Creating a Financial Future

This column has previously discussed "picturing the future that we desire", and outlining a plan to achieve it. We mentioned that the plan must include goal-setting, measurement, and implementation. That implementation is this column's focus.

Putting the plan into action is what implementation is all about. Its one thing to have goals, but without concrete steps to achieve them, they remain dreams. The last column discussed measuring the money required for each of these goals. Now it's time to figure out how we're going to put that money together.

Of course, the first step is the obvious one. We must have a source of income. This could be a salary, an endowment, or even a loan (although we'd normally advise against that last option). One might consider multiple sources of income. This protects against undue dependence on one source.

Assuming that some income exists, we can begin to make plans for saving. Based upon our analysis, we can determine how much must be saved on a daily, weekly, monthly, or annual basis to reach our goals. We can then consider if it is possible to grow the money fast enough to reach our target date.

If, in the end, we find ourselves unable to save adequately for our goals, we must consider that the problem may not be in our plan, but in our income levels. Sometimes it's simply a matter of recognizing that goals may be unattainable without adjusting income levels. This might involve second jobs, or side businesses, or rather may require stepping back from the current situation entirely, and increasing employability through education or training. Furthermore, it might suggest that new, creative ideas should be considered. Alternatively, it might simply involve selling off unproductive assets. Whatever the case may be, the income level is a crucial part of any financial strategy, and one often overlooked by investment professionals.

Finally, once the income levels and saving decisions have been established, we turn to the final component: the investment strategy. The final strategy may include many different types of investments, and use many different types of methods, but in the end, it should always be focused on the goals.

For example, if the goal is to purchase a house in 1 year, investing in stocks may not be the optimal strategy unless you intend to take a great deal of risk. On the other hand, if you plan to purchase a house when you have earned enough money, but plan to remain flexible regarding the specific time, stocks may be more viable.

This brings us to the consideration of asset types. This is one of the most critical decisions to make. There are at least a dozen different types of assets to choose from. Some of the most popular are:

Stocks Mutual Funds Real Estate Limited Partnerships

Art & Collectibles Gold/Commodities Bonds Insurance

Businesses Derivatives

Of course, this list could go on, but we'll focus on some of these. First, let's dispose of the easy ones. Investing in a Business can be a great choice for someone with a solid business plan and sufficient time and capital to make it work. However, many businesses require a full-time commitment, and unless one is able to give up their regular income, it can be a problem. It is possible to start a business part-time, depending on the type, and this may be an option for some. Additionally, one could invest in someone else's business, but here one must be concerned with issues of honesty, compatibility, and incentive. Finally, investing in a business carries with it liquidity problems, because one cannot always sell a business for what its worth without first locating an ideal buyer. Thus, if you've planned to sell at a certain date, in anticipation of reaching a goal, you may have trouble.

Limited Partnerships carry with them unnecessary problems, largely because there is not a great market for these either. Thus, even when they have value, one may not be able to sell them easily. In this way they resemble investing in small businesses, and carry the same risks.

Insurance truly should not be considered an investment, but I include it here because it is so often sold as an investment. In many ways, it can help one plan for tax considerations, but as a pure investment, it is a non-starter.

Art & Collectibles can sometimes increase in value over time, and for those with specialized knowledge in a certain area, it may be a wise speculation. However, much like running a business, it takes time and energy, and has liquidity problems. Still, these can be a small proportion of a portfolio for some investors.

Commodities are bulk holdings of any uniform item for which all have a uniform value. This would include oil, orange juice, coal, silver, or pork bellies. Gold is a commodity with unique qualities because of its long history of use as money and reputation as a dependable store of value. All commodities have fluctuating prices in common, and those who invest in commodities generally have an intimate knowledge of the market for that specific good. Over 90% of people who invest in commodities lose money, while the experts generally make a comfortable living. Investing in commodities can be extremely risky for those who do not have specialized knowledge.

To reach Scott Pearson for comments or to learn more about his Investment Advisor services, visit http://www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor's Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.

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