Cash flowing assets help dodge Murphy

In the past, I’ve mentioned big things to watch out for, including inflation¬†and fees. I’ve also mentioned how your wealth building plan needs to be able to dodge pot shots from Murphy.

One of the biggest benefits of cash flowing assets is that even when their value dips, they still yield output. One of my holdings, VNR, yields around 9% annually, and it pays out every month. The payout has been consistent and I have only seen it increase. It’s not guaranteed. But to get guaranteed, I have to accept something much smaller, like 0.1% on a money market account. My rental properties continue to yield monthly rents. Their values have been going up, but if they dipped it doesn’t immediately cancel the lease. In other words, these assets will continue to keep bringing money despite their dip in value.

Don’t bet the farm on mutual funds

If your investment portfolio is totally based on appreciating mutual funds, negative market performance will put an incredible amount of negative pressure on you. It has been shown in many studies that people fear losses more than they celebrate gains. When your market value drops, there is a historic tendency for people to sell to stop the losses. That may prevent the losses from getting worse, but it effectively makes the losses real instead of “on paper.”

But if you own cash flowing assets, you don’t have your entire investment tied to the appreciative value. Instead, the constant flow of cash, either monthly or quarterly, can make the appreciative aspect of the asset not as critical to building wealth. If we look at the history of wealth building, especially amongst the top 10%, we can see a definite pattern. The wealthy tend to own stocks, real estate, and business equity. These all can appreciate, but a key aspect is that they all generate cash as well. The wealthy aren’t simply holding themselves at bay during negative years. They don’t need the hand holding that many financial advisors are attempting. Instead, the wealthy have cash flowing assets and are actively involved in gathering money and strategically employing it to grow the assets, pay off excessive debt, or finding new assets.

So what happens when Murphy strikes? Your assets can drop in value, but still yield cash. You can panic and start selling assets, but the pressure may not be so strong. You may be getting hit by unfortunate situations, but knowing that more cash is coming if you hold onto your assets can help you avoid making a bad situation worse. You might not have completely avoided Murphy, but collecting cash flowing assets and not dropping them in a panic will certainly help you come out on top in the long run.