- He has a line of unsecured revolving credit that is almost 5.85 times his annual salary. He has already used up 99% of that line of credit, so he has all but maxed it out.
- His interest payments alone on that debt consume approximately 18% of his annual salary.
- Every single year he is spending roughly 67% more than he makes (which he makes up for by using his line of credit).
Tuesday, January 26, 2010
Role Playing
Let’s play a game…
You’re a loan officer at one of those “greedy banks”. A guy walks into your office and here’s his financial situation:
Sounds utterly ridiculous doesn’t it? Well as I said this is just a game. If this were real life and you were the loan officer you would simply laugh him out of your office and move on to the next client.
The bad news here is that in reality you’re not the loan officer, you’re actually the co-signer of this debt because the guy is the U.S. Congress and the President and you, as the taxpayer, are on the hook for these obligations.
The sad thing about it is that not only do you have no say in how this money is being managed, you also have no choice but to co-sign for this loan or you will be put in prison. Sounds a bit like a twisted kind of identity theft doesn’t it?
If these folks were running one of those “greedy” private corporations, they’d be the ones facing prison….
Source: http://finance.yahoo.com/news/Figures-on-government-apf-2178072020.html?x=0&.v=2
Thursday, December 17, 2009
Who Is John Galt - Thoughts on Class Warfare in America Today
Who is John Galt?
That’s the first line in Ayn Rand’s classic novel Atlas Shrugged. As the book unfolds it turns out that John Galt was an engineer/inventor who simply got tired of picking up the slack for the rest of the world. He walked off the job one day never to return. Throughout the course of the book captains of industry mysteriously disappear only to turn up at the end of the book in a hidden valley where the producers of the world have created their own secret society where they don’t have a bunch of moochers dragging them down.
A bit far fetched I’ll admit. That could never happen today because the liberals would undoubtedly track them down and find a way to tax them into oblivion. However, the basic premise of the book is interesting:
If you get enough people who are non-producers depending on the producers of the world the sheer weight of those non-producers will overwhelm the producers causing them to finally just give up and eventually bring us to a grinding halt.
Again, perhaps a bit extreme… or is it? In today’s economic turmoil we have many who continue to propagate the politics of class warfare -- e.g. the “haves” vs. the “have nots”. I personally believe this is due in part to jealousy, but also due to just plain ignorance.
Many liberal and so-called “moderate” politicians on both sides of the aisle in congress know now that all they have to do is screech “no tax cuts for the rich” and their constituents will pile on.
I think a worthy question is - Who are the “rich” and how did they get that way? Some are entertainers, athletes and trust fund babies to be sure, but the reality is that the “rich” by and large got that way by being productive members of society. They are the small business owners, the captains of industry, the inventors, scientists, physicians, etc. In short, they are the ones who provide jobs in a time when we really need jobs.
Of course the counter to this is “the rich are greedy, dishonest, etc”. I don’t disagree that there are those. However, I submit to you that the vast majority of the “rich” are people just like you and me who have families, hopes and dreams, etc. They agonize at the thought of having to lay off employees, they contribute to charities, they try to be fair and give back to the society that provided them the opportunities that got them where they are today.
You may recall the old story of the goose who laid the golden egg. The farmer reasoned that, rather than wait for the goose to lay one golden egg every day, he should be able to simply slice open that goose and pull out all the eggs at once! He soon found out that when he sliced open the goose, not only were there no eggs to be had, but now the goose was dead and could no longer produce.
Just something to think about the next time you hear people rail against “the rich” and “corporate tax cuts” -- where do you think these jobs we need so desperately will come from?
That’s the first line in Ayn Rand’s classic novel Atlas Shrugged. As the book unfolds it turns out that John Galt was an engineer/inventor who simply got tired of picking up the slack for the rest of the world. He walked off the job one day never to return. Throughout the course of the book captains of industry mysteriously disappear only to turn up at the end of the book in a hidden valley where the producers of the world have created their own secret society where they don’t have a bunch of moochers dragging them down.
