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Tools of the Financial Trade: Real Estate Investment for Building Wealth

This is the second in a series of articles about Real Estate Investing as a Financial Tool.  Read the series from the beginning or click on the links below to learn more about each of the strategies presented.

Real Estate Investment is a versatile financial tool and can be used to help achieve any or all of these investment objectives:

  • Wealth Building
  • Portfolio Diversification
  • Tax Advantages
  • Appreciation Potential
  • Cash Flow Creation
  • Community Support
This post will explore how real estate investment can be used as a strategy to effectively Build Wealth for your overall portfolio and/or financial goals. 

Wealth Building

Real estate investments can help you to acquire assets capable of growing equity and increasing investment capital.  This strategy can be applied quickly or slowly over time, depending on the project, goals, individual capabilities and appetite for risk.

Fast Track

‘Flippers’ use real estate as stepping stones to amass lump sums of equity in a relatively short period of time.  Most often, they purchase a property at well-below market price (often foreclosures or fixers), then turn around and sell as quickly as possible for a profit.

This can be a great way to build significant capital in a relatively short period of time (less than a year).  However, it can come with some significant drawbacks, notably the time, expertise and labor required to prepare the property for resale, higher taxes on short-term gains, and of course the ever-present profit-eroding ‘Unexpected’.  This includes repairs, property expenses, debt and carrying costs, market changes, purchase/sales costs, selling period, etc. that weren’t adequately planned for or anticipated.

It’s easy to get excited when calculating all the potential profits on a transaction but many people forget to also prepare a potential ‘worst-case scenario’ or a contingency plan for the unexpected or underestimated costs that are bound to come up.

Since profits from this method are usually only realized when the property sells, having to hold it even just a few months longer than anticipated can quickly erode returns, especially if financing is involved.

Similarly, many people purchase new construction homes with little or no money down with the intent to sell in a year or two as phases are added, the neighborhood stabilizes and values appreciate.  In the 2008 housing market crash, many buyers purchased without proper due diligence and adequate investment capital.  When financing froze and home sales literally came to a screeching halt, people found that they were unable to sell, unsuited to being an impromptu landlord or unable to afford the monthly costs of owning a rental home, in some cases even with a tenant in place.  Timing is a critical factor, especially when banking on future profits to make up for interim negative cash flow.

Building wealth rapidly is an exciting prospect but be sure to do your homework up front.  Inexperienced and/or under-capitalized investors can quickly find themselves in over their heads and/or with a very expensive learning experience!

Project-by-Project

Slower-paced wealth building usually involves a slightly longer time frame, often 3-5 years or so.  This strategy is typically used with development and construction or ‘value-add’ projects, where an investor will purchase, lease or option a project property and take specific, calculated steps to improve or add to its overall value over a certain length of time with the intent to then re-sell and realize profits.

Land development can range from working with the local city to establish zoning, permitting, platting, subdividing, etc. to putting in the infrastructure (roads, curbing, utilities, etc.) for future construction and actually building on the land.  Each step of the development process can add value to the property, with  investment capital and costs recouped through sales or refinancing.  Many developers look for ways to control the risks involved in the development and construction process, such as lining up a lease or buyer for the property before building or prearranging for higher-cost construction financing to convert automatically to a lower-rate permanent loan after a set period.

Development and construction projects can be quite lucrative but can also carry significant risk to initial investment capital and hefty up-front costs.

Value-add project improvements can include capital or cosmetic repairs like upgrading units, replacing a roof, repainting, resurfacing parking lots, as well as strategic asset management action like leasing vacant space to increase net income, restructuring or extending leases, putting more efficient management systems in place,  fractionalizing ownership, refinancing with a different/better loan product, etc.

Funds to pay for capital improvements are either calculated into the purchase price up front and/or paid for by  existing cash flow from the property.  Strategic actions usually will need a stabilization period for the property to show consistent performance at new income or expense levels.

Investors using this wealth-building model either become, joint-venture with or hire a project manager who is responsible for executing the improvement plan for adding value to the property.  Expertise is obviously an important factor and depending on the scope of the improvements, may involve a great deal of coordination with sub-contractors or other professionals.  Timing can still be a major factor in realizing profits with this wealth-building method, especially if there are heavy up-front costs or if the building is completely vacant.

