Archive for July 9th, 2008

Injury timeout (The Financial Athlete #20)

July 9, 2008

I was injured. People encourage me with the sound advise of “take it easy,” and I reply, “I’m tired of taking of it easy.” I miss the action in sports. Moving, I feel alive. Sitting, I feel physically stagnant. Yet I am disciplined to refrain from playing the sports I love until I recover, knowing my injury will worsen otherwise.

In sports, injuries are part of the game. It’s also part of investing. Assets can become “injured”. By this I mean the asset stops producing a return on investment, but that doesn’t mean it won’t produce again. It’s important to recognize the difference between dead assets which will never produce income and “injured” assets which will. By confusing an “injured” asset for a dead one, investors take unnecessary losses if selling.

An example of an “injured” asset is losing a key tenant in your commercial real estate building. That passive income check you’ve grown accustomed no longer gets mailed. Later you’re relieved to hear the property management found a new tenant. However, you’re stuck with the bills for tenant improvements, further delaying passive income. You feel some comfort in knowing the property should again produce income within 2 years.

To prevent injuries athletes stretch. To withstand an “injury” from an asset, investors need multiple streams of income.