A bit far fetched I’ll admit. That could never happen today because the liberals would undoubtedly track them down and find a way to tax them into oblivion. However, the basic premise of the book is interesting:
If you get enough people who are non-producers depending on the producers of the world the sheer weight of those non-producers will overwhelm the producers causing them to finally just give up and eventually bring us to a grinding halt.
Again, perhaps a bit extreme… or is it? In today’s economic turmoil we have many who continue to propagate the politics of class warfare -- e.g. the “haves” vs. the “have nots”. I personally believe this is due in part to jealousy, but also due to just plain ignorance.
Many liberal and so-called “moderate” politicians on both sides of the aisle in congress know now that all they have to do is screech “no tax cuts for the rich” and their constituents will pile on.
I think a worthy question is - Who are the “rich” and how did they get that way? Some are entertainers, athletes and trust fund babies to be sure, but the reality is that the “rich” by and large got that way by being productive members of society. They are the small business owners, the captains of industry, the inventors, scientists, physicians, etc. In short, they are the ones who provide jobs in a time when we really need jobs.
Of course the counter to this is “the rich are greedy, dishonest, etc”. I don’t disagree that there are those. However, I submit to you that the vast majority of the “rich” are people just like you and me who have families, hopes and dreams, etc. They agonize at the thought of having to lay off employees, they contribute to charities, they try to be fair and give back to the society that provided them the opportunities that got them where they are today.
You may recall the old story of the goose who laid the golden egg. The farmer reasoned that, rather than wait for the goose to lay one golden egg every day, he should be able to simply slice open that goose and pull out all the eggs at once! He soon found out that when he sliced open the goose, not only were there no eggs to be had, but now the goose was dead and could no longer produce.
Just something to think about the next time you hear people rail against “the rich” and “corporate tax cuts” -- where do you think these jobs we need so desperately will come from?
Friday, November 27, 2009
Taxing the Rich to Help the Poor – The Morality of the Robin Hood Syndrome
We all know the story of Robin Hood. He was the guy who roamed the Sherwood Forest with his band of merry men robbing from the rich and giving it to the poor. In fiction this makes a good story, but in practice there are some serious moral implications with this story as it is interpreted today. The reason this is relevant is that there is a growing attitude in America that I like to call the “Robin Hood Syndrome”. Indeed, much discussion is taking place within our government and even by rank and file citizens about taxing the rich to pay for war, healthcare, etc. Other than the obvious impact of being a slippery slope I see several problems with this.
1. The thing that people fail to realize about the Robin Hood story is that the true meaning of the story has been perverted. Think about the story – Robin Hood’s arch nemesis was the Sheriff of Nottingham, a government official. The story takes place where the form of government was not a representative republic based on capitalism, but on feudalism which, by definition, means that the “rich” were actually the government of that day.
2. Karl Marx, the author of The Communist Manifesto and generally regarded as the father of communism is credited with the quote: “From each according to his need, to each according to his ability.” This is the premise for wealth redistribution which is a foundational concept of communism. Communism has been proven time after time to be an epic failure. In stark contrast, over the past couple of centuries, capitalism has made the United States the greatest country in the world in just about any measurable way.
3. Regardless of how one feels about “the rich”, it is both illegal and immoral to compel disproportionate payment from those who earn/have more. A study conducted by the IRS in 2004 indicates that the top 25% of earners in this country pay fully 85% of the taxes whereas the bottom 50% of earners only pay 3% of the taxes! Even more amazing is that these figures are for a period after the dreaded Bush “tax cuts for the rich”.
4. Another thing that is frequently ignored in this discussion is a precise definition of “the rich”. Many income levels have been bandied about ranging anywhere from $150K/yr Married Filing Jointly (MFJ) to $250K/yr (MFJ) and all points in between. There are two problems with this -- the first is that these figures completely ignore the differences in the cost of living. Where $150K might be a decent living for a family in the Midwest, it may be barely a livable wage for someone on the East or West Coasts. The second issue is that this figure doesn’t take into account inflation. Many adults over 40 can remember that back in the day, simply making $100K/yr was an extremely good living regardless of where in this great country you lived. This means that even if we settle on what income level is regarded as “the rich”, according to the politicians that figure will remain static regardless of how much the cost of living increases. Don’t believe me? Do a little research on the scam called the Alternative Minimum Tax.
