Let me introduce you to the investment pyramid. Understanding this pyramid was a game change for me.
Decades ago a wealthy family friend called me to invest in a limited partnershipcalling it a “an exciting opportunity.”
I did not know that a limited partnership was illicant And I couldn’t sell my shares even though I saw the company going to bust.
When I told my accountant this story he pulled a triangledivided into 4 levels, explaining this represented the entire investment world. My mistake began at the top.
Then he pulled a reverse triangle and rests on the wobbly tip. “See what happens when you start at the top,” he explained. “Your portfolio is not very stable, is it?”
My accountant had just given me the secret of investing wisely: Start at the bottom and work your way up, level by level.
Level # 1: cash or cash equivalents (CDS, Treasury, Money Market Funds, Basic Bank Accounts). This is Your safety net. You have cash to cover the unexpected without sliding in debt. There is a little volatility so you are probably not losing sleep worrying. Risk: Inflation.
Level # 2: Conservative warehouses and bonds(Solid companies, high classified bonds, funds with good track records.) This level fluctuates more than, says treasuries, but is very liquid, and the return is high enough to offset inflation. Risk: Need to sell on a down -market
Level # 3: More unstable investment(New markets, foreign funds, unwanted bonds). Appropriate to a small part of your portfolio as price fluctuations can be extreme but certainly can ratch up your returns. However, you need a strong stomach and a longer time frame. Risk: Severe volatility
Level # 4: Resistant Investment(Limited partnerships, venture capital, hedge funds, opportunities, raw materials). Gains here can be huge, but it can also loss, which leads to huge fortunes or suddenly bankruptcy. Risk: Ultra High.
Entrepreneurs, Guess where your business fits? At the very top. I worry when women tell me their biggest and sometimes their only, investment is in their own company.
I urge everyone to make sure they have a solid foundation of cash in the bank and a healthy retirement fund before They plow capital for their own businesses.
How are your investments stacked up? Are you on stable soil or do you need to re -evaluate? Share your thoughts in a comment below.
Barbara Huson
Barbara Huson is the leading authority of women, wealth and power. As a bestselling author, financial therapist, teacher and wealth coach, Barbara has helped millions to take responsibility for their finances and their lives. Barbara’s background in business, her year as a journalist, her master’s degree in counseling psychology, her extensive research and her personal experience of money gives her a unique perspective and makes her the greatest expert in giving women the opportunity to live up to their financial and personal potential.
Barbara is the author of 7 books, her newest, Rewire for Wealth, was published in 2021. You can learn more about Barbara and her work at www.barbara-huson.com.
Your safety net. You have cash to cover the unexpected without sliding in debt. There is a little volatility so you are probably not losing sleep worrying. Risk: Inflation.