20 Aug Working with Wealth
“Wealth is the ability to fully experience life.”
Henry David Thoreau
“He who dies with the most toys wins.”
To fully experience life today, in terms of supply, time may be more valuable than money. Who today has the wherewithal to spend two years simply living on the shore of a pond? Time is the one commodity that cannot be replaced. It could be said there is no lack on this planet except for lack of time. A percentage of life passes with each day that cannot be rewound, retrieved or replaced. The number of days left on this planet cannot yet be extended indefinitely, but one person’s work can live on indefinitely.
Money is necessary not only for day-to-day survival but also in preparation for an unpredictable economic future. Expansion and recession follow each other in cycles that everyone recognizes, but that no one can accurately predict. Human beings must prepare for a winter that they know is coming, but they just don’t know when.
A new home must have a location, as does a new home for investments. That is where financial life resides and that is the portfolio that must be maintained. Like the three most important factors in real estate investment—location, location, and location—the choice of where financial assets are held can make the difference between success and failure.
When looking for a home for savings, investment and future financing, one must first select an institution that will serve current and future financial concerns. Wealth must be secured, but also allow future growth and investment diversification. Banks insure savings accounts up to $250,000 per depositor, so diversified banking institutions that offer access to securities markets have the advantage of insured savings and options for future investment.
Everybody pays. Some pay with the inconvenience of limited information and few investment options. Some pay later with fees or higher interest rates that come with the expanded services needed for further investment diversification. Often it is more efficient to pay upfront for a set level of service for a certain period of time as with a Certified Financial Planner (CFP®).
Beware of free. The payment may not be made with cash upfront, but whoever holds the deposited or invested money has expenses, and so must get their income somewhere. The source of that income may influence the investments they offer and potential advisory direction.
Building wealth, like building houses, has tried and true methods of construction that have worked for countless others, but only if standards of architecture and construction quality are upheld along the way. If the institution is the foundation, the investments are the roof and walls. A diversified balance of asset classes allows a portfolio to produce enough income and capital gains to last through market pullbacks. The portfolio roof must not leak losses into the living space of financial security.
How a portfolio is balanced is a matter of personal preference for the individual investor, but a balance must always be considered. Balance considers the “What ifs?” Not only what if it rains, but also how long the roof will protect its precious contents. Not only is the projection of return on a portfolio important, but also how likely it is that that return can be projected.
Savings become investments, and investments grow beyond federal insurance limitations. The investor must then consider the financial security offered by each individual investment versus its potential for reward, and risk.
“Never invest in a business you cannot understand.”
Some want to be sure they get where they are going, while others want to get there first and thus take a riskier but faster route. Risk tolerance is the key. The gains over time are larger with aggressive growth-oriented investments, but short-term paper lossescan compel some to sell in fear of further loss. Murphy’s lawrequires that such sales be made at the worst time and lowest market price. No one can really know their risk tolerance until they experience a risk they cannot tolerate.
For others, the long-term plan involves tracking a carefully laid-out route to a certain destination, completing the stages with resources at hand, while preparing for future stages. There is no one best way to build wealth, but there may be a best way for each individual. The most important foreknowledge may be what notto do and what not to buy.
Beta (β) is a factor used to measure a stock’s growth potential or “expected return,” but also it is also a measure of reaction to day-to-day market news, and thus its volatility. For a potentially higher long-term gain, the investor pays with short-term uncertainty. Two steps forward followed by one step back might be hell for some, but it is heaven for a long-term growth investor.
The most challenging sections registered securities representative Series 7 licensing exam involve margin accounts and options trading. If these investment strategies are so hard to understand for those who must, it follows that an individual investor can never keep up. Losses inevitably follow.
Spreading the Wealth
“No one would have remembered the Good Samaritan if he hadn’t had money.”
Everybody needs to have fun, and toys are symbols of one’s ability to have fun whenever one has the time. But toys that are not used for lack of time are assets that could better be used to create more time. What is the wealth for? After survival, security and estate have been planned and funded, what shall be done with the rest? It is a great responsibility to select where the work of a lifetime is placed for posterity. Giving frees the giver of the responsibility for those assets and allows for selection of the receiver. With wealth comes power. Into whose hands should the power be passed?
Appreciating assets build wealth over the long term, but information about which assets to buy, their market values, where to buy them, and whom to buy them from may be as valuable an investment as the asset. As Warren Buffet says, “Never invest in a business you cannot understand
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