Investing can be likened to a house. A great house has a strong foundation, sturdy walls, and a strong roof impervious to rain. A good home has large doors and windows to allow some light and air into the house. A good home has good landscaping and a security wall around it. A comfortable home also has comfortable furnishings and a cozy interior.
You must be wondering what this has to do with investing. Well, a good investment portfolio is well diversified more like the house we have been describing. A good investment portfolio has a bedrock foundation of assets which is typically land and real estate. These assets typically have relatively low returns but provide much-needed stability and safety for any investor. If everything fails your plot of land will remain.
A good investment portfolio also has a roof that is similar to your treasury bonds. These bonds provide a reliable source of income for the family in all circumstances. These bonds will continue to generate cash in all economic conditions and will cushion the investor from changes in his fortunes.
Well-designed homes need walls that hold up the roof and enclose the house. These walls represent your career or primary business. The income from your career or business is what you use to build the roof over your head and reinforce the foundation. Without the walls, there can be no roof and the foundation will remain exposed to the weather. The walls also allow you to furnish your home with beautiful artifacts.
The windows and doors allow your portfolio to breathe. The windows are your emergency funds and savings held in mutual funds and unit trusts. The doors allow visitors to come in and represent group savings like SACCOs and investment clubs. Without windows and doors, the house is dark and uncomfortable. Your emergency fund provides much-needed relief in case there is a leakage in the roof to repair.
The landscaping adds beauty and can elevate the value of your house. These are your stocks that can go up in value. They are beautiful to look at and everyone who visits is quite impressed by the beauty of the home.
Then you have a wall fence that encloses the home and provides security. This is your life insurance and other pension assets. These assets provide ultimate protection in case your income sources dry up. Without the fence, your portfolio is prone to attack from thieves and wanderers.
Finally, we have the beautiful furnishings and the interior decoration. These are the things in your life which are not necessarily assets but nonetheless make life easier and more beautiful. Your car, phone, gadgets, home appliances, etc. fall into this category. You can surely live without them but life would be boring. So you still need them in your portfolio to lead a happy life.
So we can see that a good home has different parts playing different parts. There is the foundation which is your land and real estate holdings which provide stability. Then you have the roof which are your bonds generating predictable cash. The windows represent the mutual funds and unit trusts to handle emergencies. The door is your group savings like SACCOs and investment clubs. The walls represent your career and business. The interior furnishings are your gadgets and other items which add colour to life. The landscaping is the stocks and listed shares. And finally, the wall fence is your life insurance and pension funds.
I hope you invest like the way you build your home!
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