Let me introduce you to the investment pyramid. Understanding this pyramid was a turning point for me.
Decades ago, a wealthy family friend urged me to take a position in a limited partnershipcalled it an “an exciting opportunity.”
I didn’t know that a limited partnership was illiquid and I could not sell my shares at the same time as I watched the corporate go bankrupt.
When I told my accountant this story, he drew a triangledivided it into 4 levels and explained that this represents all the world of investing. My mistake was starting at the highest.
Then he drew an upside-down triangle that rested on the wobbly tip. “See what happens when you start at the top,” he explained. “Your portfolio isn’t very stable, is it?”
My accountant had just told me the key to smart investing: Start at the underside and work your way up, step-by-step.
Level #1: Cash or money equivalents (CDs, Treasury bonds, money market funds, basic bank accounts). That is
Your safety net. You have money to cover the unexpected without falling into debt. There is little VolatilitySo you are unlikely to fret about losing sleep. The risk: inflation.
Level #2: Conservative stocks and bonds (Solid corporations, highly rated bonds, funds with track record.) This level fluctuates greater than, for instance, government bonds, but could be very liquid and the yields are high enough to compensate for inflation. The risk: Selling in a declining market
Stage #3: More Volatile Investments (Emerging markets, foreign funds, junk bonds). Suitable for a small a part of your portfolio as price fluctuations may be extreme but can definitely increase your returns. However, you wish a powerful stomach and an extended time-frame. The risk: strong volatility
Level #4: Riskiest Investments (Limited partnerships, enterprise capital, hedge funds, options, commodities). The profits here may be enormous, however the losses may also be enormous, leading to very large fortunes or sudden bankruptcy. The risk: extremely high.
Entrepreneurs, guess where what you are promoting suits in? At the highest. I worry when women tell me that their biggest, and sometimes only, investment is in their very own business.
I urge everyone to be sure that they’ve a solid money base within the bank and a healthy pension fund before They invest capital in their very own corporations.