A detailed cost analysis is essential for any development or improvement project, along with a healthy cushion or reserve fund for the ‘Unexpected’.

Long-Term Outlook

One of the biggest criticisms of real estate is that the investment capital or equity cannot be as easily converted to cash as liquidating a stocks and bonds account.  However, building wealth patiently over time with real estate is how many business and family dynasties were created.

‘Buy and Hold’ is a term often used with much longer investment time frames, often 10 years or more.  Long-term wealth-building can been used strategically in an investment portfolio to achieve various long and short-term objectives depending on what is purchased and how it is structured.

Land-banking is the practice of buying an empty lot or raw piece of land with the anticipation that it will become more valuable over time.  Ever hear of the phrase, ‘Dirt Cheap’?  Unimproved land is less expensive to purchase and costs less to own than property that has a building already on it.  Land-bankers strategically purchase in areas that they consider to be or will eventually be ‘in the path of progress’ as towns and cities grow and develop new communities.  This can happen quickly, take years or may never happen at all if development is slow, takes a different path than anticipated or if environmental or other challenges arise that make development difficult or cost-prohibitive.

Investment Real Estate can be any residential or commercial property purchased for growth and/or profit potential.  Many people buy a second home or break-even rental property in anticipation that eventually over time, it will appreciate in value as most real estate has done historically overall.  This is often referred to as an ‘Appreciation Play’.

Income property is purchased with the expectation that it can generate enough income through rents or leases to ideally provide a source of income for the investor or to at least cover its own expenses for property tax, insurance, ongoing maintenance, repairs and other expenses associated with ownership.  Even property free and clear of any financing will have operating and administrative costs that need to be planned and prepared for.

One of the truly powerful wealth-building abilities of real estate is the ability to leverage your initial investment and increase its earning and growth potential exponentially.

If part of the purchase price is financed there will be loan payments to account for but if those costs are also covered by income generated by the property, the tenants ultimately pay down your loan, thereby increasing your equity and building your wealth in the process.

Obviously, financing adds another variable and additional risk to the equation.  Operating costs and loan payments are due regardless of vacancy or other interruptions in income.  Highly leveraged properties and under-capitalized, inexperienced owners can be a dangerous combination.  Investors need to carefully examine the past and projected performance of the property as well as their ability to manage the asset.  Again, a reserve fund is a wise way to help manage property cash flows and avoid being prematurely forced to sell.

Leverage is simply another tool and can be used as responsibly or irresponsibly as the investor wielding it.

Bottom line:  Build wealth at a pace with which you feel comfortable and can afford.  Expect the Unexpected. Partner with discretion, integrity and experience.  Any investment or project is only as good as the people involved.

This is the second in a series of articles about Real Estate Investing as a Financial Tool.  Read the series from the beginning or click on the links below to learn more about each of the strategies presented.

Tools of the Financial Trade: Investing in Real Estate Makes Sense

I’ve said it once, I’ll say it again:  Real estate investment is an incredible financial tool.

Why use the term ‘tool’?  Because a tool can be used to help you do the job you want when you need it.  You might need a little instruction and practice to use it properly and with as little risk or harm to yourself as possible (ever bang your thumb with a hammer?!) but ultimately, a good tool can help leverage your time, effort and money to get a job done more quickly, efficiently and effectively.

And as any artisan or craftsman knows, having the just the right tool for the job can make a huge difference.  But a tool is just a thing.  It takes the energy and know-how of the person using it to make it work and to get the most out of it.  It’s also important to have as many different tools in your toolbox as possible – so that you can pull out just the right one exactly when you need it.

Real Estate Investment is a very versatile financial tool.  It can be used in different ways to accomplish different results.  If you can only carry or learn to use a few tools, it makes sense to pick ones that can be applied in as many situations as possible.

Investing in real estate as a financial strategy makes sense for many different reasons, including:

  • Wealth Building
  • Portfolio Diversification
  • Tax Advantages
  • Appreciation
  • Cash Flow
  • Community & Economy
Over the next few posts, we’ll take a closer look at each of these potential investment objectives and how Real Estate Investment can be used to help achieve them.  
 
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Market Movements Make Money – Position Accordingly

Let’s face it – the Stock Market is really not for the faint of heart, especially in times like these!

