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We discussed in the earlier section the important investing principles that, if followed, will result in a quality investment plan and lead to a successful investment portfolio. We also discussed the investment hourglass and how that helps you understand what you should do before you invest and also how to build a successful investment portfolio. If you follow this process, there is a greater chance of a successful portfolio—one that can help you achieve your personal and financial goals.

This section discussed the priority of money. The priority of money is a process of determining which investment vehicles can help you achieve your goals the fastest. It is largely due to understanding the tax advantages of the various investment vehicles, and utilizing the vehicles that can help you get the highest after-tax returns.

Investment is similar to an amusement park. At an amusement park, people go on rides that appeal to them; likewise, in the area of investment, people invest in areas that suit them. The key to investing is to find out which rides you like, based on your age, your goals, your budget, and, for some, your medical history. Asset classes are the rides.

Asset classes broadly categorize investments with specific and similar risk and return characteristics. Asset classes are categorized by the characteristics that are unique to particular groups of securities, such as type of financial instrument, market capitalization, maturity, and geographic location. The major asset classes are cash and cash equivalents, fixed-income investments (bonds), and equities (stocks).

There were six important lessons to be learned from this section:

  1. Different investment vehicles have different tax advantages. You are responsible for understanding the various investment vehicles available to you so you can make the best decision as to which vehicles to use.
  2. Utilize the investment vehicles that give you the highest after-tax return. Taxes are a drag on returns and reduce the amount of money that you have for your personal and family goals.
  3. Taxable and retirement assets should be managed differently due to tax effects. You will not have just one portfolio of investment assets. You will likely have many separate individual investment portfolios that all added up to your total investments.
  4. Each asset class has very different return and risk characteristics. When you build your portfolio, you should take these characteristics into account. While history is not a predictor of future asset class performance, it can tell us how specific asset classes have performed in the past.
  5. There is a positive relationship between risk and return. As a general rule, the higher the return, the higher the risk.
  6. While equities are volatile on a short-term basis (annually), over longer periods of time the bad periods are offset by good periods. If you have a sufficiently long time horizon, the bad periods (i.e., periods of negative returns) are generally offset by the good periods (i.e., periods of positive returns). The key is to invest long-term.


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

  1. Do you understand the “priority of money”?
  2. Do you understand the risks and benefits of the major asset classes?
  3. Do you understand the risk and return history of the major asset classes?


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