If someone is offering an investment that will get you a great return, comes with zero risk, and gives you the ability to access your money anytime, they’re making an impossible promise. Every investment comes with compromise. Find out how the three R’s can help you decide which investments fit into your financial plan and which ones you should avoid.

• Every investment has the explicit promise that you will get more cash in the future in exchange for your cash flow in the present.
• Every investment also requires a compromise among the three R’s: Risk, Reward, and Readiness.
• Risk is the potential for loss. Reward is the potential for gain. Readiness is also known as ready access or liquidity; it’s how readily you can access the amount of money you have invested. Sometimes you can pick one, sometimes two, but there is no way an investment can have all three. If someone is promising you all three, the quality of their promise is definitely questionable.
• Consider stocks and bonds. Stocks have a high potential return and can be sold at any time the market is open, but with those things come a high level of risk. With bonds, your risk is almost zero but with that comes the fact that the reward is low and you have almost no access to your money until the bond matures.
• For each investment you make, you have to figure out what you’re willing to compromise on.
• Retirement is another good example. When investing for retirement, you don’t really care about ready access because you won’t need the money until you retire, but you really want to get a high return so that you have enough money to live on when you do retire.
• You have to look at risk in more than just percentage terms; you also have to look at it over time periods. Risk changes over time. The stock market generally gets less risky over time, but that can be difficult to remember in the moment.
• Even safe investments come with risk - not so much the loss of your principle but the loss of purchasing power. If your budget today is $5000 a month, at 3% inflation over the next ten years, it will take $10,000 to buy the same amount. For investments made over long periods of time, you have to factor in inflation.
• Risk, Reward, and Ready Access are part of the five keys to a winning portfolio. Every investment comes with a compromise and every financial planning situation has a different compromise that depends on what your goal is.

 

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.