Many people today are concerned with their investment portfolio’s performance, and are worried that they will not have enough money for their goals. In fact, most investors have experienced little or no growth over the last 10 years. After adjusting for taxes and inflation, they may have less money today than when they started investing.
They are looking for an alternative to the investment road they have been travelling on.
We believe that many of the rules have changed in the world and the economy, and have been changing rapidly and dramatically for more than 15 years. These changes are on a global scale, and have made it more difficult to be successful using traditional investment tools. These changes will continue for the next several decades, as our technology grows, our interconnectivity and interdependence increases, and our world continues to get smaller, hotter, and more crowded.
However, there are fundamental behaviors that have survived through the entire course of human history, and commerce and business still behave in much the same way as it did when mankind began to exchange goods and service. Therefore, we believe that a fundamental shift in the way one views investing needs to occur, and that if you approach investing as a business, focus on cash flow, and select assets that grow over time as a natural course of inflation and supply and demand, you will have a better chance at obtaining all of your financial goals.
Our investment philosophy is centered on four principals:
- When investing your money, you should behave like a business owner.
- Positive cash flow is critical.
- Capital assets have a natural tendency to increase in value over time.
- True diversification can reduce risk and increase returns.
You should behave like a business owner.
As any business owner will tell you, income and profits derived from the efforts of others is their main motivation. To create a product or service that will provide them with income today, and be able to sell that business for a profit in the future, is what drives their day to day business choices. In other words, produce passive income today and plan for profits for tomorrow.
Your household is no different. Most people spend much of their time trying to increase their income, reduce costs, and put the difference to work for them so that one day their money will provide them with passive income. They trade most of their waking hours working for money today, so that tomorrow their investment money will work for them.
When investing while thinking and acting like a business owner, making your money work for you today and in the future is your primary focus. Positive cash flow becomes a natural way of being.
Positive cash flow is critical.
A business will suffer and eventually fail if it does not have enough cash flow to cover expenses. In fact, the only way a business can survive is to have enough income left over every month to allow investment in new products or services, open new locations, higher exceptional talent, and expand sales through marketing.
Your investment portfolio should have many income components to it that allow redeployment of this cash flow to assets that provide potential growth, provide stability when growth is slow, and provide a strong cash position to take advantage of investment opportunities when they can be purchased at a discount. And as you continue to build this passive income component, in time your income will exceed your expenses, and you will have obtained financial freedom.
Capital assets have a natural tendency to increase in value over time.
We believe that growth is a natural side effect of inflation and supply and demand. In 1973 you could purchase a home for $32,500. A gallon of gas was 40 cents. A dozen eggs cost 45 cents, and you could buy a new car for under $3,000. The Dow Jones Industrial Average was 850. So in 35 years, most things have increased in value (or cost) by 5 to 10 times. This has been a normal course of business since man first started to barter and trade.
Since this appears to be the natural order of things, focusing on true diversification and cash flow, along with careful selection of capital assets, will provide growth naturally. We believe that focusing your portfolio on growth alone will most times end up disappointing you and could become an obstacle in achieving your investment goals.
True diversification can reduce risk and increase returns.
Many economists have tried to define investment behavior, and there have been many studies, even Pulitzer Prize winning studies, that illustrate why diversification and asset allocation is important. Modern Portfolio Theory is widely practiced by most investment firms. While we generally agree with this theory, we feel it misses on few key points. Asset Allocation should include not only securities such as stocks and bonds, cash instruments, such as money markets, savings accounts and CD’s, but also
- Commodities, such as gold and oil (or companies that produce, service, or sell them)
- Direct deeded real estate, such as rental properties, land and commercial buildings
- Futures, such as options and currency trading (or structured securities that utilize these strategies)
Additionally, by viewing these investment choices through the eyes of a business owner, your choices will be made based on cash flow, taxation, opportunity, and investment costs.
Contact Genesis Financial Advisors for an example of a portfolio using modern portfolio theory, and one using our investment philosophy, based on a moderate risk/reward tolerance.
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