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In Uncertain Times, Stick With Investment Basics

Monday, 25 October 2010 08:50 AM Current | Bio | Archive

I often receive e-mails from clients explaining the latest tax or investment opportunity they are considering.

Mostly, after a bit of due consideration, I reply with some version of: “Don’t be a fool.”

After all these years of advising clients, I understand that in uncertain and scary times, people are psychologically more prone to doing some desperate things. And these desperate moves are on top of some dumb acts for which they are already paying the price.

To help explain my thinking, I point out to clients that they made their money from managing risks while taking advantage of financial opportunities.

While we are in unstable times with great changes likely to occur, this is no time to forget staying with the basics of how they made their money and kept it.

The investment basics are timeless and universal. The world has always been going through upheavals of one kind or another. The economic events of today are, in reality, capable of being executed a bit faster but are fundamentally no different.

These historical investment principles, the basic rules, are quite simple.

Foremost is to live within your means. This is obviously a notion lost on the government.

What I can say with great confidence is that financial happiness comes from a positive cash flow. Even though I advise only as a lawyer and not as an investment adviser or accountant, I have no hesitancy to point out that “income” or “earnings” is not cash flow.

With having cash in hand, and sometimes with the help of a little sweat equity, investments can be made. While there can be no reward without risk, it is important to have the confidence that there will be the return of the principle before optimizing the return on principle. Security of capital is the primary objective if wealth on a sustainable basis is to be achieved.

Minimize tax. Tax is a cost, not a social benefit. Regardless of all the propaganda surrounding the paying of taxes as our duty as citizens, tax is not voluntary, but a forced extraction of your hard earned money on the threat of criminal proceedings. The guys collecting it have guns.

A 40 percent to 60 percent cash-flow haircut because of taxes, with very little benefit in return, does not lead to your personal financial security. Never has and never will.

Think seriously of using qualified pension and retirement plans, and insurance effectively. Insurance, in particular, is tough to beat as a financial product as it enjoys the benefits of both the risk reduction of the law of large numbers and tax deferral of the income. Re-investing 100 percent dollars with little risk always compounds a lot faster than risk invested 50 percent dollars.

There is no substitute for continually increasing your technical knowledge of investments and financial planning. While you should not — ever — be buying investments you don’t understand. Relying on the credibility or reputation of people, even billionaires, who you don’t know is no substitute for figuring things out for yourself.

It’s your money so there is every reason why you should learn more about what people are trying to sell you. And what they are getting out of it. If the investment is so good, then why are they offering it to you and not just keeping it for themselves?

Ask a lot of questions. Get answers. If nothing else, you’ll be that much more confident that you are either buying something worthwhile or realize that somebody is trying to pull another fast one.

Investment discipline is difficult. I know that. But investing on the emotion of greed or selling out of panic only leads to broken dreams and recriminations. Well researched investments in a properly diversified portfolio will survive even the economic crisis and political upheaval that define today’s environment.

Investment discipline is needed to follow through on strategic plans to achieve stabilized overall goals. This means not only informed investment decisions but also constant monitoring. The marketplace is constantly adjusting and you should be ready to immediately do the same.

Investing for success is, like life itself, a very serious game. At this stage of life, we all know that there are certain fundamental rules that go a long way to make for good, if not great, personal relationships.

The same is true when it comes to investing. What should I can say when someone calls me for advice on what they should do in these uncertain times? I say, let’s stay with the basics.

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I often receive e-mails from clients explaining the latest tax or investment opportunity they are considering. Mostly, after a bit of due consideration, I reply with some version of: Don t be a fool. After all these years of advising clients, I understand that in...
Monday, 25 October 2010 08:50 AM
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