Now, let’s take one final look at Robin Hood. Why were the poor of Nottingham in the condition they were in? Because, due to living in a feudal system, they had all been reduced to serfdom by the government of their day! They were actually the ones doing all the work and providing the means of production, but the feudal lords (aka the government) were reaping all the benefits.
So… really when you think about it, Robin Hood was actually an advocate of tax cuts, taking money from the “government” and returning it to the people (aka the producers). I submit to you that if the true meaning of this story were to be applied to today’s political climate, Robin Hood would be leading Tea Parties right now. What say you?
1. The thing that people fail to realize about the Robin Hood story is that the true meaning of the story has been perverted. Think about the story – Robin Hood’s arch nemesis was the Sheriff of Nottingham, a government official. The story takes place where the form of government was not a representative republic based on capitalism, but on feudalism which, by definition, means that the “rich” were actually the government of that day.
2. Karl Marx, the author of The Communist Manifesto and generally regarded as the father of communism is credited with the quote: “From each according to his need, to each according to his ability.” This is the premise for wealth redistribution which is a foundational concept of communism. Communism has been proven time after time to be an epic failure. In stark contrast, over the past couple of centuries, capitalism has made the United States the greatest country in the world in just about any measurable way.
3. Regardless of how one feels about “the rich”, it is both illegal and immoral to compel disproportionate payment from those who earn/have more. A study conducted by the IRS in 2004 indicates that the top 25% of earners in this country pay fully 85% of the taxes whereas the bottom 50% of earners only pay 3% of the taxes! Even more amazing is that these figures are for a period after the dreaded Bush “tax cuts for the rich”.
4. Another thing that is frequently ignored in this discussion is a precise definition of “the rich”. Many income levels have been bandied about ranging anywhere from $150K/yr Married Filing Jointly (MFJ) to $250K/yr (MFJ) and all points in between. There are two problems with this -- the first is that these figures completely ignore the differences in the cost of living. Where $150K might be a decent living for a family in the Midwest, it may be barely a livable wage for someone on the East or West Coasts. The second issue is that this figure doesn’t take into account inflation. Many adults over 40 can remember that back in the day, simply making $100K/yr was an extremely good living regardless of where in this great country you lived. This means that even if we settle on what income level is regarded as “the rich”, according to the politicians that figure will remain static regardless of how much the cost of living increases. Don’t believe me? Do a little research on the scam called the Alternative Minimum Tax.
Now, let’s take one final look at Robin Hood. Why were the poor of Nottingham in the condition they were in? Because, due to living in a feudal system, they had all been reduced to serfdom by the government of their day! They were actually the ones doing all the work and providing the means of production, but the feudal lords (aka the government) were reaping all the benefits.
So… really when you think about it, Robin Hood was actually an advocate of tax cuts, taking money from the “government” and returning it to the people (aka the producers). I submit to you that if the true meaning of this story were to be applied to today’s political climate, Robin Hood would be leading Tea Parties right now. What say you?
Monday, November 23, 2009
Wealth Building 204 – Mutual Funds
Previously we discussed stocks, bonds, and cash as investment vehicles. I mentioned that, unless you have specialized knowledge in the financial industry and want to spend significant time conducting research on individual stocks and bonds, mutual funds are probably your best way to invest.
Mutual funds give you professional money management and allow for diversification even if you only have a little bit of money to start investing with. Most people who have company sponsored retirement plans like 401Ks, 403bs, etc. are invested in mutual funds and are somewhat familiar with them, but some may not be so I will discuss the different types of funds available.
