julyblogsmThe words are familiar. You have a Portfolio of Stocks, Bonds, Mutual Funds and Securities. What do they mean? What is it exactly that you own? Why do you need it? The financial world has a language all its own and it is often complex and even confusing. If you watch the financial channels on TV, you will hear things from seemingly intelligent people who talk as if they just looked into their crystal ball and saw the future. They use terms that are meaningful to an analyst or a stock trader, but what do they have to do with you?

As a financial planning firm, our mission is to translate concepts and strategies into real life programs that will shape your future. Often we need to simplify the complex and bring it back down to earth where we can use ordinary language we all understand.

One of the biggest symptoms of this problem is published every year by Dalbar. Dalbar is a research company that tracks investment and investor statistics. They report year after year that the individual investor underperforms the market. Why is that? Most experts agree that although the individual investor can buy the same items that the professional can buy, they have a hard time keeping it. One of the reasons, in my opinion, is a misunderstanding of what they own.

Owner vs. Investor

For most people the process is simple. You earn income, then save and invest whatever you can to accumulate capital. At some point you use that capital to generate income. What is capital? Capital is defined as, “any form of wealth employed or capable in the production of more wealth.” So the objective is to reach a point in time when your “capital” can provide enough wealth to replace your income.

An investor is presumed to be one who buys and sells things. “Buy low and sell high!” is the mandate but as Dalbar points out, few manage to master that skill. Could that be because the investments have become so abstract that they have little real meaning to the investor?

An owner, on the other hand knows what he owns. When accumulating capital there are several varieties available. You can own businesses. You can loan money to businesses, governments or people. You can own real estate. You can own commodities, like gold and silver or wheat and corn.

Investors hire professional managers to buy these things, but the investor owns them. If you have stocks in your capital account, you own part of the business. The purpose of a business is to provide goods and services, grow and generate a profit to the shareholders. If you loan money to a business, government or person, they will pay you interest and eventually return your principal. If you own rental real estate you get rent from your tenants.

An owner will focus on the value of the capital and what it is able to produce. The market value for any asset will change every day. That has very little to do with the value of the capital unless you are selling on that day. Sometimes that is the right thing to do. Sometimes it is not. Understanding what you own and how it will create wealth for you by providing long lasting, durable income is the key to financial independence and peace of mind.

A sound strategy will organize what you own so that it will provide you with the income you need to support your lifestyle while continuing to grow. This is wealth producing more wealth. Growing that wealth while protecting what you own from the risks associated with these enterprises is the goal of good management and good planning.

Owners take a long term view because they understand the underlying value of what they own. They understand the purpose of capital and have the patience to let it work. Markets will fluctuate, creating opportunities for good managers and more wealth for patient owners.

All owners are investors. All investors do not have an owner’s mindset. Understanding what capital does for you and what it can do for those you care about will change your perspective and give you the confidence to relax.