The Three Legged Stool
My paternal grandparents were born near Lake Como, Italy. My grandfather learned how to farm, and he did just that until he died chopping wood at age 88. As a boy, I would walk into the barn where I watched him milking cows. Never got the hang of it, but I liked hearing the ping of fresh milk in the galvanized bucket. In order to get where he needed to reach, Popper would sit on a three legged stool. That wooden stool causes me to think of three investment legs for every household or business endeavor. As you know, lots of things come in sequence or synergy of three, even sneezes.
First leg: Investment Portfolio
Although debate continues about asset allocation, no one denies the impact and importance of diversification. Equally, all investors are aware of investment risk, even though many won't talk about it. Assets divided among a diverse group of assets adds further safety when money gets exposed to the unexpected. We may find ourselves within the matrix of major or macro economic changes. Observing the price of oil, the weakened value of the dollar, and the emergence of China recommends broad asset class participation. Robert Kreitler in his book, Getting Started In Global Investing writes, "Investors focused exclusively on on Wall Street are ignoring the global sea change occurring in world markets."
Noticed the manic behavior or volatility of the markets? Volatility equals investor uncertainty. Since institutions account for most of the stock and bond trading, even the "big boys and girls" find the markets "uncertain". Implementing hedge strategies seeks to reduce the uncertainty while benefiting from the volatility. "Hedging your bet" acknowledges that when one asset is up, another is down. Specialty mutual funds make commodity, currency, and real estate investment choices possible. Consider reading Roger Gibson's Asset Allocation: Balancing Financial Risk
Second leg: Real Estate
My maternal grandfather never trusted the stock market. Lumber, mortar, land, mortgages represented what mattered for him. Admittedly, it worked for him. My wife tells me of a local couple who have leveraged their home equity to purchase a "fixer-upper" that they hope to "flip" for a profit. Real estate is a net worth maker for some. All investments have "boom and bust" cycles. Landlords have lost tenants to low mortgage interest rates. Now, the cycle may change, and multi-unit rental property may provide positive cash flow and long-term capital gains. Although finding property where you live makes logistical sense; locating a property in places like New Bern, North Carolina may provide income and a retirement home. Scott Frank tells his strategy in Buy Low, Rent Smart, Sell High Third leg: Cash Flow
One of our children changed jobs recently. It was all about cash flow. In our community, those on fixed income become frustrated by increasing property taxes; it's all about cash flow. Finding a continued stream of income, even in small increments, validates the effort. From hobbies to web sites, entrepreneurial instincts work for many. Ask Martha Stewart or Kevin Bidwell. Each succeeds with an idea that serves users while providing potential life-time streams of income. Not many of us like multi-level marketing; however, multi-billion dollar businesses exist because many do believe in it. A call from a successful colleague living in India yesterday confirms this interest internationally. Ecommerce transactions exceeded 3 trillion dollars in North America during 2004, and all the ideas have not been discovered. Want some guidelines for testing your ideas? Read The Wall Street Journal, Monday, May 9, 2005, "You Have A Great Idea. Now What?" by Wendy Bounds.
"... A cord of three strands is not quickly broken." - Ecclesiastes 4:12 NIV (New International Version)
Ray Randall serves clients as a registered investment advisor with his firm, Ethos Advisory Services, Essex, Massachusetts http://www.ethosadvisory.com. He has wide experience within the financial services industry, writes a weekly newsletter for Ethos Advisory Services, and coordinates the developments at Echievements http://www.echievements.com. Ray holds a Masters Degree from Gordon-Conwell Theological Seminary, Hamilton, MA. You may email him or call (877-895-3756).
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