Dragons? What do dragons have to do with you finances?
No, I am not talking about actual fire-breathing, damsel-eating lizards. I am using the symbolism of a dragon to illustrate how there are three menacing and dangerous things you need to worry about.
Just like the King Arthur tales of old, these dragons will steal your wealth. Yet evolution has taught these dragons to be more subtle and sneaky and take from you without you even knowing it.
Like a Knight of the Round Table you must challenge these beasts to guard your financial dominion.
The beasts you will need to fight are:
1. The first beast is called "The Dragon of Taxes",
2. The second dragon is understood as "The Dragon of Inflation",
3) The third and most important dragon is known as "The Dragon of Poor Performance"
The third dragon is the most important because it is the only one we can tame.
This does not mean you ignore the first two dragons that you cannot defeat. The Dragon of Taxes and the Dragon of Inflation are immortal! So you need to pick your battles.
You see, the Dragon of Taxes represents the government's capability to levy taxes on your revenues and wealth. You may elect someone who will cut back your taxes, but you will always pay some sort of taxes.
The Dragon of Inflation represents the demand of the marketplace for money and the interest policy of governments. Inflation may be high in some years and low in others, but it will always erode your spending power and your wealth. You cannot slay the Dragon of Inflation.
The third dragon known as The Dragon of Poor Performance is the only dragon that you can tame. The good news is that if you manage to tame this dragon, it will help you fight the effects of the other two dragons!
Defeating the Dragons
Let's pretend that you may be a brave knight and you set out to beat the Dragon of Poor Performance. You attack but hardly escape with your life because you misunderstood the dragon's strength. You decide that it's best of lay low and lick your injuries.
The problem is that while you are resting the other two dragons come along and gobble you up. Not so wise in actual fact!
When you get poor performance in your investments either by not picking right or too conservatively, whatever returns you do get could be completely eaten up by Taxes and Inflation. Yikes!
Let's assume that you invest in a guaranteed certificate that is assured to generate five percent a year. You have just guaranteed that you aren't making the cash you may have. You should not ignore those investments that are out there and have doggedly earned 8% a year even though they might be riskier.
Can a 3 point difference in the return be worth the risk? Yes! It may not seem like much, it is crucial to get the better return, especially when you factor in the magical effect of compounding returns.
Let us presume you needed to invest $1,000 for your brand spanking new baby for him / her to have as a graduating present when they turn eighteen. You invest it, forget it, and never contribute another penny.
Scenario 1 @ 5% Starting amount - $1,000 Years - 18 Additional contributions - $0 per month Rate of return - 5.00% compounded daily Total amount you will have contributed - $1,000 Total at end of investment - $2,459
Not too shabby, but we still have not figured in inflation and taxes. Before we talk about those two, let us compare the result if you had picked an investment that generated 8% a year.
Scenario 2 @ 8% Starting amount - $1,000 Years - 18 Additional contributions - $0 per month Rate of return - 8.00% compounded daily Total amount you will have contributed - $1,000 Total at end of investment - $4,220
Not surprising you would earn more money, but who would have known that the 3 point difference was worth $1,761 more! Taking the greater risk does pay off. Still, we can't forget the first two dragons, the Dragons of Taxes and Inflation. Look out, because they always take their share of the pie.
You Need To Invest To Preserve Your Financial Health.
Avoiding risk is impossible. There is no such thing as risk free, because low-return and low-risk investments are subject to tax and inflation risk.
Face it. Taxes and inflation is here to stay. They will wear away your wealth. Since you can't fight them, you must learn the way to manage them. The solution is to get good returns and to tame the Dragon of Poor Performance.
Want proof?
Let us assume the state taxes you at 25%, for each buck you earn; you give twenty-five cents to the Dragon of Taxes.
Scenario 1: A 5% return x 25% tax rate = 1.25 points off your five percent return = 3.75% exact return after taxes. That is just hardly keeping above inflation that has sometimes run between 2% and 4% a year.
Scenario 2: A 8% return x 25% tax rate = 2.00 points off your 8% return = 6% actual return after taxes. Now this is a much better spread over inflation.
Do you see what I mean when I say that the Dragons of Taxes and Inflation will gobble you up when you invest poorly? The solution comes in taming the only dragon that can help us fight the other two.
Here Boy! Fetch! Making The Dragon of Poor Performance Your Pet.
One of the simplest techniques of taming the Dragon of Poor Performance is to stop making only investments in assured investments (CDs In America and GICs in Canada).
Use them as a place to store money for short term periods whilst you understand where to invest your money, but never use it's your main investing method, unless you are about to retire! Get the best interest rate you can for your short term money. It is always better to get three percent than two percent for the explanations mentioned above, but since it's a place to just park your money, you must get your cash working better for you.
The only way to get better returns is to directly invest into companies on the stock exchange. The stock market has provided a much higher rate of return over interest based investments like bonds and CDs/GICs consistently, year over year.
Don't believe the ignorant people that an investment in the market is like betting. It is betting for those that don't understand the guidelines. But just like a knight needs to be trained in the weapons of sword and shield to properly battle a dragon, you too must learn the right tools to get your best returns.
Consider at the minimum Exchange Traded Funds which are wonderful instruments that capture all of the returns found in the stock market. They do better than Mutual Funds and should be the shield in every knight's armor.
If you want to not just tame but slay the Dragon of Poor Performance with the Excalibur sword, you need to do some research through websites, electronic courses, and books on "Stocks and Options".
Remember that the greatest rewards come to those willing to manage the greatest risks!
May you successfully win your battle with the Dragons.