Recent news and the ongoing economic uncertainty have been causing some pretty wild rides and sometimes it feels like you’re just hanging on for dear life. It can be a pretty scary place, even for the most seasoned and experienced day traders.

But without the downs, you can’t have the ups. Without the ups, you can’t have the downs. It doesn’t matter which side you’re betting on; without movement there is little potential for profit. For those players who can keep their cool during this time of fear and panic, there is money to be made.

The same essentially holds true for Real Estate. Investors want to see the real estate markets cycle because that is when real opportunities happen. Remember the old adage, ‘Buy Low – Sell High’?  It’s hard to buy low if the market is always up!

In most situations, movement means change, and change creates motivation. Sometimes perfectly good assets and real estate must be sold because of a death, divorce, partnership dissolution, retirement, downsize, loan maturity, interest rate adjustment, etc.  Sometimes the owner has simply accomplished his goal and is exercising his exit strategy to realize a profit. Sometimes the owner has just not managed the asset well. Whatever the motivation, if you aren’t expecting the change or if you aren’t properly prepared, your hand could be forced sooner than you’d like or under less-than-ideal circumstances.

Fortunately, the Real Estate markets tend to move at a much slower pace than the breakneck, minute-to-minute rollercoaster of the stock market. For those who are looking (and who actually want to see!) it’s usually a lot easier to anticipate market movement or upcoming changes and then have time to plan and prepare accordingly.  For example, information and statistics are available that show another wave of mortgages with interest rates re-setting coming up over the next few years. That could spell disaster for those owners who don’t start working on a plan to resolve the issue but it can also spell opportunity for investors who start positioning now to be ready to purchase if and when some people are forced to sell.

Ideally, owners and investors will plan and prepare to be in a position to minimize losses or to take advantage of upcoming opportunities when movements happen. Understanding your investment and the things that can affect its value are the keys to making smart investment decisions.

Smart investors are proactive, not reactive. They constantly monitor their holdings and make strategic moves to protect overall value – hedging their bets, so to speak. That way, if something changes or it the market moves in the opposite direction than what they think, the portfolio’s principal value is still largely protected. Whether it’s a stock, real estate or other asset class, every investment asset needs to be actively monitored and managed, even the passive ones. (Note: Property Management is not the same as Asset Management!)

In Real Estate, hedging or protecting your principal is often as simple as having ample cash reserves to weather through a rough spell of unexpected vacancy or repairs. The only time you really need to worry about the value of real estate is when you go to sell. Adequate liquidity can usually help you smoothly ride out a down cycle so you aren’t forced to sell at an inopportune time.

As many investors have recently discovered, a Home Equity Line of Credit (HELOC) is a poor and unreliable substitute for an actual cash reserve account. A HELOC can and will be revoked or capped by the lender at any given moment, regardless of spotless credit or payment history.

Many real estate owners make the mistake of cannibalizing their investment by draining every drop of the operating cash flow or overleveraging the asset. Then, when something unexpected comes up or something changes, they blame the market or the real estate itself for a problem that they created by not carrying sufficient reserves. You WILL have tenant changes, you WILL have some repairs – these are eventualities that can and should be planned for by all real estate owners.

Bottom line:  Know your assets, know your investments, keep your eyes open and plan ahead. These market movements are creating a lot of opportunity and it doesn’t look like it’s ending any time soon. Batten down the hatches of your solid performers to ride out the turbulence, cut loose the dead-weights and position yourself to take advantage of the opportunities created by these market movements.

Why Women Make Great Investors

Women really do make great investors.  Why?  Because investing is about more than just math and numbers.

Women are becoming more and more deeply invested in their own financial success for many reasons:  Careers are being pursued and marriage is being delayed, divorce rates are higher than ever, single-moms and women who are the sole or main breadwinner in the family are increasing, cost of living is rising steadily, job security is virtually non-existent…the list goes on.  There are no guarantees in life and situations can change drastically in the blink of an eye.  Independence and self-sufficiency are more than just words; they are a gateway to freedom.  Women are no longer content or willing to be dependent on others for their quality of life.  

