your Flywheel Investing Strategy
I recently wrote a blog post titled Unlock Passive Earnings: Build These 6 "Digital Online Vending Machines" for Mostly Automatic Income. With my cash flowing assets, I used to take the monthly cash flow and redeploy the money elsewhere. Then one day, I had one of those light bulb moments when I decided to go into all of my online, cash flowing assets and turn on the reinvest feature. I wanted to crank up my investing flywheel in my final 10-15 years in the workplace and make the attempt to grow my family's wealth as quickly and exponentially as possible. I am happy to report that this strategy is beginning to pay off!
In the grand tapestry of investing, the implementation of the flywheel concept, coupled with the goal of achieving hockey stick growth, presents a compelling narrative of patience leading to exponential rewards. As you persistently reinvest the cash flows from a diverse array of assets, such as rental properties, REIT dividends, and digital product sales, you not only strengthen the financial base but also set the stage for a surge in returns. This approach ensures that each reinvestment adds a layer of momentum, subtly at first, but gaining significant traction over time.
Hockey stick growth, characterized by a period of relatively flat growth followed by a sharp increase, aligns perfectly with the flywheel concept in investing. Initially, the effects of reinvestments might appear negligible, mirroring the flat part of the hockey stick. However, as compound interest and reinvested dividends start to interplay effectively, the upward bend in the growth curve begins to manifest. This is the pivotal moment where sustained efforts translate into noticeable financial advancements, a period where the cumulative impact of reinvested returns fuels a steep upward trajectory in asset value and income generation.
Conclusively, embracing the flywheel strategy in your investment endeavors isn't merely about expecting returns; it's about strategically crafting them through disciplined reinvestment and leveraging the power of compounding. As your portfolio experiences this hockey stick growth, not only does it affirm the efficacy of the flywheel concept, but it also vividly illustrates how strategic patience can dramatically alter one's financial landscape. This method ensures that the financial flywheel, once adequately set in motion, continues to accelerate, pushing past initial slow gains to a realm of rapid and robust financial growth—thereby transforming the principles of consistent effort and reinvestment into a tangible blueprint for achieving and sustaining wealth.
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