No, I am not talking about actual fire-breathing, damsel-eating lizards. I am using the symbolism of a dragon to illustrate how there are three menacing and dangerous things you need to worry about.
Just like the King Arthur tales of old, these dragons will steal your wealth. Yet evolution has taught these dragons to be more subtle and sneaky and take from you without you even knowing it.
Like a Knight of the Round Table you must challenge these beasts to guard your financial dominion.
The beasts you will need to fight are:
1. The first beast is called "The Dragon of Taxes",
2. The second dragon is understood as "The Dragon of Inflation",
3) The third and most important dragon is known as "The Dragon of Poor Performance"
The third dragon is the most important because it is the only one we can tame.
This does not mean you ignore the first two dragons that you cannot defeat. The Dragon of Taxes and the Dragon of Inflation are immortal! So you need to pick your battles.
You see, the Dragon of Taxes represents the government's capability to levy taxes on your revenues and wealth. You may elect someone who will cut back your taxes, but you will always pay some sort of taxes.
The Dragon of Inflation represents the demand of the marketplace for money and the interest policy of governments. Inflation may be high in some years and low in others, but it will always erode your spending power and your wealth. You cannot slay the Dragon of Inflation.
The third dragon known as The Dragon of Poor Performance is the only dragon that you can tame. The good news is that if you manage to tame this dragon, it will help you fight the effects of the other two dragons!
Defeating the Dragons
Let's pretend that you may be a brave knight and you set out to beat the Dragon of Poor Performance. You attack but hardly escape with your life because you misunderstood the dragon's strength. You decide that it's best of lay low and lick your injuries.
The problem is that while you are resting the other two dragons come along and gobble you up. Not so wise in actual fact!
When you get poor performance in your investments either by not picking right or too conservatively, whatever returns you do get could be completely eaten up by Taxes and Inflation. Yikes!
Let's assume that you invest in a guaranteed certificate that is assured to generate five percent a year. You have just guaranteed that you aren't making the cash you may have. You should not ignore those investments that are out there and have doggedly earned 8% a year even though they might be riskier.
Can a 3 point difference in the return be worth the risk? Yes! It may not seem like much, it is crucial to get the better return, especially when you factor in the magical effect of compounding returns.
Let us presume you needed to invest $1,000 for your brand spanking new baby for him / her to have as a graduating present when they turn eighteen. You invest it, forget it, and never contribute another penny.
Scenario 1 @ 5% Starting amount - $1,000 Years - 18 Additional contributions - $0 per month Rate of return - 5.00% compounded daily Total amount you will have contributed - $1,000 Total at end of investment - $2,459
Not too shabby, but we still have not figured in inflation and taxes. Before we talk about those two, let us compare the result if you had picked an investment that generated 8% a year.
Scenario 2 @ 8% Starting amount - $1,000 Years - 18 Additional contributions - $0 per month Rate of return - 8.00% compounded daily Total amount you will have contributed - $1,000 Total at end of investment - $4,220
Not surprising you would earn more money, but who would have known that the 3 point difference was worth $1,761 more! Taking the greater risk does pay off. Still, we can't forget the first two dragons, the Dragons of Taxes and Inflation. Look out, because they always take their share of the pie.
You Need To Invest To Preserve Your Financial Health.
Avoiding risk is impossible. There is no such thing as risk free, because low-return and low-risk investments are subject to tax and inflation risk.
Face it. Taxes and inflation is here to stay. They will wear away your wealth. Since you can't fight them, you must learn the way to manage them. The solution is to get good returns and to tame the Dragon of Poor Performance.
Want proof?
Let us assume the state taxes you at 25%, for each buck you earn; you give twenty-five cents to the Dragon of Taxes.
Scenario 1: A 5% return x 25% tax rate = 1.25 points off your five percent return = 3.75% exact return after taxes. That is just hardly keeping above inflation that has sometimes run between 2% and 4% a year.
Scenario 2: A 8% return x 25% tax rate = 2.00 points off your 8% return = 6% actual return after taxes. Now this is a much better spread over inflation.
Do you see what I mean when I say that the Dragons of Taxes and Inflation will gobble you up when you invest poorly? The solution comes in taming the only dragon that can help us fight the other two.
Here Boy! Fetch! Making The Dragon of Poor Performance Your Pet.
One of the simplest techniques of taming the Dragon of Poor Performance is to stop making only investments in assured investments (CDs In America and GICs in Canada).
Use them as a place to store money for short term periods whilst you understand where to invest your money, but never use it's your main investing method, unless you are about to retire! Get the best interest rate you can for your short term money. It is always better to get three percent than two percent for the explanations mentioned above, but since it's a place to just park your money, you must get your cash working better for you.
The only way to get better returns is to directly invest into companies on the stock exchange. The stock market has provided a much higher rate of return over interest based investments like bonds and CDs/GICs consistently, year over year.
Don't believe the ignorant people that an investment in the market is like betting. It is betting for those that don't understand the guidelines. But just like a knight needs to be trained in the weapons of sword and shield to properly battle a dragon, you too must learn the right tools to get your best returns.
Consider at the minimum Exchange Traded Funds which are wonderful instruments that capture all of the returns found in the stock market. They do better than Mutual Funds and should be the shield in every knight's armor.
If you want to not just tame but slay the Dragon of Poor Performance with the Excalibur sword, you need to do some research through websites, electronic courses, and books on "Stocks and Options".
Remember that the greatest rewards come to those willing to manage the greatest risks!
May you successfully win your battle with the Dragons.
About the Author:
C.P.Billows is the publisher of In The Money, the Stock Options Trading Course, a 60 page eBook available at www.mandalainvesting.com. Click here for article submission.
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