Saturday, November 12, 2011
No, no, no, and no. . . Investing Like You are Poor
In some financial article I have somewhere for the blog, a writer made a very insightful comment which I am paraphrasing about too many people in our communities are investing like they have just stepped off the boat, even though their relative financial comfort should call for a more conservative approach. Yet they are investing recklessly, make it or break it style. It was one thing for our grandparents to put what little they had into a single basket. The worst that could happen: they'd be left with nothing in their pocket. But where they are on the financial spectrum, that type of investing is simply inappropriate. They are simply taking on too much risk, and in the process they often end up loosing more financial footing trying to 'get rich' when normative investing would be more suited.
A team that is mid-game and keeping the score close (i.e., they have a reasonably comfortable life an some good years ahead of them) simply should not be throwing their football into a disorganized, crowded end zone. But, it is happening far too often and I've seen more than enough shares at our favorite frum women's forum to know that this issue is prevalent and relevant.
In this imamother thread a wife brings her concern to the chat room (a bigger issue is that the husband isn't listening to the wife and they aren't a team as he plans to enter into a passive income activity that isn't really passive and is sure to involve her even though he probably doesn't even realize that between sips of kool-aid). She is rightfully concerned about her husband's plan for an inheritance. He heard from a relative about a lady who buys homes in other states, rents them out providing income, and then sells them a few years later.
Ah, investing in a cash-guzzling non-liquid asset with inheritance money, sight unseen, in a state you don't live in because you heard a tip from a relative. Screams bad idea!
I don't want to talk too much about real estate investing and get side-tracked, but I would recommend a first time investor create a situation of maximum flexibility: flexibility in the family budget to cover shortfall/losses, flexibility on the time frame, flexibility regarding property management or self-management.
When people who lack funds run into money (be it an inheritance, a platinum album, the lottery), they often act out of emotion. Below are some questions that I recommend those who run into money to consider. Readers are free to add their own questions.
1. Is our own personal financial situation under control?
2. Have we invested in our own income earning potential?
3. Are we investing in the future income earning potential of our children?
4. What are our predictable future financial needs and what level of liquidity do we need?
5. What level of risk is appropriate for our family?
6. What level of involvement in an investment works for our family?
7. What type of industries/investments interest us?
Especially for non-passive investments (and I'm not talking about passive from a tax perspective):
8. What will it cost to maintain this investment? What are the risks?
9. Do we currently have the relevant skills, experience, and support needed to make this work?
10. Are we on the same page regarding our investment(s) and can our family manage this considering all other needs?
While no one really wants their money sitting around losing money to inflation, there is absolutely nothing wrong with letting your money sit while you explore your get on the same page.