Since starting my blog, I have seen all sorts of comments and reactions to investing advice… some have been quite heated.
I have been asked about the safest and best places to invest in. And I’ve even been scorned or told that I was wrong about certain ideas.
So why is there so much confusion or strife about the ‘best’ ways to invest? I think it has to do with a lot of opinions, paid-off-influencers, and even misinformation out there. Dave Ramsey says this, Robert Kyisaoki says that. Suze Orman says this but does the opposite. ‘My brother is a CPA and says nothing of the sort’, etc…
More often than not these professionals and financial guru’s have sponsors, relationships, and are paid/compensated for their advice or rewarded if you invest in what they recommend. Although this doesn’t apply to all financial experts, often if you look closely into their personal lives many of them do not tell you all the different ways they choose to invest…only the ones they get paid to tell you about.
I’m not against them (although I like some better than others), it just makes sense to take what paid professionals say lightly. I find seeking information from investors who are successful but not compensated for sharing their ‘professional opinion’is a great way to find the real ‘truth’ about investments. Which is how I’ve come to the many conclusions stated below.
That said, there are pros and cons to every investment. Some have more cons than pros and visa versa. Some investments require a lot of time and ‘sweat equity’. Other investments require that you just pay someone a fee to manage it for you. Some are for a short duration, others for a very long time.
So let’s push pause on ‘which are the best types of investments’ and talk about what makes a good/great investment.
The next 9 principles of investing are really very basic and wise advice. I’ve been taught these principles by very successful investors who were not compensated for the knowledge they gave. After these tips, I’ll mention some pros and cons of different types of investments and what I think about each one.
1. Only go forward with an investment if there is little or no risk to your principal. Warren Buffet has said that “The first rule to investing is to never lose your principal. The second rule is to never forget rule number one!.” If you agree with what Warren Buffet says (and you should because he iswidely known as the most successful investor of the 20th century) then you cut out a lot of different forms of investing because many types of investments put your principal at risk.
2. There are tax benefits. Taxes are higher than they have ever been in history! In the fiscal year of 2013, the Federal Government brought in 1.9 Trillion dollars in income taxes! Yet even with that gigantic income they still overspent it by 400 billion!!! What does this mean? That taxes will most likely continue rising because Washington will continue overspending.
Thus, it is always best to pay taxes on the seeds rather than the harvest. If you can get into an investment that is taxed on the front end as opposed to the back end that is the best way to go. Also, if an investment can provide you with significant tax-write-offs that would be a great investment strategy as well.
3. Investments should be historically proven as profitable. If someone tells you about a brand new investment that has never been tried before I would use a lot of caution. Other investments that have been proven, tried and tested and have a great track record of GROWING are going to be a great bet.
4. You should avoid investments with historically unprofitable track records. The stock market drops significantly about every 7 years. After you lose everything you have made and the majority of your principle it is very difficult to climb back up to where you were before the drop. It takes years and years after a drop just to come out even.
I put money in the stock market for 5 years and watched it grow then dip then plummet. I was patient and waited years for it to climb back up. I sold at the top of the curvature but I still LOST money. How? It’s harder to grow your money once you’ve lost it. Recouping what you’ve lost is much much more time consuming than people give it credit for. The growth on a smaller amount takes longer to get to a certain amount than growth on a larger amount. If you are making 10% on $1000 it is going to take a lot longer to get to $50,000 than if you are making 10% on $10,000. Had I done more research on the historical track record of the stock market I would have just stayed out of it all together.
5. The investment should be transparent. You want to be able to completely understand it. If it is really hazy or unclear about how you will make money, steer clear. You should be able to fully understand how your money will grow and the possibilities of how you could lose.
6. Diversify. Don’t put all your eggs in one basket. A rule of investing is to diversify. That said you shouldn’t diversify in bad investments. It’s better to have 3 good investments than 5 with 3 being good and 2 bad. You will make the majority of your money in the best investments but for financial security, it is good to have a few good investments. They can even be the same kind of investments like hard money lending with different clients, or a few different businesses you are running.
Having 3 stock investments means you can lose everything if the stock market plummets. Having all your money in real estate could be devastating if the real estate market crashes. You can perhaps ride it out until the real estate market comes back up but it will get desperateif you are paying interest on those properties and had you diversified you could have some money growing elsewhere.
