The Elements of an Investment
Part II – Management

Money Management — the fact is this phrase has little meaning. Money (in the form of cash) actually requires no management at all. You can pile it up, or you can spend it; but you cannot manage it. The moment you invest your money into some other instrument, then you begin to experience the need to manage that investment.

Just as every investment carries some element of risk (the first of our nine elements of an investment), so too, every investment requires some level of management. And, like your tolerance for risk, the amount of management you are willing to accept in an investment will vary depending upon your age, knowledge and position in the wealth cycle (for more information on the wealth cycle, see "Jerry's Corner" in the August, 1992 edition of Financial Advisory).

Let's begin our discussion of the various kinds and levels of management by reviewing how we use the chart to the right. Remember, we rate each investment category on a scale from zero to ten. A "zero" means this investment rates poorly, requiring constant attention and management. A "ten" would need the least amount of management.

As you might guess, a passbook savings account requires the least management. Of course, you want to be sure that the amount of savings in your name in a single institution does not exceed FDIC insurance of $100,000. But other than that, your savings account poses no serious decisions and needs little hands-on management. One result of this easy management, however, is a generally low rate of return compared to other investments.

This relationship between management and return exists throughout all of your investment choices. It's important to realize, however, that just because an investment requires no management from you, does not mean it requires no management at all. In the example of a savings account, the bank manages a wide variety of investments to produce the interest it pays you on account. Therefore, the lower return compared to other investment choices is the effect of "hiring" someone else to manage your investment.

The use of third party managers is always an option with any investment choice. In the case of stocks and bonds, choosing to invest in mutual funds is one method of shifting portfolio management to the fund manager. On the other hand, you might choose to manage your equity and bond investments yourself. You, then, take the responsibility of instructing the stock broker on your investment team with regard to which stocks to buy, how to structure your portfolio and when to divest of a particular issue.

Limited partnerships are the ultimate investment for transfer of management concerns. You relinquish all management decisions and control to the general partner. As you might suspect, the risk associated with such a strategy is quite high.

Rental real estate can run the gamut of the management scale. A fully leased, triple-net office building purchased for all cash, throws off income while requiring little to no management involvement. On the other hand, a multi-family dwelling (such as an apartment complex) demands almost constant management.

Just as with each of the other eight elements, management is interrelated to all of the other elements. The management of any single investment will carry a lower rating if it doesn't meet your needs in the other eight areas. Further, because this is a personalized rating, dependent upon your time, knowledge, abilities and place in life, some investments will rate higher on your management scale than they would for someone else.

Finally, keep in mind that while you may choose to reduce your own management involvement in a particular investment, never give up control. Only you can make the best decisions related to your investment portfolio and the fulfillment of your financial success.

Elements of Investment
Elements	Savings & Money Markets	Stocks	Bonds	Limited Partnerships	Real Estate	Commodoties	Home
Risk	8	6	7	2	5	2	9
Management	8	7	7	9	4	5	7
Flexibility	-	-	-	-	-	-	-
Liquidity	-	-	-	-	-	-	-
Cash Flow	-	-	-	-	-	-	-
Rate of Return	-	-	-	-	-	-	-
Appreciation	-	-	-	-	-	-	-
Leverage	-	-	-	-	-	-	-
Taxes	-	-	-	-	-	-	-
Total	-	-	-	-	-	-	-

Select Additional Articles from Jerry's Corner The Investment Way of Life Four Cornerstones of Success Excuses... More Excuses The Wealth Cycle Investment & the Wealth Cycle An Economics Primer The Life Cycle Creating A Saving Culture Entrepreneurialism A Fortune in Your Hands Look to the Pros - Introduction - Part I - Insurance - Part II - Stock Broker - Part III - Real Estate - Part IV - Attorney - Part V - CPA The Priorities of Life - Introduction - Part I - Health - Part II - Career - Part III - Relationship - Part IV - Home Elements of Investment - Introduction - Part I - Risk - Part II - Management - Part III - Flexibility - Part IV - Liquidity - Part V - Cash Flow - Part VI - Rate of Return - Part VII - Appreciation - Part VIII - Leverage - Part IX - Taxes

Moorman and Company, an accounting and personal financial management firm based in Palo Alto, serves the San Francisco Bay Area, Peninsula, and Silicon Valley from Hillsborough to Saratoga-Los Gatos, including Atherton, Menlo Park, Los Altos, Los Altos Hills, and Cupertino.