A lot of the Myths about Money & Women floating around out there are simply false.  Statistics show that women are blowing the stereotypes out of the water when it comes to money and investing:  Women are MORE likely to join a retirement plan, women save on average 10% MORE than men, women actually spend LESS than men, and women are MORE likely to diversify their investment portfolio.

True power and independence happen not when you HAVE money, but when you know how to MAKE money.

Just ask any lottery winner or divorcee who has blown through a divorce settlement trying to sustain a champagne lifestyle on a beer budget!  A lump-sum goes away pretty fast when there is nothing in place to replenish it.  The first step is learning about Assets & Liabilities; the next step is doing something with that knowledge.

As Rich Woman Coach Nichole explains in a video Coaching Tip about Women and Investing on Robert Kiyosaki’s Rich Dad website, there’s a lot more to successful investing than just numbers and calculations.  The Rich Woman coaches identified their top 5 characteristics that make women great investors:

  • Asking for help
  • Planning
  • Multitasking
  • Diligent research
  • Value shopping

Let’s take a closer look at these strengths, how they each contribute and add up to a Great Investor Profile:

Asking for Help.  Women typically know how to ask for help when they know they need it.  And in my experience, more often than not, they prefer to ask other women.  Have you noticed all the networks and clubs and resources that are geared towards supporting women in financial and business endeavors?  The Daily Worth, WomenOwned.com, Ladies Who Launch, National Association of Women Business Owners (NAWBO), My Wealth Spa to name a few.  Many of these were created or developed just in this past decade.

Women seek and value mentors that can support and assist them in a non-intimidating, non-judgmental forum.  Although men often view women’s lunchtime or evening gatherings as a sewing circle gossip session, women frequently use friends and colleagues as sounding boards for new ideas, thoughts and perspectives.  Brainstorming and round-table sessions are becoming more and more mainstream, even in the ‘Old Boys Club’ organizations because there is strength and power in teams and in seeking outside opinions and help.

Planning.  Most women become good planners by necessity.  Often in addition to full-time employment or business ownership, women take on, or inherit by default, the monumental task of running the household, juggling kids activities, making and keeping family appointments, planning and organizing family vacations, meals, etc.  It takes a lot of planning and organization to make sure everything runs smoothly from day to day and week to week.

Investing demands a similar kind of planning and organization to be efficient and get the most out of your capital.  The ability to make and stick to short and long-term goals is important but having a system to monitor and track it all is priceless, especially when it comes to finance and investing.

Multitasking.  Women are also known to be exceptional multitaskers.  Handling several issues or tasks at once is all in a day’s work for most women.  This translates well into the world of investing because there are always many different things going on in many different markets and across many different asset classes.

Women who are able to see various market factors and how they can affect an investment will be much more able to predict possible outcomes and proactively make adjustments as needed.  Diversification is also easily appreciated and accepted by women who are more likely to hedge their bets as opposed to going for the glory in a single ‘Hail Mary’ home-run move.

Diligent Research.  Women know how to do their homework.  They are used to budgeting, comparing prices, finding the right pediatrician, school, camp, mechanic, gardener, insurance, etc.  In finance and investing, this means that women know how to investigate and identify investments that will work best for them.

Investing involves a LOT of research.  ‘Due Diligence’ is an investment term that refers to the process of verifying data presented, investigating the investment parameters and terms so that the investor can make an educated decision to purchase or decline.  As a real estate investor, I screen and analyze literally hundreds of properties before finally deciding to offer in on one or two.  Diligently investigating the investment and the people involved is a crucial step in protecting your investment funds up front and finding a good fit for your specific purposes.

Value Shopping.  Warren Buffet once said, “Price is what you pay; value is what you get.”  Women seem to intrinsically know how to stretch a budget and shop for bargains.  They are aware of what’s available, what the going rates are and will go clear across town to get something at a discount.  Women know that it makes sense to get a designer gown at half price if they are willing to find and sew on a couple of missing buttons.

Investing for value or value-add opportunity follows the same principles as shopping for any kind of bargain.  You need to have a good idea of the general market value so that you have a benchmark to evaluate the investment you are looking to purchase and know when it’s priced below its true value, or when a few simple steps are all it takes to realize its potential (add value, like sewing on a button).  Once you know what to look for, it gets easier to spot the gems.