7. You should be able to keep a close eye on your investments. If you can’t find out where your money is and how it is doing, that is an investment you should avoid. It is very important to stay involved and check in often on the investment process.
8. Your investment should more than outpace inflation. Inflation varies but on average it is about 4% growth each year. If you invest you will want to make sure you are making at least 4.25% or more on your money each year.
9. You need to know and be able to handle the terms of the investment. Some great investments are long term, others very short term. Can you make it X amount of years without the money you are investing? Don’t invest in something that will cripple you financially.
So what are some investment options?
I’ve listedthe investment what I understand/know about each and ultimately what I think about them below…
Starting areasonablebusiness- Great investment if done right. It requires a lot of work, knowledge, and business skills. If you don’t have those qualities it can be a bit of a risk. But businesses have great tax write offs and the amount of profit you make in a successful business can out perform any other type of investment. Usually, the terms are longer. Typically the principal will be in assets and inventory and cannot be ‘lost’ if managed correctly.
Hard money lending- You act as a bank. Great investment option if set up correctly. There is collateral in case of default (so you don’t lose your principal), a big profit margin on interest made, and short investment terms.
Real Estate- Great investment if done properly. There are tax advantages, small to huge profit margins, and typically the property is the principal and it is very difficult to lose it if managed correctly. This is a pretty secure investment.
401K’s- Not good. You can lose almost everything. There are fees on the front and back ends. Taxes are huge on the back end. They rise and drop without any personal involvement/management. They require long investment terms and are very difficult to exit. Also, you have no collateral, therefore, your principal is always at risk. If your employer matches your funds it may be worth it if you roll it into a different safer investment as soon as you can but you need to know about the high rollover fees and penalties if pursuing this route with a 401K.
Life Insurance Investment strategies (including Whole Life, IUL’s, and Annuities)- Poor to Fairinvestments. There are caps and floors so you never lose your principal. Typically there are long investment terms. Fees and taxes on the front end (the seeds) but non-taxable on the back end growth (the harvest). Some policies you can access the cash, others you can’t. They have low to medium profit margins. You don’t have to do anything to grow the money but the policies are transparent. Most policies are very expensive so beware of the monthly policy fees.
Stock Market investing (buying and selling stocks)- Typically BAD. You can lose everything including your original principal. Although there are loose terms as far as length goes you never know whether to sell or not sell. You can make a good amount of profit but once profit and principal drop it can take years and years to remake those same earnings. The stock market is very difficult to predict, has a historically volatile track record, and is expensive: management fees, taxes on the back end, etc. There are professional stock investors that are filthy rich. They are very few and far between. If you have spent your a good portion of your life and pretty much every waking minute studying the market you may be profitable in it.
Precious Metals- Fair to Good (depending on knowledge). They are liquid and can easily be sold. They are recognized as legal forms of tender. It is hard to make a lot of money unless you are very experienced. The investment terms can be as long or short as you want. They are taxed on the front end. Can’t lose principal. They are easy to acquire (if you start with silver). They can be used as insurance for a recessive economy but they can fluctuate. Precious metals are great for an insurance policy and/or for a savings/security account but not that great as a form to make money unless you are very experienced on when to buy and sell.
CDs & Mutual funds- Fair to Good. They have small profit margins but are fairly safe. Different investment lengths are available. Some tax benefits.
IRA- Good to Excellent. Lower earning rates but great tax benefits (consult a CPA). Longer terms. Fairly secure.
As you can see there are many different investment options (even more I haven’t listed) and all have pros and cons. I have been involved in many of these investments at one time or another (or currently). Anyone of them can go bad if not entered into or managed properly. So before investing do a lot of research and learn as much as you can about the options you are interested in. Sometimes paying someone who is very successful in the type of investment you want to embark on to be your tutor will be worth the money as well.
Why Invest? If you want to learn the power of investing please check out this post and why Albert Einstein said that compound interest is the most powerful force in the universe. It will show you how to calculate how fast your investments/money will double and how important investing is.
Did I miss an investing strategy that you have tried or know about? Please comment below.
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