One of the most common questions I get from the participants in my monthly tax and wealth coaching teleconferences is, “Is XYZ a good investment?”
XYZ may be storage units, gold, international funds, mobile homes, businesses, commercial real estate, you name it.
The answer I give to each participant is the same. It depends.
It depends on your personal wealth strategy.
The Magic of a Wealth Strategy
The magic of creating a personal wealth strategy is that you can answer all of your own investment questions simply by referring to your strategy.
When developing a wealth strategy, there are several key questions to answer so you can answer the question, “Is XYZ a good investment?” I’ll share 2 of these questions right now.
Question #1:
What are your personal preferences?
Different types of assets have different types of characteristics. A successful wealth strategy is able to match the characteristics of a particular asset to your personal preferences.
Is your preference High, Medium or Low when it comes to certain investment characteristics? Here are a few personal preferences to consider:
Rate of return
Cash flow
Interaction with other people
Tax advantages
Once you have identified your personal preferences, you can begin to navigate through the specific type of asset to focus on.
For example, if you have a high preference to interact with others, then you can weed out assets that do not have this characteristic. The more personal preferences you can identify, the more you can narrow down the choice of assets that best match your preferences.
What is your investment criteria?
Once you have identified an asset, you are still left with an overwhelming number of options.
For example, let’s say you’ve selected commercial rental real estate as your asset. There are thousands of investment opportunities with commercial rental real estate!
How do you narrow down these options? By quantifying your preferences.
For example, you may have a preference for a high rate of return and quantify it as expecting to earn at least a 20% return on your investment. And if you have a low preference for cash flow, then you may set your cash flow criteria as $0.
How do you set these numbers?
Warning! Most investment mistakes come from not following a well thought out wealth strategy. I know several people right now who are struggling with their financial situation. Why? When I look at what they have done, it is clear that they did their investing without a clear strategy. Or, they had a strategy and deviated from it.
The numbers need to work with your wealth goals. This means you need to run the numbers. If you apply the numbers to where you are today, do you get to where you want to be? If you don’t, then your numbers need to change.
The end result is a specific set of criteria that an investment opportunity must meet in order to investigate it further.
Using the example criteria above, if an investment opportunity has a rate of return of 15% and cash flow of $1,000, you will pass on it because it does not meet ALL of your criteria.
It also means if an investment opportunity has a rate of return of 50% and negative cash flow, you will pass it up because it does not meet ALL of your criteria.
Taking the time to select your asset type and set the investment criteria for that asset is often a huge time saver. Imagine being able to sort through 100 investments in just a matter of minutes to find the 5 investments that meet your criteria. Plus, you can now focus your time on doing your due diligence on just those investments that meet your criteria. This is a powerful system!
Is This a Good Investment?
So, getting back to the original question – Is this a good investment? The answer: It depends. It depends on if it meets your investment criteria. If it does, then pursue it.
The magic of creating a personal wealth strategy is that you can answer all of your own investment questions simply by referring to your strategy.