8 Rules of Building Wealth
By Alan L. Olsen, CPA, MBA (tax)
Greenstein Rogoff Olsen & Co. LLP
Forget Performance; look at fees
Remember that it’s not what you make, it’s what you keep. When evaluating an investment evaluate the cost to generate an investment return. If you are using an investment manager compare the performance of the investment net of fees. Be careful when entering into non-tradition investment vehicles like limited partnership interest. These types of investments tend to have higher management fees and are often illiquid.
Invest when a stock’s earnings estimate is being revised upward.
Investing when a stock is strong is often a sign of good management and strong underlying value. Be focused on stocks that are reaching new highs because the management is committed to increasing the stock value. Look for stocks that announce buyback programs. This is often a sign that management feels the stock is undervalued. If the insiders feel that way, its often a great sign that you should be buying the stock too.
Monitor cash flow to find the winners
Increased cash flow into a company is a great sign that the company is fundamentally strong. With increased cash flow the company has the ability to pay increased dividends and expand without taking on a lot of debt.
Put the right investments in the right places
Don’t just buy an investment because everyone else is. The best investment policy is found in a balanced portfolio and outlines investment objectives. For example, if you are young and starting out your career, you should be heavily weighted into stocks and making investments with greater potential returns. A person approaching retirement should adopt an investment policy that focuses on predictable cash flow and protection of principal.
Forget 1-year outlooks; plan at least 5 or 10 years ahead
Even the best professional investment advisors cannot predict what is going to be the best performer for the next year. The best investment policy is reached by keeping a long term perspective in mind. When you invest, invest for the long term. Be patient and allow your portfolio to experience volatility. If you are worrying about your investments, then you have too much invested. Only invest what you can afford to lose.
Don’t be afraid to hold cash
You should set aside some cash outside of the electronic banking system. If you were to experience a disaster your credit cards may no longer work, but your cash will. Hold enough cash to manage your affairs for at least 4 days (or 72 hours).
Follow the outstanding shares
When evaluating a company be sure to check who is currently holding the stock. For example, how much is owned by institutional investors. Institutional shareholders give more stability to the stock unless bad news is announced. If the stock is quickly dumped by the institution, this will probably result in a large drop on the market. Look for companies that have less than 50% of the outstanding stock in institutions. This may bring a greater up side if you are holding stock and the institutions are looking to acquire large blocks. Also, companies with stock buyback programs are a good sign the company’s stock is undervalued.
Don’t rely on your instincts; they’re probably wrong
Most people learn this lesson the hard way. If everyone is dumping a stock, that doesn’t mean that you should be buying. Do no try to time the market in a stock. Remember the saying: “Lows hit new lows and highs hit new highs”. The best investment policy is one that adopts a slow steady pace.