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Risk is Not for Herds

June 10, 2016 by  
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Last week I talked about risk taking and how the willingness to take risk when it comes to investing is critical.  Those people who really want to attain Financial Freedom or FF need to look at themselves to determine their tolerance for risk.

As a real estate investor working towards achieving FF, it’s important to understand your own temperament, and your ability to assume that element of risk.  It’s important to know your limitations and not torment yourself with sleepless nights by taking unnecessary risks in trying to keep up with others whose capacity to assume risk might be much greater than yours.  This decision may slow you down on the road to FF, but what is FF without some enjoyment, comfort and happiness along the way?

Everyone has a level and a threshold for tolerance and excessive and unnecessary risk will only create anxiety and tension and may well shorten your life.  So take a hard look at yourself and measure how much risk are you willing to take that doesn’t make you worry you to the point of causing pain, anxiety and suffering in your life.

But keeping in mind our objective, achieving FF, it is important to remember that the greater the potential risk the greater the inherent reward will be. It is also almost impossible to avoid every risk at any one time in selecting an investment. In order to achieve and maintain high rates of return, which are critical for achieving total FF, one must be prepared both mentally and emotionally to incur a higher than average risk. So look hard at yourself and measure how much risk you can handle.

Remember that “eagles don’t fly together in flocks.”  So if you are going to make it big you can’t just go along with the flock or the herd.  If you earnestly desire to achieve FF today, you must learn to assemble all the facts, calculate the risks, be decisive, and then act accordingly.  Statistics and history prove that the majority of people fail to ever become FF because they do not have a specific plan. They are content and willing to wait patiently throughout their lifetime for Social Security or they are looking for that one super great investment or the lucky lottery number to suddenly become super rich.  Don’t follow those kinds of people. Work on your plan that will take you to total FF over a reasonable period of time and you will reach the level of Financial Freedom that you set as your goal.

Avoiding Your Own Loss Aversion

June 3, 2016 by  
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Statistics indicate that the majority of people are security conscious. This fact has been verified in a number of studies which concluded that many people people’s fear of failure is twice as great as their desire to succeed. Some of these studies also noted that in general, there will be up to 5 times as many people choosing a stable situation than people choosing an option with recognized risk. In order to achieve FF (Financial Freedom) you cannot be afraid to fail or take a risk.

Our tendency to avoid risk is known as loss aversion. It means a person believes that if they lose something, say $50, their level of unhappiness with that loss will be significantly greater than the potential increase in happiness if they gain $50.  Its apparent in our everyday lives. People will order the same thing off the menu every time simply because they are afraid they might not like what they order if they try something new, even when there is a good chance they could find a new favorite. Similarly, people put their money in low interest bearing savings accounts rather than put any of it some kind of investment account that will most likely make them significantly more in interest, primarily because there is some chance of loss. So it sits in the banks making next to nothing.

The problem may come down to a belief that one has no control over the outcome of their circumstances, be it their food or their investments. A class of Harvard graduates was asked what they believed were the necessary ingredients to become financially successful.  Their conclusion was summed up in two words, “Greed, and Luck.” I couldn’t disagree more.

If you consider the statistics I mentioned, you might very well conclude that only one out of five people will ever have FF. But that is just a statistic and has no bearing on what YOU will achieve. You can decide to take the risk and be that much closer to FF. Next week I will talk more about risk taking and what you as an investor need to understand about yourself.

The Risk Hurdle

May 27, 2016 by  
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Financial independence or Financial Freedom (let’s call it ‘FF’ for short) carries many connotations. Ask ten people what these terms mean to them and you will probably get ten different answers.  Many people today have dreams of becoming financially independent, however only a small percentage of the population actually achieves this envied position in life.

