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Risk and Liquidity

Whenever you look at risk, you should simultaneously be looking at liquidity. You can understand your risk exposure best by initially analyzing your liquidity. Do you have enough cash that is accessible to pay your mortgage, and pay all other bills? For how long? How about enough to allow you to ride out a downturn in the market, economy or job loss?

Be sure that you start with a sound foundation when building wealth. That starts with liquidity and managing risk. It is like the song I used to sing in Sunday School about the wise man versus the foolish man.

1. The wise man built his house upon the rock, The wise man built his house upon the rock, The wise man built his house upon the rock, And the rains came tumbling down.

2. The rains came down, and the floods came up, The rains came down, and the floods came up, The rains came down, and the floods came up, And the house on the rock stood still.

3. The foolish man built his house upon the sand, The foolish man built his house upon the sand, The foolish man built his house upon the sand, And the rains came tumbling down.

4. The rains came down, and the floods came up, The rains came down, and the floods came up, The rains came down, and the floods came up, And the house on the sand washed away.

Understanding, managing and reducing RISK is paramount in building wealth.

We talk a lot about optimizing assets, and understanding, managing and reducing RISK is paramount in this process. You cannot achieve financial independence until you understand the risk exposure you have on all your assets. Once you understand all the different types of risk with your home, real estate, IRAs, 401(k)s, retirement accounts, insurance, etc.; you can then begin to learn how to manage and reduce your risk exposure.

I did not say eliminate risk. There is no way you can completely remove all risk. Even if you were able to, there would be no return nor any reward. You would remain stationary with no opportunity for growth. Risk is essential to building wealth, but it can also be its demise.

One way to manage and reduce risk is to share the risk with someone else or with another entity. That way you do not have full exposure and neither does the other party. But together you are stronger and can be empowered to do much more. The most common example of this is a mortgage on your home. But it also can be applied to your retirement accounts, life insurance, and other long term investments.

These are definitely crazy times. With the market losing over 30% over the past year, and simultaneously the real estate market remaining sluggish and dropping 9.5% during the same period of time, many people may be asking the question "Where would it have been best to have my money over the past year?".

It is important to look at what has happened so that we may learn from it, and not make the same mistake(s) in the future. The single largest problem on an individual level as well as on the large corporate level was and is LIQUIDITY. Liquidity is the ability to access the cash value within an asset. If the cash value of the asset is locked up so that you cannot easily access it, then the asset is not considered liquid.

If you have read any books in the Missed Fortune series, then you will know that my dad, Douglas Andrew, learned this lesson for himself back in 1983. He did not have liquidity when things out of his control happened and he was without income for a period of time. This caused him and my mom to lose their newly built dream home in forclosure. Rather than turning sour after that horrible experience, my dad turned it into a learning opportunity and has spent much of the past 25 years teaching people how to avoid the same mistake he made while simulatenously building wealth.

If individuals had liquidity, we would not be seeing the massive amount of foreclosures going on right now. In fact there were 71,000 pieces of property repossessed in the month of June. The current problems with many of the financial institutions including AIG, Wamu, Lehman Brothers, and others is due to not maintaining a sufficient amount of liquidity.

Liquidity is the most important principle in your personal finances. With sufficient liquidity you could easily ride out both the troubles in the real esate and stock markets. Not only could you ride them out, but you could take advantage of investment opportunities while others are forced to watch them pass by.

When investing serious cash you want to make sure that the investment you are considering has sufficient liquidity, safety, and earns a good rate of return. Many people get these priorities out of order and put rate of return first. This is where you gamble and can get into trouble. As we talk about in our book Millionaire by Thirty, we prefer maximum funded life insurance contracts. When these are structured and funded correctly, they provide some of the best liquidity, safety and rate of return. You can join us for our free webinars to learn more about what to do in these turbulent times with your serious cash. Empower yourself with knowledge.

Register for our free webinar on October 23 to learn more about which house of cash you want your money in - "Three Houses for Cash - Where is all the money going?"




Or watch our past webinar on the lock and reset features of an indexed universal life insurance policy works compared to having your money directly in the market.




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