Finance and investing may seem like a spider’s web of intricacy and detail but understanding the rules and knowing how to filter out the junk makes it a lot easier.  Women have the skills and qualities to excel in the investment arena on their own terms.  Women really do make great investors!

~ Eleanor Roosevelt ~

Investing Takes Effort: Would You Let the Dealer Pick Out Your Car?

When purchasing a big-ticket item like a car or a house, don’t most people usually do a little research, shop around, compare prices and look for specific features that suit their needs?  Of course they do.  So why do many people not bother doing the same when it comes to their investments, especially their retirement, arguably one of the most important big-ticket items a person will ever own?

It always surprises me when people talk about their portfolio but have no clue as to what they are invested in.  They’ll often joke about it and make a comment about leaving it up to the professionals or that’s why they pay their stock broker/adviser the big bucks.

Let me ask you this:  Would you let the dealer pick out the car you’re going to purchase?  Or how about letting your real estate agent pick out your home?  Highly unlikely.  So why would you let anyone else have the last say on your retirement or investments?

Think about some of the reasons why you probably wouldn’t leave the decision-making up to a dealer or agent:

Perspective.  The fact that there are six – count’em, six! – cup holders may be a fabulous feature but not as high on your list of ‘Auto Must-Haves’ as it might be for the car-pool commuter.  An agent might find the school next door to be most convenient but your spouse working the night shift might disagree when trying to sleep during the day.  Different people are always going to have different opinions based on their unique personal perspective, especially when it comes down to the details.

Priorities.  The dealer may also not realize that you’d rather give up side air-bags for an extended warranty, even though you indicated that ‘safety’ was a priority.  An agent  might consider a view to be more valuable than a yard.  Many of us don’t even realize our own priorities until we start looking at options and are faced with making some decisions.

Cost.  It’s way easier to spend someone else’s money.  It’s also easier to take risks and overlook ‘minor’ issues when it’s not your buck.  The agent or dealer won’t have to live with the stiff clutch or the less-than-functional kitchen layout.  And if compensation is based on a percentage of price, they might not be as aggressive in negotiating the sale.  Always track the money chain.  Fee structure can often make a big difference in how much you end up actually paying for something.

Value.  No one will care as much about getting the best bang for your buck as you will.  These are your hard-earned dollars so it makes sense that you’ll want them to work as hard as you do (or harder!)  That’s why we usually take the time to shop around, to get the most value for the best price.  We each have a different cut-off point when we feel we have a good idea of the ‘going rate’ and are comfortable with the intrinsic value of the purchase.  The dealer or agent might only look at 2 or 3 options before making a decision.

Reliability.  Choices can be tough, either having too few or having too many.  It’s hard to know all the in’s and out’s of every product in every field and it can be even harder to slog through all the information out there and filter it down to manageable, suitable options.  That’s one of the reasons why we look to loan brokers, agents, lawyers and other professionals.  Hiring a specialist in the field and leveraging their knowledge and experience is usually well worth it.  But…

How reliable would you consider the data or opinion if the dealer/agent providing the information was also the owner of the car or property you are about to buy?

Don’t get me wrong.  I think it’s VERY important to seek professional assistance and advice, especially for infrequent, large and/or complex transactions.  But just like an auto dealer or real estate agent, their role is to give information, guidance, advice and support through the transaction.  You might decide to outsource some of the legwork but ultimately you need to make the final decisions.

All of these concepts apply when making any major decision, including investment and retirement planning.  If you leave all the decision-making up to someone else, you are basically at the mercy of their choices.  You don’t have to be an expert but you owe it to yourself to do a little research and have a basic understanding of the core concepts, even when you use a professional, so that you can effectively evaluate the information you are given and make informed decisions.

NOTE:  Many employer-sponsored retirement and 401k plans are limited to a few select investment funds but they usually include dollar-for-dollar matching contributions.  It’s hard to go wrong with free money!  Just be sure to monitor statements and fund performance, and discuss options or concerns with the fund manager.  Don’t forget ~ 401k accounts can normally be rolled over into an IRA when employment has ended.  Know where your funds are and what they’re doing!

Million Dollar Formula: Anyone Can Make a Million Dollars

I just read an article by Timothy McMahon, editor at Financial Trend Forecaster entitled All it Takes to Make a Million Dollars is Time, Consistency and Rate of Return.

