Wednesday, April 28, 2010


I could have a closet filled with every possible type of polo t-shirt, but all I would have is a diversified collection of polo t-shirts. When people refer to diversification they usually are referring to a mixture of stocks and asset classes. A person's 401(k) or 403(b) has very minimal options for diversification, but they are "diversified."

In these accounts, and most other investment accounts, most people just have a diversified collection of Polo t-shirts. What I mean is that they have a diversified stock portfolio. The fact of the matter is that stocks are only one asset class. If someone only owns one asset class then they are not diversified.

You might say, "What about bonds, and precious metals?" So now you have a dress shirt to go with you Polo Shirt collection. It's better, you are starting to see the point and get a little bit more diversification, but it's not enough.

The problem is that most people don't look at their entire financial picture. They only see what they think they think they need to. If they step back they might be reminded about their dresser, maybe a bureau or armoire. Who knows, maybe they even have a closet just for shoes. The point is that there is more to a wardrobe than polo shirts just like their is more to your financial picture than you investment portfolio.

Every where your money goes is part of your financial picture, and every part of your financial picture has an effect on your financial goals. So, when you are setting financial goals and trying to make a decision about money, remember to consider your entire financial picture.

Sunday, April 18, 2010

Step 1

I meet people everyday who are putting off investing for one reason or another. A very common one is that they feel like they don't have enough money to invest. The funny part is that they shouldn't start with investments. As I wrote about in "Column VS Pyramid" you can't build straight up. People who tell me that they don't have money to invest are right. If they are worried about something like not having money then they still have to start at ground zero. However, a lot of these people are contributing to their 401(k) plans. The problem with that is they haven't built their foundations yet.

If someone is starting at ground zero the first thing they should start doing is saving. I don't know anyone that is successful who hasn't saved 10-15% of their income. That's just what success people do. There are millions of reasons to put off saving, but the fact is that no matter how much someone makes they should live within their means and save 10-15%. If 15% is too much to start out with, then they should start with what they can. If someone cannot do 15% they should start with 5% in a short-term savings account. If they can save 10% then maybe they can handle a short and medium term account; 5% in each.

A person should save in order to create a 3-6 month emergency fund. The point of the emergency fund is to create a cushion for unexpected expenses. If someone does not have an emergency fund and unexpected expenses come along they use debt to pay for those expenses. By creating an emergency fund a person is able to create a foundation on which to build wealth.

I have met several people that want to pay off debt first. I am a strong advocate of paying off debt as fast as you can and staying out of debt. However, I do believe in the principle of paying yourself first. If you are trying to pay off debt and you have an unexpected expense come along then it will only exasperate your debt. However, if you are able to save a little along the way, and create your emergency fund, then unexpected expenses will not get you off track to paying off your debt.

Saving should in no way compromise paying off your debt. Save what you can and pay off your debts as soon as possible. Never let the furthering of someone else's wealth hinder the creation of yours.

Thursday, April 1, 2010

Every Purchase An Investment

Someone mentioned to me the other day that the Tri-plex I am buying is an investment, it's not the same as if it was a Single Family home. Though he is right in some ways, it made me think about what is and is not an investment. For example the Tri-plex I am buying is without question an investment. However, don't most people consider their homes an investment too? What I mean is that even if I was buying a Single Family home wouldn't it still be an investment. In fact it is my opinion that every purchase is an investment of one kind or another. Furthermore every person is an investor, good or bad. Let me explain.

Each dollar that we earn has the potential to create wealth. That is, every dollar has the potential to be invested and grow. If we didn't have any expenses and we invested every dollar we made into creating wealth, only then would we see our true wealth potential. Unfortunately we have expenses. For some crazy reason we are required by nature to do things like eat. And for some even crazier reason food costs money!

Of coarse most of us are going to spend the majority of our money. However, each dollar we do spend has an opportunity cost. An opportunity cost is the benefits you could have received by taking an alternative action in this case wealth creation instead of eating. defines investment as the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value. If every dollar we earn has the potential to create wealth then I purpose that every time we use a dollar it is an investment. The question is it a good or bad investment.

"Every time we use a dollar it is an investment"

Now, I understand that we have expenses. I'm not suggesting that someone is a bad investor because they spend their money at the grocery store. However, we do have choices in how we meet our needs and how we spend our money. It is also important for us to distinguish our needs from wants. For example, I like to buy candy. I have one crazy sweet tooth. When I spend $1 on a candy bar it may not seem like much, but over a 30 year period that $1 can have an opportunity cost of as much as $300. The question is what do I want more? A candy bar or $300? Everyone of us faces questions like this on a daily basis. What makes us a good investor or a bad investor is how many choices we make like this.

Once we put our money aside in order to create wealth, that is an entirely different type of investing. Someone can be a good investor in the grocery store and a bad investor in their IRA. The trick is finding financial balance.