Throughout this site there are many resources about tools and vehicles that can help you in managing your money.  It is important to become educated about what is available and how different investment vehicles work.  Whatever decision you may make, always remember the important principle of diversification.

There are many that claim “if I only had $2 million, I would be set for the rest of my life.”  The idea may seem enticing, however, you may be surprised how quickly $2 million turns ito $0.  There are many examples of rags to riches story in the US.  I mean it is the American Dream right?  Well, for every rags to riches story there are at least two riches to rag story.  Unfortunately, two major traits that lacks among most Americans are disciplined spending habits and wise money management practices.  In fact, there are many examples of rags to riches stories only to return to rags again.  However, wise decisions can help safeguard and preserve your wealth throughout the remainder of your life.

Diversification is an essential principle to wealth management.  I can’t even count how many people I have known personally who have experienced extremely great successful times only to see everything they earned and more taken a way from them.  Why?  Because they were not diversified.

It is only natural that as we come across practices that bring great financial success to remain focused solely on those practices.  However, this is a risky game to play and, far too many times, ends in the person having nothing.  Why did so many people become homeless when the stock market crashed during The Great Depression?  For most, it was because most of their money was in it.  What many people do not know, was that there were many people who did well, even better, during those years, because they executed strong financial planning practices.

So how do you protect yourself from wealth decay?  First of all, if you are in a trade or occupation that experiences cyclical  economies (most do) then it is important to plan for it.  Real estate is a prime example of this.  From 2003-2007, real estate was on fire.  Some houses were doubling in just a years time.  At the time, it seemed like anybody and everybody was making money off of any type of real estate.  However, towards the end of 2007, real estate was hit hard with a recession, which tanked the prices.  As a result, much of the gains that were made during 2003-2007, were taken back within three years.

There were some people who planned an exit strategy.  Anytime you embark on an profitable business, you should always construct an exit strategy before hand.  It is much like going to an auction.  Any experienced auction participant knows that you must make a final decision of your maximum price before the auction begins.  By doing this, you guard against “impulse buying” that becomes very evident in an auction environment.  I have seen people pay thousands of dollars more than they wanted to for something only because they were caught up in the auction…then comes buyer’s remorse.

This practice is also applicable to personal finance.  Judgement can become very clouded in the midst of a very successful business venture.  In fact, greed can sometimes completely take over and convince you that things will remain this good forever.  Having an exit strategy keeps you on track.  Eventually the time will come, where you decide to cash out, make a change, or whatever is decided in your exit strategy.  Sure, you may miss out on certain opportunities in the short term, but in the long run you will be much better off.

This is where diversification comes in.  Being that the US is a cyclical economy, we find that there are a lot of ups and downs throughout history.  If you look more closely, you will also find that certain industries are much more down during some of the down times than others and vise versa on the up times.  For instance, in 2009, real estate prices were down 50%, however, tech companies were only feeling a 10-12% decline.  I am sure most would say they would have preferred the latter.  However, during the up times, real estate was growing triple the times that the tech industry was. 

The point is, it is impossible to tell which industry will thrive at what time and which one will crash.  Sure you could guess and put all your eggs into one basket, or you can diversify your funds.  Sure, you may not experience as big of gains as you would if you chose a strong growing industry at the time to invest in, but you will greatly preserve much more than most during economic contracting times.

There are many different types of investment groups and funds that can diversify your funds for you.  They will sit down with you and find out your financial goals.  From there, they will give you a proposal, showing you exactly how much they allocated into each sector, also giving you the “risk” amount of the investment.  Higher risk investments tend to yield higher returns, however, they also have a greater chance of failing.

As you continue to become successful, wealth preservation will be critical.  Continue to learn how you can diversify your funds and protect yourself against our cyclical economy.

The absolute first element of understanding the time value of money is understanding compound interest. Albert Einstein considered compound interest as the eighth wonder of the world.  Compound interest simply means continuing to receive interest on interest.  Over time this simple principle can be very profitable.  Most everyone has experienced compound interest.  If you have ever had money in the bank, then you have.  In a sense, people are willing to pay you interest, in return to borrowing your money for a period of time.  As time goes on, that interest payment goes up more and more.  Interest can be compounded on a variety of different time frames.  Annually, monthly, quarterly, or even sometimes daily.  Knowing how compound interest works, will help you to appreciate it and utilize it in your planning.  See below a basic example of a short term view of what compound interest can do in a short period of time.

Another important thing to know when dealing with the time value of money, is that a dollar today is worth more than a dollar tomorrow.  Due to continual increasing cost of goods and the saturation of printed money (inflation), the worth a dollar will go down as time goes on.  The value of money today is known as Present Value. The value of an investment in the future is called Future Value. With the help of some equations or a good financial calculator, you can roughly calculate what a sum of money today will be worth in 10 years.  This is a vital step in understanding investment and what vehicles to use to increase your reserves.

You can really see the magic of compound interest work in your retirement accounts.  Since these accounts usually are not touched for several years, you can take advantage of compound interest and watch your money grow into a very healthy retirement, because you made the right investment.  By understanding the time value of money, you will be able to better evaluate potential investments and plan for the true value of your money in the future.  Remember,  a million dollars today will be worth significantly less than a million dollars in 2060.  So take some money from under the mattress and start by finding a good savings account with a healthy compounded interest rate to start making money in your sleep.

One great way to have your hand in the stock market, without knowing much about it, is by using mutual funds. Mutual funds are managed funds that are comprised of several different stocks and bonds to make up a specific sector of the market.  This sector could be technology, energy, emerging markets, financials or others.  There are risks involved in investing money in the stock market, but over time, good investments can be very profitable.

Many people use mutual funds for their retirement accounts like an IRA or 401K.  Reasons being, they are usually less risky and can do well over a long period of time.  Lets break down mutual funds and discuss some of the Pros and Cons.

PROS

Professionally Managed- Mutual funds are managed by trained professionals who are kept up to date of market conditions and moving trends.  This enables people who may not have a lot of knowledge in the stock market to let a professional help manage their portfolio.

Low Transaction Costs- When trading stocks by themselves, it can become very costly when you factor in commission costs.  By trading mutual funds, you are able to incorporate several different stocks and bonds with a minimal transaction fee.

Less Risky- Using mutual funds usually are less risky, because they diversify your investments among a variety of different equities.  As a result, usually mutual funds returns are moderate compared to singular stocks or more aggressive positions, but returns for mutual funds can still be strong.

Liquidity- As are stocks, mutual funds are very liquid.  Usually you can liquidate your funds from open-ended mutual funds within a couple days of requesting them.  This allows you to have access to your funds relatively quickly, unlike a real estate investment or joint venture.

CONS

Expesnse Fees- Although your transaction costs are down with mutual funds, sometimes you can get pulled into large expenses and management fees for your funds.  These differ depending on the fund, but sometimes much of your profits can be eaten up by a fund management fee.

Lower Returns- As I noted early, because of the diversification of mutual funds, usually your returns are a lot smaller than if you were to have a more aggressive portfolio.  This can be an advantage during a down time in the market, but can also leave money on the table during an up market.

Little Control- In a mutual fund you maintain little control to what you buy or sell or when you choose to cash out.  It can be difficult when trying to plan tax strategies since in most cases mutual funds distribute most of their capital gains and dividends to shareholders at the end of the year.  If you try and plan for taxes, this can sometimes cause some problems.

So there they are.  Mutual funds can be a great place for funds, especially in retirement accounts.  I like to use tools like Morningstar Investment Research. Morningstar can be a great resource as they have their own mutual fund rating system that shows the funds expense fees as well as their historical gains.  Mutual funds can assist you in achieving success.