In very simply terms, a mutual fund is simply a pool of money that is invested in a portfolio of securities (aka stocks, bonds, cash, or other investments). The mutual fund has a portfolio manager (or sometimes several) who are investment professionals and they make decisions on which securities will be purchased by the fund based on the particular fund’s objectives.
There are literally thousands of mutual funds out there to choose from and sometimes it can be a little overwhelming when trying to determine which ones to choose. I will spend quite a bit of time in following segments discussing that, but generally funds are categorized and there are many categories and even sub categories. For example a stock fund may specialize in large cap growth stocks or it may specialize in high yield bonds, etc. We will get into these categories deeper in later segments. Some even get as specific as investing only in certain segments of industry.
One key thing to think about when looking at mutual funds is fees. There are two basic types of fees involved in a mutual fund from a consumer standpoint. The first is commonly called a “load”. This is a sales charge from which the person or company who sold you the fund is paid a commission and the rest usually goes to marketing, etc... When that sales charge is assessed is usually determined by which class of shares you purchase.
There are several types of shares, but the most common are A, B, and C class shares. The sales charge on A shares is known as a “front end” load, meaning that you pay the sales charge up front. It’s usually a percentage of your purchase that can sometimes be as high as 5%. Charges for B class shares are known as “back end” loads. If you pull the shares out within a specified period of time you get hit with a deferred sales charge which is often prorated depending on how long you leave them in. Some companies offer C class shares which have an annual fee based on a small percentage (e.g. 1%) of the assets.
There are also “No Load” funds which do not charge these sales charges per se, but that doesn’t mean that you get a free lunch. With these you will pay management fees in some form or another.
The fees that a mutual fund can charge are regulated by the Securities and Exchange Commission and are covered in the fund’s prospectus, usually somewhere in the first few pages. You can hit the SEC’s website to get the most current information on these fees.
A quick word about the prospectus -- it is required by law that your broker or the company you buy the funds from provides you with a prospectus when purchasing any mutual fund. In addition to outlining fees and sales charges, the prospectus is a wealth of information regarding the fund’s objectives, their investment guidelines, performance information, etc. It’s often very dry reading, but I highly recommend that you review it before making a purchase. If you are using a financial planner or a broker part of the services they should provide is to go over some of the more important parts of what’s in the prospectus. If they are not willing to do that in a way that you can understand I’d recommend that you look for another broker!
Mutual funds give you professional money management and allow for diversification even if you only have a little bit of money to start investing with. Most people who have company sponsored retirement plans like 401Ks, 403bs, etc. are invested in mutual funds and are somewhat familiar with them, but some may not be so I will discuss the different types of funds available.
In very simply terms, a mutual fund is simply a pool of money that is invested in a portfolio of securities (aka stocks, bonds, cash, or other investments). The mutual fund has a portfolio manager (or sometimes several) who are investment professionals and they make decisions on which securities will be purchased by the fund based on the particular fund’s objectives.
There are literally thousands of mutual funds out there to choose from and sometimes it can be a little overwhelming when trying to determine which ones to choose. I will spend quite a bit of time in following segments discussing that, but generally funds are categorized and there are many categories and even sub categories. For example a stock fund may specialize in large cap growth stocks or it may specialize in high yield bonds, etc. We will get into these categories deeper in later segments. Some even get as specific as investing only in certain segments of industry.
One key thing to think about when looking at mutual funds is fees. There are two basic types of fees involved in a mutual fund from a consumer standpoint. The first is commonly called a “load”. This is a sales charge from which the person or company who sold you the fund is paid a commission and the rest usually goes to marketing, etc... When that sales charge is assessed is usually determined by which class of shares you purchase.
There are several types of shares, but the most common are A, B, and C class shares. The sales charge on A shares is known as a “front end” load, meaning that you pay the sales charge up front. It’s usually a percentage of your purchase that can sometimes be as high as 5%. Charges for B class shares are known as “back end” loads. If you pull the shares out within a specified period of time you get hit with a deferred sales charge which is often prorated depending on how long you leave them in. Some companies offer C class shares which have an annual fee based on a small percentage (e.g. 1%) of the assets.
