Find Your Investment Focus
Decide what asset class is best for you
My photography teacher gets lost in Photoshop enhancing his photos. He told me, “Last night right before going to bed, I decided to touch up one of my photos. I figured it would take me about 15 minutes. I couldn’t believe it when I looked at my watch and over two hours had passed. I was just so into it.”
When was the last time that happened to you? That’s a sure sign of being completely in sync with what you love.
If you’re not interested in something, then you are probably not going to pay much attention to it.
The same holds true for assets to invest in. It’s crucial you choose the asset that best suits you—your personality, your values, and your lifestyle.
The four primary asset classes
The following are the four primary asset classes. There are many, many more types of assets you can invest in.
You can invest in your own business by using your own money, raising money from private individuals, or borrowing money from a traditional lender. The purpose of the money you invest, no matter where it comes from, is to work and generate a return back to you, the business, and your investors and/or lender.
You may also choose to invest in someone else’s private business or company. The business and the owners may or may not be familiar to you. Make sure you do your due diligence, which means your homework, on:
The project (the business itself),
The financing, and
The business and management team.
There are two reasons to invest in real estate—for cash flow from rental properties and for capital gains when you buy and sell (flip) properties. I invest primarily in rental real estate because cash flow fits my formula for financial independence. You decide which works best for you.
There are all sorts of investment real estate: single family, duplex, triplex, apartment buildings, office buildings, retail strip malls and shopping centers, and industrial properties such as warehouses, hotels and mobile-home parks.
One of the biggest benefits of real estate is the concept of leverage. Leverage is the ability to use OPM, Other People’s Money, to purchase the asset. A property that is highly leveraged means there is a lot of debt on the property compared to equity. (Equity means the current market value minus the debt.) A property that has a debt of 90 percent (which means the owners and investors put down 10 percent) is more highly leveraged than a property that borrowed 70 percent and put 30 percent cash into it. The higher the debt on the property, the lower the cash flow. The lower the debt, the higher the cash flow.
Paper assets include things such as stocks, bonds, mutual funds, and retirement accounts. You can invest in stock options, stock futures, and foreign exchange. Paper assets include REITs (real estate investment trusts), which are funds that only invest in real estate. Paper assets also include ETFs (exchange-traded funds). There are too-numerous-to-count paper vehicles you can invest in.
Paper assets are typically capital-gains investments. However, stock dividends are taxed as cash flow.
Commodities are metals such as gold, silver, and copper; food such as grains, corn, coffee, and sugar; and raw materials such as oil, gas, and cotton.
The price of commodities is typically driven by supply and demand. If there is a bumper year of corn, then prices are low since the supply of corn is high. If, on the other hand, there is a shortage of corn due to a drought and unfavorable weather conditions, then the price of corn will be high.
You can buy commodities such as gold and silver at your local precious-metals dealer. Or you can buy what are called future contracts of any commodity through the futures exchanges.
Commodities are generally a capital-gains (or loss) asset.
Focus and diversify
Although it’s important to primarily invest in the things you’re most passionate about, it’s also important to be diversified. But what does that mean?
Diversification is a term heard again and again. “Make sure you are diversified in your portfolio,” the financial advisers will preach. The question is: What is their definition of diversification?
When most financial planners and advisers tell you to have a diversified portfolio, they are usually referring just to your stock portfolio. Diversification to them means investing across the various stock sectors, such as large cap, small cap, blended, blue chip, high tech, or alternative energy.
To truly be diversified means to diversify, not just within paper assets but also across all asset classes. I started investing in rental real estate.
Today Robert and I are invested in all asset classes. Each asset class reacts to the markets differently, and each asset within each class may respond differently as well. Putting all your money in one basket, called paper, may not reward you with the financial security you desire.
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