McMahon shares some numbers and data to support this formula and it got me thinking about a pretty exciting reality:  Anyone can be a millionaire.

It’s true.  The tools are available, especially here in opportunity-rich North America, for anyone with a little bit of self-discipline and a willingness to learn.  A-a-a-a-and there’s the rub.  Despite having the key to the Million Dollar Formula, those two little characteristics make all the difference when it comes to WANTING a million dollars versus actually MAKING a million dollars.

Think about it.  We all know that a journey of a thousand miles begins with a single step.  And then another and another, until we finally reach the destination.  We know the destination is there waiting for us even though we can’t see it.  We know that paths are available to get us there, sometimes many different routes. So why do so many of us never actually make it there?

Self-Discipline

It’s been said that ultimately we are the sum of our choices in life.  Nowhere is that more apparent than in our financial picture.  Good habits are the cornerstone of success but to develop them you have to be willing to prioritize and maybe even curb some indulgences along the way.

The ability to delay gratification is a huge struggle for most of us.  But it’s also your most powerful tool when it comes to money, saving and investing.  If CONSISTENCY is one of the keys to the Million Dollar Formula, then having a plan and a system can really help you balance and manage the process, as well as to stay focused on the end goal.  This is especially important when the goal is long-term, like retirement and the benefits can’t be seen or felt immediately.  Make it as easy as possible for yourself to be successful!

Temptation and accessibility are the silent saboteurs when it comes to your money and savings.  Take steps to make it harder to access your funds, like setting up a separate savings account that is NOT linked to your ATM card or locking up your credit cards (carry only one for true emergencies).  Choose to go to the park or beach instead of the mall.  Unsubscribe from magazines and emails with advertising and offers.  Keep pictures to remind yourself of the end-goal and track your progress so you have a visual representation of your success.

Treat your savings like an iron-clad fixed expense and take it off the top of each paycheck no matter when or how often it comes in.  YES, YOU CAN!  Remember, it’s about making choices.  Latte or $1M?  Eat out or $1M?  New car or $1M?  Every single indulgence is a choice you make that adds up and pushes your goal back a little further.  It’s not about doing without; it’s about priorities.  If you want to get to the Million Dollar Destination you have to make it a priority.  How quickly you get there depends on how high a priority you want (or need) to make it.

McMahon shares the math about the effects of Time and Consistency, along with an interesting thought:  “Even if you don’t have a (lump sum) nest egg you can retire a millionaire. Simply by saving $10 per day and investing it at 15% per year you will still reach Millionaire status in 25 years.  Is 25 years too long to save become a Millionaire? The average mortgage is 30 years!  So why are people willing to go in debt for 30 years but not save for 25 years?”

Willingness to Learn

People will often tell themselves that others have more opportunities, more cash, more luck or more whatever so that they can absolve themselves of any and all responsibility for their own success (or failure!) The truth is that we are each in charge of how we handle the people, things and events in our lives.

We are in the Digital Information Age.  There is information readily available on just about every possible topic you can think of, including money, finance and investing.  There are many paths to get to the Million Dollar Destination but not all of them will be right for you.  Taking time to read about different options and benefits will help you make informed decisions and more likely to avoid costly mistakes and setbacks.

Knowledge is power.  Even a child can understand the value of knowledge.  I asked my 13 year old son which he’d rather have:  A million dollars or the ability to make a million dollars.  He explained that, of course, knowing how to make a million would let him do it over and over again.  (But as we all know, knowing and doing are two completely different things – cue self-discipline!)

Are you familiar with the phrase, The rich get richer and the poor get poorer?  Knowledge and discipline really do make all the difference in the world.  McMahon shares this insight:

The Wealthy buy Assets; the Poor buy Liabilities; The Middle Class buy Liabilities believing they are Assets.

Knowing the difference between an asset and a liability is fundamental to building wealth.  Assets earn money and can appreciate in value; liabilities cost you and depreciate.  A rental home has the capacity to provide income and tax benefits AFTER covering its operating expenses, as well as the potential to appreciate in value.  Conversely, that boat you’re eyeing might provide hours of enjoyment and entertainment but it depreciates the minute you purchase and costs you every month for storage, gas, licensing, registration, maintenance and repairs.