FF does not necessarily mean being rich or having a million-dollar bank account.  It simply means having enough money to do what you want to do, when you want to do it. It means you are free from money worries, so you can pursue the things that interest you most in life.  Having FF doesn’t necessarily mean retiring and giving up all your ambitions and goals in life to just grow old.  Actually, quite the opposite is true. It allows you the freedom to put more time and effort into your work or hobbies than ever before, but from a new perspective–that of personal fulfillment and enjoyment from doing work because you want to and not because you have to.  This is true Financial Freedom!

A rather fatalistic poet once wrote, “Life to many is but a constant struggle for a mere existence, with the assurance of losing it at the last.” This is a sobering thought when you consider the United States to be probably the wealthiest country and one of the most productive in the world.

FF does not come easy. Achieving it does require some sacrifices and an element of risk.  It’s human nature to avoid taking risks and who likes to make sacrifices? After all it’s easier to spend your earnings or maybe put some money away in a safe and insured account where your hard earned money is guaranteed a fixed, albeit a very low but stable return. This then, is the great paradox in achieving FF in today’s world.

It is virtually impossible to avoid all risks at one given time, because no matter what course is taken with investment dollars, there will always be a certain degree of risk involved. The real estate investor has to be prepared to take calculated risks and be willing to enter into the unknown, if they truly want to achieve FF.

To state the problem without at least suggesting an answer is unfair. Next week we’ll talk a bit more about this, about why we are averse to taking risks even when FF is our highest desire. Understanding why can be key to recognizing where your hesitation comes from and gives you a chance to conquer it!

Recognizing Reality

February 26, 2016 by  
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Did you get to read the post from last week when we started talking about common sense? Well while that was about using common sense when getting help and advice from the professionals that support your business, this week, let’s talk about common sense when deciding what financial deals to get in on. Here is just a little more from my old publication, The Financial Freedom Report.

One definition of common sense is “what is sound and prudent but often unsophisticated”. I’ve seen many very sophisticated business decisions that have lost millions of dollars. To avoid financial traps, you need a huge dose of common sense, especially when those all around you are playing sophisticated and getting wrapped up with what is hot or in vogue. Common sense will keep you from being trapped or pushed or bullied or shocked into doing a deal that you don’t want to do.

There are many high powered, complex formulas for success and financial independence, most of which are so mind boggling it would take a PhD to understand them. Many of these formulas were written by people who never actually made big money themselves but sat back and watched others do it. From a spectator’s position they think they know the answers and then they make things so complex and involved that the average person cannot understand them. Take it from me, making a lot of money in a short period of time can be done with a simple game plan. I said simple not easy, since it takes tons of work. You are probably already working very hard but maybe not with the right game plan.

When I studied the lives and fortunes of two dozen millionaires and multi-millionaires, I was looking for a common denominator, something they all did that accounted for their success. I finally noticed factors that were present in almost every fortune. I slowly eliminated those factors that didn’t show up in every case. What I ended up with was basic and somewhat obvious, although it escapes 96 percent of those who look for it.

There are four essential ingredients, and I put them into a formula I call “PSIC”, which simply translates into P=Plan, S=Save, I=Invest, C=Compound. And I will add now in order to compound at high rates you need to use leverage.  

An insistent, fast-talking, and even somewhat logical person many times can persuade somebody to do something he doesn’t really want to do. If somebody asked you if you would like to get in on this super-hot deal that will pay you a 250 percent return without any risk and without a lot of your effort, what does your common sense tell you? Common sense should tell you that if a deal were really that good, the guy trying to sell you the deal and or the promoters behind him would probably not have trouble getting the needed money as a loan from a bank.

The simple fact is, those kinds of returns don’t exist. Yes, it is possible for you to get 100 and 200 and even higher percent returns, but not without a lot of work on your part and certainly not without any risk.  Deals like that don’t come all packaged neat and simple, especially without risk and without great effort on your part. Believe me it won’t happen! If I had a deal with a return like that (and I have had those kind of deals) you’d better believe that I would be able to borrow a whole lot of money, which I have done many times, even if I had to pay 2 or 3 times the going rate of interest. Common sense is recognizing reality and then acting accordingly.