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There is a difference between financial assets (investment assets) and investment vehicles. Financial assets are specific classes of securities that you have the option of investing in, including stocks, bonds, mutual funds, real estate, money-market mutual funds, CDs, and so on. Investment vehicles are special types of investment accounts that provide special tax advantages and allow you to invest in various financial assets. These accounts are useful because they provide specific tax advantages that are not available if financial assets are purchased individually.

Understanding the priority of money can help you identify the tax benefits and other benefits that different investment vehicles offer. Understanding these priorities can help you to determine which investment vehicles will help you achieve your financial goals the quickest. The priority of money is divided into three sections: free money; tax-advantaged money; and tax-efficient, wise investments. Understanding the priority of money can help you determine which investment vehicles you should use first in working toward your financial goals.

Some investment vehicles are preferred over others because they provide tax advantages and other advantages. Unfortunately, some of the investment vehicles that are high priority of money also have lower maximum contribution limits. Although some investment vehicles have limitations, it is still a good idea to adhere to the priority of money. You should first invest money in vehicles that are the highest priority of money. When you have reached the maximum amount you can invest in these vehicles, or when you have invested as much money as your company is willing to match, then you should invest in the next highest priority of money. Continue to invest until you have utilized all of your available investment funds.

Strategies for developing investment portfolios differ among individual portfolio managers and institutions. The strategy each investor prefers depends on the way he or she views the market; an investor’s strategy also depends on his or her goals, budget, and experience in investing. It is impossible to discuss the strategies that every portfolio manager uses to build each portfolio; however, as I have reviewed successful portfolios, I have found that several critical phases of investment remain the same. This section includes the bottom half of the investment hourglass: a pattern of successful portfolios that I have seen in my experience.

The bottom of the investment hourglass is divided into four phases. The first level of the hourglass represents the phase in which you develop your emergency fund and food storage. The second level represents the phase in which you develop your portfolio’s core, which should include broad market index funds or core mutual funds. The third level represents the phase in which you diversify your portfolio by broadening and deepening your asset classes. Finally, the fourth level represents the phase in which you develop your opportunistic assets, such as individual stocks and sector funds.

To build a successful portfolio, you must first learn about the process of investing. The process of investing is a disciplined approach to building an investment portfolio. This approach teaches a logical order for buying securities and helps you minimize transaction fees and taxes. There are many ways to approach building your investment portfolio; the process of investing that is outlined in this section is a consistent, logical, and principle-supported approach that can help you minimize transactions costs and taxes. This approach also teaches a logical order for purchasing securities and helps you set financial goals to help you as you build your portfolio.

Once you have established your investment plan and understand how to build your portfolio, there is a five-step investment process that will help you build your portfolio:

  1. Determine a target monetary size for your portfolio.
  2. Determine target percentages for each asset class.
  3. Calculate the target amount for each asset class in both your taxable accounts and retirement accounts.
  4. Research potential candidates for financial assets and select the assets most likely to help you achieve your goals.
  5. Purchase the assets and compare the actual portfolio with the target portfolio.

The investment process that is presented in this section is just one method of building a portfolio. As you build your portfolio, follow your investment plan carefully. This plan will help you make choices that are consistent with your personal goals, your risk-tolerance level, and your budget. Write a well-thought-out investment plan, follow the principles you have learned in this course, and then invest according to your plan. Remember to follow the principles of wise investing and the priorities and processes of investing; be aware of the effects of taxes, turnover, and costs; keep allocations within your target ranges; limit turnover as much as possible; use dividends or interest to buy new financial assets or make changes to your existing assets; sell wisely and infrequently; if you are able, sell appreciated assets in the form of donations; and remember the investment hourglass!


Now that you have completed this section, ask yourself the following questions:

  1. Can you explain the “priority of money”?
  2. Can you describe the phases of successful investing?
  3. Can you explain the investment process?

If you can answer yes to each of these questions, you are ready to move on to the next section!


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