Money Always Flows into One of these Four Places

There are Two Themes to my Investment World.

1. I look to where people are saying “this doesn’t make sense.”

2. I look where things are so obvious that you just can’t see them because they are right there.

In this post I’m going to be addressing the second theme. The question is where and how money can be invested. When you know the answers to these questions you get the edge. One of the biggest edges you can have is point of view and being able to see things that other people don’t see. The edge we are discussing today is where money flows.

We Live in a Closed System.

What I mean by this is that when you make money you are already fully invested. If you work you’re most likely getting paid in your local currency. Let’s take USD for an example. As soon as someone pays me I’m immediately invested in a currency – US Dollars in this case. Look at the image below. There are for main quadrants that you can be invested in. Stocks, bonds, real estate, and currencies.

four quadrant investment

Now, we know from history that if you keep your money in currencies you are loosing 3% a year on average. This means you don’t actually want to be in currencies for long periods of time because the trend is against you. So anyone that has their money sitting aside in the bank is actually invested in their currency. The problem with this is that all currencies lose value over time. So there really is no such thing as setting your money aside.

Where Money Flows

This is the close system. You can’t invest outside of these quadrants. So the question becomes, if there are only four places to put your money, which one has the best long term growth? Where is the money flowing? The answer is the stock market. Maybe not each month or each year, but if you step back and look over the long term stocks beat everything.
When you know which of these quadrants is getting the most flow of money, you know where you should put your money. Knowing where money is flowing is the edge you need. But often people ask, “which stock should I buy?” I think that’s the wrong question. I think a better question is what’s the symbol if it turns out that money is flowing into stocks? And what location in stocks is money flowing? Maybe it turns out to be China. If you just know that you’re going to beat everyone. You don’t even need to buy individual stocks.

Bonds vs. Stocks

Take a look at the chart below. This is a chart of the bond market being compared to the stock market. When the line is going higher, money is flowing into the bond market and bonds are beating stocks. And vice versa. If the line is going lower, money is flowing into the stock market and stocks are beating bonds. What matters here is that the evidence shows that bonds are under-performing stocks. So the question is, why would you keep your money in the bond market if you can see that bonds are actually slowing the growth of your investments.

bonds vs stocks

Real Estate vs. Stocks

Here’s another chart comparing U.S. housing to U.S. stocks. You can see it’s similar to the bond comparison. Real estate is under-performing the U.S. stock market. One thing people like about real estate is that the price doesn’t change every second and you’re not hearing the price of real estate being talked about on the news every second. But for the long term you want to know where the money is flowing. And from this chart you can see it is flowing into the stock market, not real estate.

real estate vs stocks

Currencies vs. Stocks

In this last chart you can see currencies compared to stocks. If you look at this chart you can see the line falling. This means currencies are under-performing the stock market. Again this gives you clear direction as to where money is flowing.

currencies vs stocks

When You Know Where Money is Flowing you Find Stability

You don’t get stability by having a financial advisor ask you your age and based on your age come up with a percentage of how much you should have in stocks or bonds. To me the most important ingredient to successful investing is knowing the flow of money. Where is the money flowing? Stocks? Bonds? Commodities? Real estate?

By asking the right questions you can find clarity. Remember, you are ALWAYS invested. Even if you have your money in cash – your money is invested in the currency that you keep your cash in. And this is probably a bad idea because currencies lose 3% of their value every year on average. If you want to consistently grow your money, you need to know where the money is flowing. Knowing this is so important because we have so much instability in the market AND money has to still be flowing somewhere.

Watch the video below to learn more:

RC Peck





RC Peck, CFP


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