Most people think of investing the wrong way. They think it means ROI, diversification, guarantees, or visionary companies that are set to disrupt the market. The real question you have to ask yourself is “what are you really buying when you buy an investment?” and the answer isn’t on that list.

• There are a few key things that indicate that you are on the right track financially. You are working your cash reserve or have it already. You have a written financial plan or have an appointment with your financial advisor set up to put one together. You also have the big risks in your life insured.
• With those in place, now it’s time to look into investing. The question you really have to ask yourself before you jump into anything is “what are you really buying when you buy an investment?”
• People think they are buying into a visionary product, or diversification, or safety and guaranteed interest payments. The trouble is that’s not quite correct.
• “It’s not the return on my investment that I’m concerned about, it’s the return of my investment.” -Will Rogers
• The key for every single investment is an exchange of cash flow. Every investment is a promise of cash flow in the future.
• When you buy a stock, you are expecting the company to share the profits in the form of dividends and to eventually be able to sell the stock for more than you paid for it.
• With a bond, you’re getting the interest over time and eventually they will repay the bond.
• You’re buying a promise. Every investment comes with the explicit promise of more cash in the future.
• With a Certificate of Deposit, you’re giving a bank your money and they’re promising to pay you back the money after a certain amount of time plus interest. It’s a pretty high-quality promise. Compare that to a stock. You buy the stock and the company is making a promise that you will get a share of the profits in the form of dividends. But what happens if they lose money, or worse, go out of business?
• The first thing to consider is the amount of cash flow possible in the exchange. With stocks, that would be the potential dividends and increased sale price. With bonds, you would be looking at the interest rate and principle involved.
• The second consideration is the risk to your cash flow involved. A bear market is when the stock market as a whole goes down by at least 20% and they happen about every 5 or 6 years.
• The third consideration is timing. With bonds, there is a set maturity, but with stocks, there is no definite timeline involved.
• Your plan defines the purpose of your investments. Then you have to gauge the quality of the promise of any investment you are considering buying.

 

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