Put Problem Definition Before Solution

Investing is a curious subject.  There are many ideas, some complicated.  Huge institutions rely on our fundamental love of, mistrust of, and need for money.

Perhaps a simpler view would help.

Money is stored value.  It represents what we received in exchange for our capital, effort and skills.  The more money someone has, the more value they have exchanged.

It becomes interesting when someone has more than they need to exchange for immediate (e.g food, shelter, or entertainment) requirements.  They invest the rest.  The tool might just be a bank account where they store money for future use.

Storing for future use is the key.  Investments are time machines.  They allow today’s effort to be stored for use at a later time.  They work in reverse too.  They can transfer money to the past.  If you bought a car on credit, did not have the money then, the debt paying ability of the time machine moves money backwards.

Investing and debt management are related.  The wise among us discover that financial planning is merely moving money about in time.  There is no magical idea here, but there are some things you should think about.

  1. What will I need to satisfy my future wants and needs?
  2. When will that be important?
  3. Who will be involved?
  4. What resources can I allocate to the task?

When you know what you need and the answers to the other questions, you can seek particular time machines to move the money.  Some are very dynamic, others less so.  Some require inputs other than just money.  If you buy a duplex and rent to strangers, you will input money, time, skill and frustration.  No complicated investment has money as its only input.  You should choose time machines that match your resources and your temperament.  Holding money is meant to make your life easier not more difficult.

When examining time machines, study efficiency.  Like gas mileage for a car.  You should seek ones that predictably acquire the needed outcome with the least input from you.  Instead of miles per gallon, think about rate of return.  7% will carry you farther than 6% given the same inputs.

Be wary of things that reduce your efficiency.  Taxes are the most common.  Fees and costs to operate the account are another.  Be a little careful here.    The price to get to zero usually exceeds the value to do so.  Fees are well spent when they help you make more or keep more.  Pay attention to rate of return net of fees and taxes.

Inflation is a barrier to success.  We can expect that money will be worth less in the future so when we look at the lifestyle we want, we must estimate the money equivalent far in the future.  Not easy.  Prone to failure in fact.  As an ongoing defence, think about yield after taxes, fees and inflation.  Achieving 4% would be outstanding.

If you manage this number, you will probably turn out okay.  You may need to learn some new skills to get a satisfactory number.  Tax management and alternative investment choices that require some skill, discipline and patience will be important.

The problem is not unsolvable, but it turns out better if you understand the problem before you fall in love with some well marketed method.

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com  

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