The Business Are Us

Important Concepts for Financial Planning in the 21st Century

Your total return for each and every investment you make is directly and simply related to total necessary risk. Your financial professional should make that clear to you, especially in consideration of your tolerance for risk. Necessary risk is of course necessary (that's why they call it that) as it is at the heart of every investment. Three of the components of necessary risk are business (operating) risk, financial (leverage) risk, and tax interpretation risk.

It is easy to see why we need advisors for this. How can we be expected to consider all this, plus analyze the risk adjusted expected rate of return, on our own?

Unnecessary risk on the other hand is what so often kills the value of the deal.

You minimize unnecessary risk by avoiding dishonest people. If you are doing business with honest people your results will likely be better. Deal only with competent people. It is your responsibility to satisfy yourself as to their competency.

Always provide fair compensation to all parties involved. Is a $200 fee fair compensation for a $200,000 profit? If you expect to be treated fairly, with respect, and if you expect them to bring you another excellent investment - you must gladly pay for it. If you try to short them they will no longer be considering things from your perspective.

And diversify. When we diversify we minimize the impact of random chance - like having the only company we invest in turn out to be the single one in its industry to go broke while its competitors thrive. Adequate diversification is always an essential element of an investment strategy.

That's it in a nutshell. Your total return typically comes as some combination of current income, capital growth, and tax benefits. And an appropriate investment portfolio must be designed and maintained around your unique circumstances

Here are a few of the questions you must ask (and get satisfactory answers for) to avoid becoming a disillusioned investor. You may still be broke but at least you won't be broke and disillusioned.
Safety: How much, if any, of the principle and/or interest is guaranteed, and just how good is that guarantee?
Liquidity: How soon, and at what cost, could I exchange this investment for cash?
Cash Flows: How much cash, when, and under what circumstances must I or might I pay out, and receive?
Growth Potential: How much growth/appreciation potential might I reasonably expect, and what is the basis for that estimate?
Taxation: What are the most probable tax implications for cash flows to and from this investment, and how probable are they?
Maturity: When, if ever, can I expect to get my principal back?

Remember, some money is better than no money, more money is better than less money, getting your money sooner is better than getting it later, and paying for it (taxes for example) as late as you can is better than paying up front.

When you are considering any investment, any opportunity, or any thing for that matter - always remember TINSTAFL. While it is our nature to always want a bargain we must be aware that "there is no such thing as a free lunch" and the more time and energy we spend looking for one the more likely we are to fail.

By now I hope you are thinking about the implications of what you've just read and I also hope you will take a few seconds and post your comments for the rest of us. By sharing your experiences and insights here you will be adding to the richness of the conversation.

About the Author

Just like you, Wayne Messick is concerned about strategies for success in these challenging times. Determined to realize your potential, get his free report that is guaranteed to help you achieve the success you seek at http://www.wdm.net and also receive a COST OF CONFLICT calculator at no charge.

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Dec/10/2008 Comments Comments