Moore for your Money
BYRON MOORE, CFP®
Question: I have as a goal to really start focusing on building my portfolio this year. Where should I begin?
Answer: If you want to build high, you should first go deep.
Almost immediately following the tragic events of September 11, 2001, there was popular agreement that another magnificent structure must take the place of the fallen Twin Towers. By 2005 a final plan was approved and in April 2006 construction began on the structure that would one day be called One World Trade Center.
During the first three years of construction, however, no small amount of grumbling went on concerning the “lack of progress” on the project. Many public figures complained about the “big hole in the ground” in Lower Manhattan.
In reality, it took three years to complete the foundation and “below ground” portion of the building that would one day be the tallest skyscraper in the Western Hemisphere. The structure was complete in July 2013. About half the construction time was spent below ground.
But that’s how it is with skyscrapers…and portfolios – the larger the structure you wish to build, the deeper you must go with the foundation.
I know less than nothing about construction. But I assume that a skyscraper’s foundation must protect the building from at least two things: movement below the ground and high winds and other elements above the ground.
The taller (larger) you want your portfolio to stand, the deeper you need for its foundations to go. So, what are the foundations of a great portfolio?
Liquidity. The only reason to invest money is for someone, one day, to spend it. To make it first person personal – I save and invest money so that one day (usually during retirement) I’ll have something to spend when I am no longer willing or able to work.
That’s a great plan, but often the vagaries of the marketplace get in the way. Portfolios have a nasty habit of going through down, or “bear,” phases at just the time I need to withdraw money to live on. One of the foundations I need under my portfolio is a reserve of cash sufficient to weather these storms. Two years worth of expenses would be a minimum. Five years worth might just let you sleep peacefully.
Longevity. Money needs to last…certainly it needs to last longer than we do. Given enough time, a well designed, diversified portfolio has great odds of growing at a sufficient pace to do just that. But the fact remains, there are no guarantees in portfolios – just possibilities.
I’ve observed that retirees with a significant portion of their basic lifestyle (their needs, maybe not all their wants) covered by guaranteed, fixed income from Social Security, pensions or guaranteed income annuities both sleep better and make better long-term investors. Less reason for them to get nervous. Less reason to shoot their portfolio in the foot. More likelihood they will let their portfolio live to fight another day…to last.
Legacy. Most of us want to know there will be something that outlasts us. It may be nothing more than something left for our children or grandchildren. But given the opportunity, most want to leave a legacy. A portfolio is a significant, and perhaps the largest part, of that legacy.
But if I know that undergirding of the portfolio portion of my legacy is something guaranteed to be there when I leave this earth, it can give me a steady hand during rough investment weather.
Cash. Guaranteed income. Guaranteed legacy.
To the those unfamiliar with building strong, lasting structures, these can seem like a waste of time – like a hole in the ground.
But if you want to build wealth that will stand the test of time, learn from those who have done it before – don’t skip the foundation.
It comes first.