Think of yourself as a bank

All of us in service industries need to be able to communicate effectively. A couple of weeks ago I was trying to explain to a client the value of a balanced investment portfolio coordinated by a financial plan with a good investment policy statement. The fellow looked at me like a cow staring at a new gate. From out of nowhere I came up with, “Look…think of yourself as a bank.”

If you put a dollar into a successful bank or insurance company it will rattle around and make money. Institutions behave in this manner because they evolve, it’s all part of their business plan. They are run by committees and experts who match the institution’s long-term liabilities to their long-term assets. Individual investors seem to have a little more difficulty adopting these skills. But the ones that do, almost always become successful.

When an individual generates cash, these monies need to be invested just like an institution would…either long term or short term. Your investment policy should help you quantify this decision. Don’t invest in risk assets unless you are willing to hold them five to seven years. Short term is one year or less, often on-demand. Practice asset/liability management. Know that a five-year bond becomes a four-year bond, then a three and then a two-year bond.  A successful equity investment will qualify for long-term capital gain tax treatment after one year.  As a well-managed portfolio matures, it becomes populated by appreciated assets.  These assets systematically generate liquidity, reducing the need to invest in short-term, low yielding investments.

When you need liquidity, reduce your on-demand and short-term investments first, generate long-term capital gains second, and borrow third…but borrow reluctantly.  Manage your tax liabilities and understand the difference between earned income, interest, dividends, short-term gains and long-term gains. Have a financial plan. Do all of this holistically, favor the enterprise; don’t get caught up in the minutia of the individual parts. Think of yourself as a bank.

As I used this metaphor to explain some of the intricacies of “cashology,” I could see the light bulb go on in my client’s head. Earning a person’s trust is indescribably satisfying. In this case, my internalized celebration quickly gave way to… what took me so long?

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