https://www.financialsamurai.com/why-cash-flow-is-more-important-than-net-worth/
Whether you are a fake retiree, a traditional retiree, or someone with a day job, cash flow is more important than net worth, especially during an economic downturn.
Net worth is often an illusion that only helps to boost your ego when times are good. When times are bad, calculating your net worth loses it’s appeal because it mostly hurts your ego.
During an economic downturn, if you don’t invest in cash-flowing assets, your portfolio will likely underperform. If your investments also have weak balance sheets, then they will likely underperform even further.
The starkest performance difference during a bear market is between growth stocks and dividend stocks. Therefore, if you are a growth investor, it’s important to take some profits when times are good to capture the outperformance. Otherwise, growth investors won’t ever be able to capitalize on their investments since they receive no dividends.
When growth company CEOs like Elon Musk and Satya Nadella were dumping Tesla and Microsoft stock aggressively near all-time highs, it’s worth paying attention.
The value of an investment is based off its present and future cash flow. Never forget this truth. Eventually, an investment needs to generate income for its owners, otherwise, the investment is only based on the greater fool theory.
As an individual, your cash flow is what enables you to do what you want. Cash flow is real whereas net worth is subjective.
Do you include the value of your primary residence in your net worth (of course)? Should you calculate your net worth on a pre-tax or post-tax basis (do both)? What should the value of your private business be in your net worth (best to be conservative)? And so many more considerations for calculating one’s net worth.
A subjective net worth is why it’s unfair to tax unrealized capital gains. Your investments might be worth X one day and X minus 70% several months later. The market is fickle.
Sure, if you accumulated a large enough net worth that produces zero income, you could simply draw down principal to fund your lifestyle. Many do. However, this path is riskier and less reliable. Because if your net worth produces no income, then it most likely consists of more volatile assets. The main exception are precious metals, and perhaps to a lesser extent, fine art, and collectibles.
I love real estate and blogging the most because they are two assets that produce strong cash flow. While valuation multiples expand and contract, I’m busy focusing on free cash flow and creation to pay for the lifestyle I want.
Real estate is my favorite cash flow investment partly due to the steadiness of its rental income. Everybody needs a place to live during good times and bad times. And by the time leases are over, bear markets are usually over as well.
Not only is real estate income relatively steady, you can remodel your rental property to generate more cash flow as well. The ability to take action to improve rental income is very attractive for able-bodied people.
Since I would never sell a strong cash-flow business in a relatively low-interest rate environment, its fluctuating value is background noise that doesn’t matter. What somebody is willing to pay for something is both uncontrollable and subjective.
Yes, it’s sometimes fun to fantasize about being able to sell Financial Samurai for big bucks and finally buy my beach front mansion that will eventually fall into the sea. However, what a shame to give up something fun to operate that’s been a part of me since 2009.