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Archive for November, 2011

What’s the difference between a Saver and an Investor and who is the most successful?

Taking a closer look at this question there is no doubt that there is a close relationship between being a successful investor and a good saver. While many successful investors may ‘flaunt’ their wealth, the most successful tend to be very astute and conscious of where every dollar is being spent and hence showing all the traits of a successful saver.

A person who is first and foremost just a saver can do very well for him/herself. They find a saving in everything they do and this will eventually create a significant difference to their wealth, irrespective of their income. Generally, savers will be conservative by nature and this will be reflected in their investment style with safe, bank deposits being a favourite.

An investor on the other hand, will seek to create wealth by investing their own funds (and often with borrowed funds) into a variety of assets in the hope of creating wealth. When it pays off, they can be extremely successful, when it fails, it can be disastrous.

It is not unusual to see investors becoming very successful only to fail miserably by overextending their positions with borrowed funds. This has been highlighted in the last few years with share and property markets collapsing sending many a successful investor broke.

How does an investor fail so badly? Debt is normally at the heart of any investor’s disaster with greed not far behind. Here is step by step example of how it can fall apart for the investor. ($100 used for easy explanation)

1. Invest own funds of $100 in an asset (eg shares, property etc). This initially earns a good return Investor starts thinking, “This is easy, I can make more money if I had more money!”
2. Borrow $100 from the bank, now has $200 invested
3. Investor gets a little cocky and starts living the extravagant lifestyle
4. Asset drops in value – “Don’t panic, things will come good, just hang in there”, the investor says
5. Asset keeps dropping and now valued at less than 50% of the $200 invested
6. The bank wants its $100 back – quickly! The bank sells the asset and harasses the investor for the balance i.e. the bank wants all its $100 back.
7. The investor has to start selling other assets. The investor now has less than zero invested (negative equity) and often a lifestyle of a millionaire that can’t be sustained – Game over.

The saver does not take as many risks as the investor and certainly has little interest for an extravagant lifestyle. Hence a more secure future awaits the saver, albeit with limited upside.

So, back to the question, which is best, a saver of an investor? A balance between the two is the logical way to go. By being an over-cautious saver, it can be hard to get ahead particularly in the current ‘low’ interest rate environment. Investors need to think like a conservative saver and make sure they can always survive a disappointing investment and therefore benefit from the investments that come good.

You need to wait for your life to be right before you make the attempt. You tell yourself, when I get the new job, when I get the next promotion, or when I get my next raise, I’ll go to work on my debt.

The number reason people don’t get out of debt is they don’t try. This may apply to you. You need to, but never appear to do it. You put it off for whatever reason.

I call this “perfect situation procrastinating.”. This enables you to put off any action, while you wait for your situation to be ideal. It reminds me of a narrative I read the other day about a brother registering her daughter for kindergarten.
Perhaps you are waiting for some artificially set date. You tell yourself the first of the year will be a lovely time to start or when you get back from holiday. Whenever it is, it is always in the future.

The teacher asked the child to pick her favourite color crayon and write her name on of the pieces of paper. The brother hovering in the background, knew her daughter could not only spell her name, but the names of all her relatives members. They was pleased her daughter would do so well.

The brother, a school teacher, took her daughter to register for kindergarten. They were greeted by the kindergarten teacher near a table outside the room. On the table they had some paper and crayons. The brother stood back while the teacher did, what the brother recognized as, a simple screening of her daughter’s abilities.

However the child stood and stared at the crayons. The teacher again asked her to pick her favourite color and write her name. The child remained still. Her brother knew they could do this but stayed back to permit the teacher to handle it. The teacher then put her arm around the girl and told her it was all right, they would learn to write her name in the work of the school year.

As the small girl and brother rode home the brother asked her why they didn’t write her name. Her daughter responded, “She asked me to write my name with my favourite color and there was no pink crayon.” The small girl, able to doing what was asked of her, didn’t do it because the situation was not ideal.

What do you think of when you hear the word ‘blueprint’? I think of a plan. A set of organized, sequential steps that one must take to build whatever they are trying to build. We don’t often hear the word blueprint when it comes to money though, do we?

Maybe, we think, it’s because nobody really knows. That cant be the case though, because there are plenty of wealthy people around, people that have somehow figured out how to become and or stay wealthy. How are they doing it? Do they have some sort of magic pill that only people with money can buy? No. thankfully, it’s much simpler than that. The answer is, they follow a plan.

People who build and sustain wealth have and follow a plan. They sit down with someone they deem knowledgeable about finance, has the tools to implement the plan and will hold them accountable should they stray. Do you realize that these resources – the people, the knowledge, the tools, are within your grasp? All you have to do is reach for it, and like magic (not really), these things are suddenly available to you.

If that doesn’t give you a glimmer of hope about your financial situation, I don’t know what will! I experienced profound relief that finally, somebody was willing to sit down with me, give me information I can actually understand and figuratively hold my hand while I build my wealth. Wow.

You should expect (demand) 3 things from your financial adviser/counselor of choice:

1. They will help you identify areas where you can free up money to be applied to your future goals and dreams.
2. They will help you establish and organize the priorities of your portfolio building objectives.
3. They will help you transform your blueprint, or plan on paper, into actual reality.

It will be clear in your very first meeting with this person whether they are willing or able to follow through on these commitments to you. If they aren’t, drop them and find someone else. Financial advisers and counselors are hidden in plain sight – most people never see them until they need them. Suddenly, they seem to be everywhere you look!

Take the time to find a financial adviser that is truly going to work in your best interest. Listen to your instincts and don’t be afraid to tell them it’s not the right fit. You owe it to yourself and your family!