The Power of Three

Many good things come in threes: the Apollo space program used three astronauts to land on the moon; the Defense Department oversees forces on land, sea, and air; the simplest stable platform is the tripod: it has three legs.

In finance, it’s recognized that there are fundamentally only three types of assets: bonds, the senior claim on an enterprise’s cash flow; equities, the residual claim on that cash flow, and real estate, which is an operating claim on cash flow.

Sensible investment policy mirrors this fact. It looks to maintain assets in all three areas. A couple nearing retirement ought to look at all their assets in this light and strike a balance. If they own their home outright or have significant home equity, that represents a large real estate holding. Their accumulated Social Security benefits comprise an inflation-indexed annuity which is backed by the Federal Government. Add to this any private pensions that have been earned.

What doesn’t arise naturally for most people are equity holdings. Those are investments that will grow as the economy grows. Yes, they are more volatile than the other two asset classes, but that is because they are financially the riskiest, with the most potential for growth. But if people save diligently throughout their working lives, they can build up a significant equity portfolio, to go along with the real-estate and fixed income that naturally occur.

"A three strand cord is not easily broken." By investing regularly in equities most folks are building up a stable tripod of personal capital. That’s the power of three.

Douglas R. Tengdin, CFA
Chief Investment Officer
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