Business owners who want to invest their profit often come to me for advice as to where it should go. Perhaps you can relate – and remember, this isn’t a sales pitch. It’s an investment lesson that every business owner needs, and lots of people tell me they wished they’d learned it sooner so that they could make better investment choices. Here we go.
Let’s say that you wanted to invest $2,000 per month, and you weren’t sure where to put it. I would have two investment opportunities for your consideration.
First, there’s Investment A. It has a high risk of loss, no rate of return, no interest, no liquidity and worst of all, it offers you no potential income stream. Oh, and there’s a high cost of ownership, too. Are you in? I didn’t think so.
Then, there’s Investment B. It has no risk of loss, a guaranteed return and it earns interest over time. It also offers you liquidity and plenty of income stream options, so that you actually make money on it – and yes, it has a low cost of ownership. Would this be a good investment choice for you? Of course!
It should come as no surprise that when I present this lesson, no one ever opts for Investment A. That’s because rational people generally prefer guarantees, a consistent rate of return and low cost of ownership – not to mention an option that gives them an additional income stream they actually have access to. Unfortunately, many people have been conditioned to think that an investment is something they may or may not actually get something out of, but should do anyway. Consequently, they get confused when it comes to what makes a good investment. Take real estate, for example.
We’ve been trained to believe that real estate is always a great investment, haven’t we? But that isn’t necessarily the case. That’s not to say that real estate is not a powerful asset; it’s just that its success depends on a variety of factors, including market conditions, the profit margin you manage to achieve, and of course, the location of the property. Plus, a house is just one of many potential assets you could own. Isn’t an asset only as good as what it does for you? Your primary residence gives you a place to sleep, but is it really a great investment? Maybe, maybe not. Investing in real estate does not necessarily offer you all the same advantages of Investment B – and those are the advantages you want, no matter what you are investing in.
Any asset you are considering investing in should meet the criteria that Investment B meets: a low cost of ownership, no risk of loss, a guaranteed return, earned interest, liquidity – and most importantly, at least one additional income stream. There are several examples, but one of them may be bank CDs. Another may be whole life insurance. You should never jump head long into any investment until you sit down with a Certified Financial Planner®, so that would be my next recommendation – and never, ever put your money somewhere because someone on TV said you should. Those people are financial entertainers, not financial advisors.
Use the above criteria for any investments you are considering; this will help you, along with your advisor, to make the best decisions about where to put your money.
Kraig Strom, CFP®, ChFC® is a Certified Financial Planner® and owner of WealthyCastle.com. He can be reached at 877-297-5851877-297-5851 or www.WealthyCastle.com.