There are also “No Load” funds which do not charge these sales charges per se, but that doesn’t mean that you get a free lunch. With these you will pay management fees in some form or another.
The fees that a mutual fund can charge are regulated by the Securities and Exchange Commission and are covered in the fund’s prospectus, usually somewhere in the first few pages. You can hit the SEC’s website to get the most current information on these fees.
A quick word about the prospectus -- it is required by law that your broker or the company you buy the funds from provides you with a prospectus when purchasing any mutual fund. In addition to outlining fees and sales charges, the prospectus is a wealth of information regarding the fund’s objectives, their investment guidelines, performance information, etc. It’s often very dry reading, but I highly recommend that you review it before making a purchase. If you are using a financial planner or a broker part of the services they should provide is to go over some of the more important parts of what’s in the prospectus. If they are not willing to do that in a way that you can understand I’d recommend that you look for another broker!
Friday, November 13, 2009
Wealth Building 203 – Investment Vehicles
Last segment we discussed in very general terms considerations for building an investment strategy. In this segment we will build on that by being a bit more specific in how you can apply those building blocks given an infinite number of investment choices.
Because we want to stay relatively simple here we will skip all the exotic investments and focus on three major types: Stocks, Bonds, and Cash.
Stocks
When you own stock in a corporation you literally own a part of that company. It may only be a few shares and therefore a very small part, but it’s part ownership nonetheless. That doesn’t mean that you can go into the headquarters and start telling the CEO what to do or carry out a computer since you technically own part of the company, it simply means that you have a share in the present and future earnings.
In very broad terms, if the corporation has positive net income then the shareholders may be paid a dividend, which is a portion of the net income of the company on a per share basis. There are different types of stock, but the type we are most interested in is common stock. Common stock not only has the potential to earn dividends, but common shareholders may also vote on certain things within the company. You may also hear stocks called “equities” because owning stock implies that you have equity in the company.
There are all sorts of methods for valuing stocks to determine if they’re over valued or undervalued, however those are beyond the scope of this discussion. There are many different classes (e.g. small cap, mid cap, large cap, growth, income, etc.) of common stock that have different levels of risk associated with them. We will discuss these classes more when we talk about diversification and risk management.
Bonds
Also called “debt instruments”, bonds are basically how companies and all levels of government borrow money. Essentially when you buy a bond you are loaning money and in return you will theoretically receive interest payments plus your original principal (the amount you “loaned”) back when the bond matures. In practice bonds are rarely purchased and held to maturity, they are generally bought and sold on the secondary market many times over throughout the life of the bond, which means that even the face value of the bond can fluctuate in value. This is a profound oversimplification of how bonds work and as with stocks there are valuation methods for determining whether a particular bond is a good purchase or not, but at least you have a basic understanding of the difference between stocks and bonds which is all you need for our purposes.
Cash
In the context of personal finance when someone says they have a certain percentage of cash in their portfolio it doesn’t mean that they have it stuffed in their mattress, it simply means that they are invested in a “cash” type investment. These are usually characterized by the fact that the principal (the amount you invested) does not fluctuate in value. People generally consider money markets (although technically the value of money market shares can decrease in value, in practice they are almost always stable), CDs, and plain vanilla savings accounts as cash investments.
So, now you know all you need to invest right? Well, not exactly. This was just a very superficial survey of some of the more common vehicles. When advising clients my general rule of thumb was that unless they had specific financial knowledge or had a very high net worth and were willing to take on stock analysis as a hobby they should probably stick with mutual funds. We will cover those in the next segment.
Because we want to stay relatively simple here we will skip all the exotic investments and focus on three major types: Stocks, Bonds, and Cash.
Stocks
When you own stock in a corporation you literally own a part of that company. It may only be a few shares and therefore a very small part, but it’s part ownership nonetheless. That doesn’t mean that you can go into the headquarters and start telling the CEO what to do or carry out a computer since you technically own part of the company, it simply means that you have a share in the present and future earnings.
