Over the years, I’ve made my fair share of financial mistakes. While those experiences have taught me invaluable lessons, they also came with a steep price tag. To help you avoid the same pitfalls, here are some key guardrails to guide your investment decisions and protect your wealth.
1. Only Invest in Assets Backed by Cash Flow
One of the biggest lessons I’ve learned is the importance of cash flow. If an asset doesn’t generate regular, predictable income, it’s speculative at best. Cash flow provides a safety net and ensures that even if the value of the asset fluctuates, you’re still earning returns. Whether it’s real estate, businesses, or dividend-paying stocks, prioritize investments that pay you to hold them. Before investing, ask yourself: where’s the income coming from, and how reliable is it? If the answers aren’t clear, it’s a red flag.
2. Seek Trusted Opinions for Major Investments
When you’re considering an investment that constitutes more than 10% of your net worth, it’s essential to get outside perspectives. Consult with 3-5 trusted individuals who have expertise in the area you’re investing in. These people can challenge your assumptions, point out risks you may have overlooked, and provide a more objective view. This doesn’t mean you need to follow their advice blindly, but their insights can help you make a more informed decision.
3. Don’t Give Loans Without Sellable Collateral
Lending money is risky, especially when it’s not secured. Never issue a loan unless it’s backed by collateral that can be sold within three months. The key here is liquidity. Collateral should be something tangible and marketable, like real estate or valuable equipment, not vague promises or assets with questionable value. If things go wrong, having collateral ensures you have a way to recover your money.
4. Limit Exposure to Assets You Don’t Control
Control is a critical factor in mitigating investment risk. Don’t allocate more than 10% of your net worth to assets you don’t personally control. By “personally control,” I mean having decision-making rights and direct access to the bank accounts tied to the investment. If you’re relying entirely on someone else to make decisions or manage the money, you’re exposing yourself to unnecessary risk.
5. Scale Back Risky Investments
A simple rule of thumb: if losing the money you’re investing would materially change your life, it’s too risky. This doesn’t mean you should avoid all risk—taking calculated risks is part of building wealth—but you need to size your investments appropriately. Only invest amounts you can afford to lose without jeopardizing your financial security or peace of mind.
6. Stick to Your Investment Limits
Set a firm cap on how much you’re willing to invest in a particular opportunity. Once you hit that limit, commit to putting no more money in, regardless of new developments or changing circumstances. This discipline prevents you from throwing good money after bad. Be prepared to lose everything up to your limit but absolutely nothing beyond it.
7. Understand the Investment Fully
If you can’t clearly explain how the investment works, you’re not ready to put money in. This isn’t about “sort of” knowing; it’s about actually knowing. To test your understanding, have a friend quiz you on the mechanics of the investment. If you’re answering “I don’t know” to anything, go back and do more research. Understanding the risks, returns, and operations of an investment is non-negotiable.
8. Hold Cash as a Default Position
Cash is often underestimated in its value as a strategic asset. Your default position should be holding cash, not being fully invested. Cash provides flexibility and optionality, allowing you to take advantage of opportunities as they arise. It also protects you from making impulsive decisions when you’re unsure about the market or specific investments.
9. Prioritize Yourself and Your Business
Before looking for external investments, consider how you can invest in yourself or your business. Personal development—whether it’s gaining new skills, pursuing education, or enhancing your health—often delivers returns that far exceed traditional investments. Similarly, reinvesting in your business or starting a new one allows you to leverage your expertise and maintain control over the outcome.
10. Question Why You’re Getting the Opportunity
When presented with an investment, always ask: “How many people said no before me?” It’s a critical question that forces you to think about why others passed. Write down why you believe they said no. This exercise isn’t about dismissing the opportunity outright but about understanding the potential risks and ensuring they’re acceptable to you.
11. Stick to Your Core Competency
One of the biggest mistakes investors make is straying too far from their core competencies. If you have a proven track record in a specific area—real estate, small businesses, or another niche—set an extremely high bar for investing outside of it. Most opportunities outside your expertise won’t match the returns or risk profile of what you already know works. Stick to your system and avoid the allure of shiny new opportunities.
12. Never Rush into a Deal
High-pressure tactics are a red flag. No single opportunity is so important that you should feel rushed into making a decision. If you’re being pressured to act quickly, walk away. There will always be another deal, and patience often leads to better outcomes.
13. Don’t Be Afraid to Size Up When It’s Right
When an investment passes all your tests, you’ve done thorough diligence, and you have high conviction, don’t hesitate to go big. These rare opportunities are often life-changing, delivering outsized returns. Just ensure that your decision aligns with the other guardrails and that you’re prepared for the risks involved.
Building and preserving wealth isn’t about avoiding all risks—it’s about taking smart, calculated risks within a disciplined framework. By following these guardrails, you’ll avoid unnecessary losses and make more informed investment decisions. Remember: wealth is built over time through patience, discipline, and a clear strategy. Use these principles to protect your hard-earned money and grow it wisely.
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