As your funds grow, so will the temptation to spend and/or move them around.  It’s important to understand the pros and cons and the ins and outs of what you are invested in so that you can make informed decisions, regardless of whether it’s the stock market, real estate or any other asset class.   Rates of return vary greatly from product to product and every investment carries its own risk and parameters.  Again, there are many possible paths to get to the Million Dollar Destination so you need a basic understanding how they work to decide which is right for you.

Million Dollar Formula

So here it is again, the not-so-secret formula for anyone to make a million dollars:

Time + Consistency + Rate of Return = $1Million

Whether it’s the magic of compound interest or the brilliance of principal reduction, the sooner you start, the longer your funds have to work for you.

You have the Million Dollar Formula ~ The big question now is what are you going to do with it?

BTW, did you know that one of the best graduation or birthday gifts that you can give your kids is a ROTH IRA?  They may not fully appreciate it now but when it helps to pay for their college education or a down payment on a house, rest assured your kids will profusely thank and consider you a financial genius! 

‘Make Money’ is not a SMART Goal

‎”It is more important to know where you are going than to get there quickly.” ~ Mabel Newcomer

If you don’t have a clear, defined financial goal how are you going to know if you ever reach it?

‘Make Money’ is not a SMART goal (Specific Measurable Attainable Realistic Timely).  How much money?  In what time frame?  With what amount initially invested?  You need to clearly state exactly what it is you want to accomplish.  Then, you can measure and evaluate, and make adjustments as needed to stay on course.

When you want to go somewhere you’ve never been before do you just get in the car, start driving and hope you get there?  Of course not.  You get out a map, look at where you are and where you want to go, and then plan a route that suits you best based on your personal preferences and needs – like taking or avoiding toll roads or highways, visiting certain cities or sites along the way, taking 3 hours to get there versus 6 hours, etc.  If you run into a roadblock or detour or something unexpected comes up then you pull the map back out, make the necessary adjustments and get back on the road.  A plan to meet your financial goals can and should be crafted and maintained in much the same manner.

So what is it that you want your investments to accomplish?  Think both short and long-term.  Do you want to generate income to pay for college tuition?  A wedding?  To replace a spouse’s income so they can stay home with kids or retire early?  To help you retire to a warmer climate or closer to children and grandchildren?

It’s okay to think big; you just have to be prepared to plan and break it down into manageable chunks to make it happen.  You also need to be patient and give the plan time to work.  You can’t make a great chili without letting the spices simmer!  It’s also okay to change your mind and make changes along the way.  You never know what life’s going to throw at you.

One of my biggest pet peeves is that most so-called ‘financial advisors’ don’t seem to actually advise people at all.  They just babble on about risk and safety and then suggest putting money into a company-managed fund (for which they get compensated) and eventually you should ‘make money’, because it’s a ‘balanced’ fund where losers are off-set by winners.

Really?!  I should spend the next 30 years investing my life savings in something I don’t fully understand that might eventually make me some amount of money?  How is that a good plan?  Please don’t tell me that it’s to protect my principal.  If that were the case, it’d be easier and safer to just stick to FDIC-insured CD’s.

Every asset should have a POSITIVE effect:  Generating income, off-setting paper gains/losses, creating tax benefits, preserving or enhancing net worth or otherwise helping me reach my overall personal and financial goals in some way, shape or form.  Personally, I want my assets working as hard as possible!  Every investment should have a specific purpose for being in your portfolio and role to play in working towards your overall goals.  

If you don’t understand why you are invested in a particular product or vehicle, you need to ask questions and do some research.  At the very least you should be able to read and understand your investment account statements.  If your advisor can’t or won’t help, it might be time to find a new advisor.  Remember, no one will care as much about your money as you.

Bottom line, if I’m paying for advice, I want an opinion.  I’m not asking for a guarantee, just an opinion from a knowledgeable professional in that particular field.  I want a summary of information and data used to form that opinion.  I want to know exactly what this particular investment is designed to do for my portfolio and how and when it will help achieve my overall investment goals.

Then I can make an informed decision and make sure I stay on track to accomplish my goal.