In very broad terms, if the corporation has positive net income then the shareholders may be paid a dividend, which is a portion of the net income of the company on a per share basis. There are different types of stock, but the type we are most interested in is common stock. Common stock not only has the potential to earn dividends, but common shareholders may also vote on certain things within the company. You may also hear stocks called “equities” because owning stock implies that you have equity in the company.
There are all sorts of methods for valuing stocks to determine if they’re over valued or undervalued, however those are beyond the scope of this discussion. There are many different classes (e.g. small cap, mid cap, large cap, growth, income, etc.) of common stock that have different levels of risk associated with them. We will discuss these classes more when we talk about diversification and risk management.
Bonds
Also called “debt instruments”, bonds are basically how companies and all levels of government borrow money. Essentially when you buy a bond you are loaning money and in return you will theoretically receive interest payments plus your original principal (the amount you “loaned”) back when the bond matures. In practice bonds are rarely purchased and held to maturity, they are generally bought and sold on the secondary market many times over throughout the life of the bond, which means that even the face value of the bond can fluctuate in value. This is a profound oversimplification of how bonds work and as with stocks there are valuation methods for determining whether a particular bond is a good purchase or not, but at least you have a basic understanding of the difference between stocks and bonds which is all you need for our purposes.
Cash
In the context of personal finance when someone says they have a certain percentage of cash in their portfolio it doesn’t mean that they have it stuffed in their mattress, it simply means that they are invested in a “cash” type investment. These are usually characterized by the fact that the principal (the amount you invested) does not fluctuate in value. People generally consider money markets (although technically the value of money market shares can decrease in value, in practice they are almost always stable), CDs, and plain vanilla savings accounts as cash investments.
So, now you know all you need to invest right? Well, not exactly. This was just a very superficial survey of some of the more common vehicles. When advising clients my general rule of thumb was that unless they had specific financial knowledge or had a very high net worth and were willing to take on stock analysis as a hobby they should probably stick with mutual funds. We will cover those in the next segment.
Thursday, November 12, 2009
Wealth Building 202 – Investment Strategy Building Blocks
Now we will begin to build some foundational knowledge that will help you to understand (or better understand) how investing works. At this point I am assuming that you have your budget under control and that you are saving for emergency spending, short term expenses, and long term goals. If not, you can still continue reading and store this information for the (hopefully near) future when you will be able to use it. Even if you’re not ready to invest yet, it’s never too early to start learning about it!
All the technical financial stuff aside, in my opinion the key building blocks for developing a successful in investing strategy are: Goals, Time Horizon, and Risk Tolerance. I discuss each of these in detail below:
Goals
Having high net worth sounds good, but when you think about it, for most people it’s really not very motivating to deprive themselves of immediate gratification for a number on a balance sheet. What makes it really motivating is to have goals that you are investing for. These are the things that, as you pass up that extra vacation, you can say “this is for (___________)." The more specific you can be the better. For example, I had a client come to me one time who had a significant sum of money saved up and wanted to retire young. As I looked at his portfolio I asked him what he wanted his standard of living to be. At the end of the discussion it turned out that, given his desired standard of living, he needed to continue working for a bit more before he could retire. So, as you can see it really helps to put a very fine point on exactly what you are investing for.
Time Horizon
This is a significant piece of information required to determine what an appropriate investment strategy would be. For example, I manage a portfolio for someone who had a 10 year time horizon very differently from someone who had, say, a 30 year time horizon. What might be very appropriate for one might be extremely inappropriate for another simply based on the time that they can leave their money in the investment.
