Manage Investments Like Your Business
The primary focus of an entrepreneur should always be on their business. Thus, this is where their highest rate of return should always be. Nobody can question this. A key reason for this is that they do a very good job of properly allocating company assets and costs such as equipment, people, technology, and buildings. Plus they connect the dots between these assets. This is the essence of diversification.
But an astute small business owner also knows that having all assets inside the firm probably isn’t a healthy practice. So they begin to invest externally. However the same thinking that was successful for the internal assets does not get applied to the external assets. These investments seem to get separated from each other and managed as if each of them was the only investment. A rental apartment here and another one there, cash at three different banks, home for this purpose and a cottage for that, stocks with Tom and bonds with Bill. Expenses are mingled and the assets are never connected into a big picture. It becomes very difficult to accurately gauge your total real net rate of return.
I would suggest that you look at your external investments as a whole, instead of separate entities. Put it all into one package in your mind. Managing your assets does not have to take over your life. Start by simply creating a spreadsheet. Many people are surprised to see what they have – or don’t have. If your home accounts for 56% of your wealth, put that on the spreadsheet. If stocks and bonds account for 6%, get it down. Put it all out there on a piece of paper so you can see it. This first step is always surprising.
Financial Planner or Investment Advisor – Which is Right for You?
Is there a difference between the terms financial planner and investment advisor? What separates an investment advisor from a stock broker? Often the public does not really know and the financial industry is not always eager to clarify. Let’s have a closer look at who does what.
Someone known as a financial planner is most likely to be found working for an independent firm that is not connected to the brokerage industry. They may even work out of their home. Their focus and training has been in the basic planning functions. This would include retirement, insurance requirements, and education funding. This advice can assist with clarifying goals and establishing a plan for achieving them. On the investment side they are limited in scope to services and products they can offer. Here you can find a selection of mutual funds or GICs but more sophisticated avenues are closed off. The planner’s income is primarily derived from sales of mutual funds and insurance products.
The other main group is usually referred to as Investment Advisors. Their focus and training has been on managing more in depth investment portfolios. Licensing provides access to a full range of opportunities and services. Individual stocks, hedge funds, IPOs, and flow-through shares are now accessible. In terms of money, the Investment Advisor is able to offer higher yielding products at a lower cost. There is a big difference, for instance, between being able to own individual bonds and buying a costly mutual fund full of bonds. The IA also has more flexibility in generating income. The traditional method of trading commissions and the newer fee-based model are the two main options.
Why Homes Aren’t Investments
Famous quotes abound. ‘Home is where the heart is’. ‘Home is where you hang your hat’. Home sweet home’. Your home is many things – a sanctuary, a shelter, a place to gather with family, a creator of memories – but it is not an asset that should be considered an investment. I’m not just saying this now that global housing markets have collapsed, I have always believed it.
We have been hardwired to believe without question that owning a home is essential for our financial health and security. But consider this scenario. A young couple wants to buy a home for $250,000. It takes them 5 years to save the required 50k for the 20% down payment. This money must be kept safe and therefore cannot be invested over that time. Conversely another couple who continue to rent and invest that same 50k at 7% now have almost 60k. This is before the purchase even takes place.
After the purchase we tend to forget the constant repairs, improvement projects, taxes, selling commission, and most importantly of all the cost of your time. These items never get properly accounted for. When calculating returns from home ownership many years into the future, usually only the buy price, a couple of major projects, and the sell price are considered. We don’t want to know the real numbers. And don’t forget another important factor of a good investment – liquidity. You can’t just sell a home on a moment’s notice.
I’m not arguing against home ownership, per se. There are some good deals on short term fixer-uppers and longer term holds on the water. But most of us should view our home as you would view owning a pet. You love it and you want to take care of it, but don’t expect much besides love and affection in return.
Core Money Beliefs
There is a very important step that comes before the creation of a financial plan. It is taking the time to determine how you really think about money and why you think that way. I call these your core money beliefs.
They are mainly determined early in life, and primarily depend on where you lived in your childhood and how your parents handled money. For example, if your parents came through the depression era, there is a good chance you will exhibit the same risk-averse characteristics that they do. If money was always ‘easy come, easy go’ during the early years then it probably still is and that is how you think of it.
I like to ask new clients to take the time to investigate these core beliefs. It is an especially entertaining session when both husband and wife go through my exercise at the same time. Usually they are complete opposites. Below I have listed a few common situations that arise if people do not understand or resist their core beliefs.
• Not able to tolerate the market volatility but they keep trying anyway.
• Despite being wealthy they never believe they have enough money.
• A lack of trust in almost anything outside of their control.
• Poorly organized debt management.
• Not being able to connect money objectives to life objectives.
Understanding your core money beliefs and knowing where you stand with regards to handling your money will greatly benefit you now, and in the future. By learning how you think and how you deal with money, you can appropriately make the right decision when managing your money so that you can get the most out of your investments.
Mr. Big vs. Mr. Small
It has often been said that a good small company can outperform a good big company any day. There are a number of reasons for this belief. For a comparative look let’s take the financial services industry.
Large brokerage firms have historically experienced conflicts of interests within their operations due to the underwriting process. Investment offerings are often their own internal material and very standard in nature. It can become common to think ‘products’ instead of ‘solutions’. Information on costs and returns can be vague. Their Advisors are only employees, not owners.
On the other hand, there are the smaller independent brokerages. Because there isn’t any underwriting there isn’t any conflict of interest. Instead of standard products, niche offerings are discovered through personal research. They are free to choose the best solutions from any source. Measurement of costs and returns must be accurate. Business doesn’t tend to walk in the front door, Advisors have to earn it. And finally, they own their businesses so they need to dig a little deeper.
