Chapter 1
THE FUNDAMENTALS OF INVESTING

Understand Your Current Situation

Before you make any investment decisions, you should first establish where you sit financially today. This means taking inventory, just like a business would, before making strategic decisions. You can't set financial goals or design a smart portfolio until you know your starting point. Next, ask yourself what you're trying to accomplish. Be as specific as possible. Are you saving for retirement, funding college, buying a home, or building generational wealth? The clearer your goal, the more tailored your investment strategy can be.

To determine where you are today, we need to create a net worth statement, which is a list of your assets (things you own) and liabilities (money you owe). This step is often skipped, but it's essential. You can't improve what you haven't measured. When we subtract your liabilities from your assets, we get your net worth. That number isn't just a snapshot; it's the baseline from which we build.

Within your list of assets, you're going to have things like your IRA, your 401(k), and your personal investment account, but you're also going to have things like a house and a car. It helps to break up your assets into two categories: appreciating and depreciating. Now, you need to know that there's a difference between those assets. While they all show up on the same side of the ledger, some of those assets bring money to you, like an investment account or a rental property, while other assets take money away from you, like a car or a house. This is a key distinction that many people overlook. Just because things have value doesn't mean they help you achieve financial independence. It doesn't mean they're bad, but it means we shouldn't include them in your retirement planning. Your primary home, for instance, might appreciate over time, but it likely won't generate retirement income unless sold or leveraged.

Within the liabilities section, you'll list any loans you have, like your mortgage and car loan, along with credit card debt and anything else you owe. Also include student loans, personal loans, and business debt-anything that requires regular repayment. What you have left after your liabilities are subtracted from your assets is your net worth value. How does that number look? This isn't a moment for judgment. It's a moment for awareness and planning.

The next thing we need to do is take a closer look at your assets to determine which ones can really contribute to your future financial independence. Because at the end of the day, the goal isn't to simply accumulate; it's to own assets that work for you.

Where Are You Trying to Go?

There's a lot going on in this graph, so we want to look at a lot of different things. Financial independence requires assembling multiple income sources, and mapping them out lets you clearly see how they work together. What's going to come from Social Security in the future? Consider various claiming strategies, especially if you're married, as timing can greatly affect lifetime benefits. What's going to come from rental income? Be sure to subtract expenses and consider vacancies when estimating actual net income. What might be coming from a pension? Don't forget to look at survivorship benefits, inflation protection, and lump sum options. And what's your portfolio going to have to create to make up the difference to keep you financially independent? This is the income gap and understanding it gives you a target to aim for in your investment strategy.

Once we know where you are and where you want to go, it makes it a lot easier for us to say, "Okay, let's take the basic fundamentals of creating a portfolio and start there." This is where guesswork ends and a true, goal-oriented plan begins.

Define Your Short-, Mid-, and Long-Term Goals.

Cash Is Not King

The most basic investment is cash. It's familiar and feels safe, but that doesn't make it effective for building wealth. I don't even like calling it an investment in today's world, because it's not really an investment that goes to work for you. Instead, cash goes to work for the bank. Banks take your deposits, lend them out at higher rates, and pocket the difference. That's not a winning formula for you. The way to think about money is that every dollar bill on the planet throws a shovel over its shoulder and goes to work for somebody every day. If you have it working for you in stocks, bonds, or real estate, that's great. You're collecting income and appreciation. That's your money earning money, which is the essence of investing. But if it's sitting in the bank, it's going to work for the bank.

Because of inflation, if you have money in cash you're losing your purchasing power over time. Inflation is like a slow leak in your financial tire; it gradually deflates what your money can buy. Ten years from now a dollar will buy far less than it does today, and that's why you need your money to go to work for YOU every single day.

Cash is a terrible investment. It may preserve value in the short term, but over time it quietly erodes your financial future. Keep what you need for an emergency in cash. Otherwise, make sure your dollar bills throw a shovel over their shoulder for you! Put your money in motion, because idle dollars are wasted potential.

The Challenge of Cash
Annual Income Generated by a $100,000 Investment in a 1-Year CD.

Forget About Price; Focus on Income

Bonds aren't nearly as complicated as they first appear. They're often misunderstood, but at their core, they're just structured agreements-and very logical ones at that. A bond is, quite simply, a loan. And if I loan you $10 and charge you 5% interest, for all practical purposes I have a bond. On an agreed upon date, you'll owe me my $10 back plus 5% interest per year. It's that simple.

A loan to the federal government is a Treasury bond. A loan to a county, city, state, or other governmental entity is a municipal bond. A loan to a corporation, like McDonald's, is a corporate bond, and if the company isn't doing so well, you can collect even more interest, and we may call that corporate bond a "high-yield" or "junk" bond. You get the idea.

If you buy a $100,000 bond and we look forward 10 years from now and that bond is paying 3% interest, you'll get your $100,000 back plus the 3% per year. That steady stream of income can be a stabilizing force in a diversified portfolio. Your main risk is "default" risk, which happens if the entity you're loaning money to goes bankrupt. Your other major risk is "interest rate" risk. If you loan money for 20 years at 3% and interest rates rise to 6%, well, you're stuck getting 3%, which is no fun. This is why bond maturity and credit quality should match your goals and risk tolerance.

Assuming the entity stays in existence, your return comes from the interest rate. Lots of bond managers out there try to time the interest rate market and move in and out of bonds, but most long-term investors simply play the long game, collecting their interest along the way and holding bonds until they mature. That consistency is why bonds have a meaningful place in many retirement income strategies.

Fixed Income: Forget About Price; Focus on Income
$100,000 Investment in the Bloomberg Municipal Bond Index | 1979-2022.

"IN AN ENVIRONMENT LIKE WE HAVE TODAY,
LONG-TERM BONDS ARE VERY, VERY DANGEROUS"

The Challenge with Long-Duration Bonds
Bloomberg Barclays U.S. Aggregate Bond Index-Hypothetical Returns Based on Hypothetical Moves in Rates Over the Next 12 Months.

Gold Is a Lousy Investment

For those of us who don't plan to be around 10,000 years from now, gold is a lousy investment. It may have symbolic appeal, but symbolism doesn't pay the bills.

Unlike stocks, bonds, and real estate, gold itself is nearly intrinsically worthless. Stocks, bonds, and real estate have the potential to create income. Gold produces no income and isn't a critical resource. It doesn't contribute to economic growth or job creation, and it doesn't generate cash flow. It just sits.

Historically, gold has performed worse than stocks, real estate, energy, and bonds, barely keeping pace with inflation. Every time in history that it has outperformed substantially, it has ultimately collapsed. This pattern of boom and bust makes it difficult to plan around. Finally, while gold has proven to dramatically underperform stocks and even bonds over the long run, it's still one of the most volatile asset classes. And unlike with stocks, you don't get paid to endure the volatility.

Gold belongs only in the portfolios of fearmongers and speculators. If you own gold in your portfolio, expect to receive no income, pay higher taxes on your returns, take a more volatile ride than the stock market, and get a long-term return lower than bonds. No thanks. There are far better tools for building and preserving wealth.

Gold...