Risk
The financial community is obsessive about the concept of risk and it can get very technical, but for the purposes of our discussion I will speak in very general terms here. The saying goes that the more risk you take on the more potential you have for reward. I would hasten to add that “potential” is the operative term here. The potential reward of winning the lottery given the amount of investment beats pretty much any investment out there, BUT the comparative risk is also astronomical to the point of absurdity. When discussing potential investments with my clients they would often focus on investments with very high returns. However, after further discussion what I sometimes found was that their tolerance for risk would not allow them to be at peace with the investment(s) that they were looking at. We ultimately decided on something a little more conservative. I would say that the rule of thumb with respect to risk is to put it to the “Will I be able to sleep at night?” test. That said, there are many ways of reducing risk and while still working towards superior returns. I will cover those in a later segment.
The key is to have these things well defined in your mind. This will serve you well in creating an investment strategy that you can work with and that works for you.
Assignment: Thing about these three building blocks. Make a list of your financial goals, determine what your time horizon is for each of those objectives, and think about what your risk tolerance is. Perhaps a good way to think about your risk tolerance is to make a scale from 1 to 10 with 1 being that you would never want to see any less in your portfolio than at least what you put in and 10 being that you think a good retirement plan is to buy a lottery ticket ever day. Most reasonable people fall somewhere between 3 and 8!
All the technical financial stuff aside, in my opinion the key building blocks for developing a successful in investing strategy are: Goals, Time Horizon, and Risk Tolerance. I discuss each of these in detail below:
Goals
Having high net worth sounds good, but when you think about it, for most people it’s really not very motivating to deprive themselves of immediate gratification for a number on a balance sheet. What makes it really motivating is to have goals that you are investing for. These are the things that, as you pass up that extra vacation, you can say “this is for (___________)." The more specific you can be the better. For example, I had a client come to me one time who had a significant sum of money saved up and wanted to retire young. As I looked at his portfolio I asked him what he wanted his standard of living to be. At the end of the discussion it turned out that, given his desired standard of living, he needed to continue working for a bit more before he could retire. So, as you can see it really helps to put a very fine point on exactly what you are investing for.
Time Horizon
This is a significant piece of information required to determine what an appropriate investment strategy would be. For example, I manage a portfolio for someone who had a 10 year time horizon very differently from someone who had, say, a 30 year time horizon. What might be very appropriate for one might be extremely inappropriate for another simply based on the time that they can leave their money in the investment.
Risk
The financial community is obsessive about the concept of risk and it can get very technical, but for the purposes of our discussion I will speak in very general terms here. The saying goes that the more risk you take on the more potential you have for reward. I would hasten to add that “potential” is the operative term here. The potential reward of winning the lottery given the amount of investment beats pretty much any investment out there, BUT the comparative risk is also astronomical to the point of absurdity. When discussing potential investments with my clients they would often focus on investments with very high returns. However, after further discussion what I sometimes found was that their tolerance for risk would not allow them to be at peace with the investment(s) that they were looking at. We ultimately decided on something a little more conservative. I would say that the rule of thumb with respect to risk is to put it to the “Will I be able to sleep at night?” test. That said, there are many ways of reducing risk and while still working towards superior returns. I will cover those in a later segment.
The key is to have these things well defined in your mind. This will serve you well in creating an investment strategy that you can work with and that works for you.
Assignment: Thing about these three building blocks. Make a list of your financial goals, determine what your time horizon is for each of those objectives, and think about what your risk tolerance is. Perhaps a good way to think about your risk tolerance is to make a scale from 1 to 10 with 1 being that you would never want to see any less in your portfolio than at least what you put in and 10 being that you think a good retirement plan is to buy a lottery ticket ever day. Most reasonable people fall somewhere between 3 and 8!
Wednesday, November 11, 2009
Honoring Our Veterans
On this particular day, I wanted to take a moment to thank my brothers and sisters in uniform past and present. The sacrifices these folks make to keep our country free and safe are indescribable. Their selfless service is appreciated.
I also want to acknowledge those who left behind to keep the home fires burning as their loved ones bravely serve our country overseas. I thank you for making this sacrifice as well.
I also want to acknowledge those who left behind to keep the home fires burning as their loved ones bravely serve our country overseas. I thank you for making this sacrifice as well.
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