To Dare Mighty Things means to Take Risks

Theodore Roosevelt, circa 1902

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‎”Far better it is to dare mighty things, to win glorious triumphs even though checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the gray twilight that knows neither victory nor defeat.” ~ Theodore Roosevelt

When it comes to investing, there are no guarantees and nothing is ever completely risk-free.  Really.  There are investments with projected lower volatility and there are ways to help mitigate risk but there is no way to completely eliminate risk all together.

If you choose to invest, you will have to expose yourself to some kind of risk at some point.  The good news is that you get to choose.  And it is your choice.  Own it.  Own it when you prosper and own it when you don’t.  When you authorize funds to be sent, you make the choice to invest.  It might be good, it might be great, it might be not-so-good, and on occasion it just might be a spectacular disaster!

No one has a crystal ball.  The best any of us can do is to research and learn and grow.  The only way to grow is to learn from our mistakes and missteps.  Sometimes we want something so badly (like a guarantee) that we ignore many of the warning signs that, on hindsight, were right there staring us in the face from the start.  Sometimes unforeseen variables come into play.  Sometimes things just don’t pan out as projected.

Don’t beat yourself up for a bad call (and certainly don’t beat up your broker!)  It’s impossible to completely eliminate your mistakes just like it’s impossible to completely eliminate risk.  But there are a few things you can do to help you mitigate and manage the fallout:

  • READ, READ, READ…and then read some more!  Read every word on every page of every document about every investment or project or private placement.  Make sure you understand all of it (including the risks) before opting in.
  • Beware the Guarantee.  Immediately red flag anything ‘guaranteed’ for intense scrutiny and further research.  Seriously.
  • Check out the people involved.  People can make or break a project no matter how great the idea.  Follow the leadership and follow the money (salary, distribution and profit structures).  Good people put their investors first.
  • Document everything.  Keep copies of all signed paperwork, documents, information and communications.  Following up phone calls with a summary email is a great way to help keep track of conversation details.  Dated docs make it easier to reference back to details (especially at tax time).
  • Learn.  Review the investment or project to pinpoint what went right and/or what went wrong.  Being able to objectively identify the elements or activities of a success or failure will help you to apply that knowledge to future projects.  If you let yourself get emotional, too busy pointing fingers and blaming everyone (including yourself) then you’re not going to be able to learn and grow from the experience.

Next time you get the chance, read or listen to a biography of someone you admire.  Chances are they’ve experienced just as many failures as successes.  Everyone gets it wrong some of the time, even the professionals, especially the professionals if you consider the number and volume of transactions handled.  You can travel once a year and never run into any problems but if you fly once or twice a month, chances are you might get delayed or lose your bags every now and then.  

If you want to keep going places, you have to put it all into perspective and then get back on the plane!


Getting Started…

Samuel_L_Clemens_1940_Issue-10c.jpg Category:M...

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The secret of getting ahead is getting started.  The secret of getting started is breaking your complex overwhelming tasks into small manageable tasks, and then starting on the first one.“ ~ Mark Twain

Welcome!

This quote seemed to be the perfect way to start things off.  Getting started is probably the most important step in just about any task, investing included.  Yet it almost always seems to be the hardest.

This Blog, for instance, has been on the To Do List for months (okay, a year!) but despite the explosive growth in social media and awareness of the power of the internet, the ‘Blog Project’ always got pushed to the back burner.  It actually wasn’t the difficulty of the task that was the problem; it was the scope of the project and time it would take to understand and do it ‘right’.

The world of investing and finance and wealth can be pretty overwhelming, too.  There’s a lot of information to sift through.  There’s the anxiety and dread of making the ‘wrong’ choice.  This is, after all, your hard-earned savings and retirement we’re talking about.

But like most of the challenges we face, once you get started you’ll probably find that it’s not really as bad as you built it up to be in your mind, especially when you have a plan and a solid support team behind you.

In fact, you may even wonder why you didn’t start sooner…!

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Please note that we are NOT attorneys, certified public accountants, certified financial advisors, registered investment advisors or securities brokers. We do NOT provide legal or financial advice, nor do we make any recommendation or endorsement as to any particular investment, advisor or other service or product, or to any material submitted by third parties or linked to this site. Anything and everything posted, reposted, linked to or shared on this weblog is solely for information and discussion purposes.

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