Many of the things written in my book, “Choose Stocks Wisely,” with regard to proper risk analysis of companies are simply the things that are required where sound personal money management is evidenced. Today, I’ll share some thoughts toward making sound monetary decisions. The following list of financial practices can aid in avoiding money troubles and conversely lead to financial stability and opportunity to assist with needs of others:
–stay liquid enough, meaning maintain adequate cash or assets that can quickly be converted to cash (savings accounts, short-term CDs, for example) in order to pay bills on time and cover unexpected events.
–budget (allocate) inflows judiciously so that monthly outflows are more than covered by inflows. Put the emphasis on controlling costs rather than on generating more and more inflow. When you let self believe more money is what’s needed, cost containment easily is ignored. In turn, you may find self spending excessively on unnecessary items or acquiring things at the wrong times leading to increasing financial bondage and desperate actions like taking second and third jobs to generate more inflow.
–avoid debt; while not completely avoidable in many situations, borrowing lessens financial freedom and increases financial bondage.
–spending less than what flows in leaves “extra.” Consistently set aside some of the extra (save).
–if all the above are done, invest wisely. As I’ve said many times, the reasons behind my book don’t include encouraging anyone to buy individual stocks. But if you do buy individual stocks, investing wisely means you always assess the financials carefully. This assessment starts with a careful assessment of the financial position of the company expressed by the balance sheet.
See you next time.
Paul,
I am very aware of your risk averse strategy in purchasing common stocks. However, common stocks are typically only one portion of an investor’s portfolio. A significant asset that everyone must have is real estate. As an accountant, do you believe that paying in cash for your house is the smartest strategy? (assuming you have enough in cash reserves after the purchase). Also, generally, what percentage of your portfolio would you advise that a sensible investor allocate to real estate? One can own several properties outright and collect rent and appreciation.
Ian,
I’m afraid many others can give a much more adept answer, and surely a more technical one, that I can offer. Indeed, a well-diversified “sizable” portfolio would be one including multiple classes of asset — if capital is ample enough to permit. My answer on buying real estate would be, if plausible, to pay cash. But there are a host of reasons why I could disagree with myself. Therefore, I surely wouldn’t argue my personal position against others who might adamantly disagree, especially in such a low-cost interest environment. However, personal indebtedness makes one beholding to another — sharing ownership rights. However, so long as wherewithal in other sufficiently liquid assets exists to cover the obligation (principal) if deemed appropriate, there’s a better case for seeing the indebtedness as choice rather than involving obligation. There are tax issues and other things that make a conclusive comment about paying cash way beyond blog post comment response. And I know you know that and aren’t asking for that. So, the best I can do approaches personal conviction as much as anything — to own it outright. Buying on time is akin to buying a stock on margin. And I don’t buy stocks on margin. With one’s “home,” borrowing is very often simply “essential.” So, acquiring real estate with “cash” means, to me, we are looking at an investor with significant resources. People lacking resources to own specific properties can still look to the stock market and buy REIT (Real Estate Investment Trusts) positions.
As to what percentage, one’s investment horizon and total net worth would dictate that answer. As a general rule, I’ve seen 5 to 10 percent.
Real estate held for rental income does involve a hefty personal time commitment, even if held more passively while a managing outfit takes care of the “real work” end of it. As with stocks or any other asset, the timing of the investment (buy low, sell high) is going to be a prime factor in results.
Paul