You now understand that becoming wealthy is a pretty simple concept. Buy assets (things that give you more money) and minimize liabilities (things that take your money). How? Spend less than you make so that you have some savings. You also now have some financial goals, a time horizon for when you will be spending your savings , a risk tolerance level and finally, you know how much time and energy you are willing to put into your investments. These will all guide where you will be putting that hard earned cash.
So what are your options?
The investment universe has vastly expanded over the past several decades. It can be dizzying for the amateur to figure out where to start. Luckily, it’s simpler than you might think. I use the KISS method – keep it simple, stupid. That’s why I have three main assets, in my opinion, that you can consider for purchase.
Equities are traditionally thought of to possess high risk. I won’t debate how I actually feel about this, but no doubt, if you want to purchase public equities, you should possess a longer time horizon and be prepared for more volatile swings in the value of your portfolio. However, over the long term, if you are not dancing in and out of the stock market, you can expect strong returns.
“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.” – Warren Buffett
If you are a rookie, you don’t have time to learn about your investments and are perhaps a little less risk tolerant, I strongly urge you to buy an Exchange Traded Fund (ETF) of a major stock market index. Sounds fancy, but all it does is track the value of the overall stock market. If you open a Questrade account, you can buy them for free. Buy them every time you get a paycheque, that way you don’t have to worry about timing the market. Over the long term, you can expect a strong return by investing in major stock market ETFs. Pick two or three ETFs. Maybe one from Canada, one from the US and if your feeling up for it, maybe one from a developed market in Europe. You now own a piece of the world.
You can also invest in reputable and low fee mutual funds if you like, but I prefer ETFs. If you don’t have time to research investment managers and are not sure why one is better than another, ETFs are the way to go. They are cheaper to own and study after study has proven that after fees are included, they perform just as good if not better than mutual funds. So stick to ETFs.
Individual stock picking is not for the faint of heart. It is also not for amateurs unless you are restricting yourself to a diversified portfolio of large, global, high quality businesses. If you insist on picking your own stocks, I would first suggest before buying anything that you read The Intelligent Investor by Benjamin Graham. If after you read the book you still think you want to pick your own stocks, start small and practice, practice, practice. With plenty of time and effort, maybe you will be the next Warren Buffet.
The safest of these assets, bonds of credit worthy companies are protected and secured buy the assets of the business, are first in priority in the case that the business goes bankrupt and the company is contractually obligated to continue to make its interest payments. Bonds are an essential part of almost any investment portfolio.
I wouldn’t suggest buying individual bonds if you are an amateur or have relatively little capital (since a minimum order is often $10,000 a pop). So you should buy a respectable corporate bond mutual fund or a municipal bond fund. Make sure they have low fees and are offered by a very respectable and experienced investment manager. Just like equities, you should buy them over time, so you don’t have to worry about timing the market. Bonds are the core of your investment portfolio, they will hold up much better during recessions than most other assets.
3) Real Estate
Somewhere in between in terms of risk level, real estate is often the largest investment in most people’s lives. Though it is also subject to swings in value like equities, home owners possess the piece of mind that they have a hard asset that they own and can see, touch and feel. Perhaps more importantly, they don’t get an appraised price everyday like equities. In my opinion this is part of the reason real estate values are generally less volatile than equities.
I only consider real estate to be an asset however, if you are not living in it, but are instead renting it out and generating positive cash flow from owning it. Real estate is often a liability if you live in it, because it takes your money. You pay for your mortgage and you pay for repairs and maintenance. Over time, many owners put more time, energy and money into their homes than they receive via the appreciation of the property over time. An investment property, however, where the rent you are generating is greater than all the expenses of owning the home (mortgage, repairs, maintenance, taxes etc.), is an asset, and many people have become very rich from buying investment property.
It takes more time, energy and know-how to buy an investment property. But there are several advantages including not having to use your own money (via using a mortgage), and the direct control you have over the value of the property. This is not the case with equities, as you can’t use margin (a mortgage for equity purchases), and you don’t have control over the value of the investment.
Real estate is often a good option for do-it-yourselfers and people that are willing to put in the time to make sure they can generate a positive return from investing in the property.
That was a lot, but now you have some options. There is also the question of how much of one asset class to buy vs the other.
The general rule of thumb is that the more risk tolerant and the longer your time horizon, the more of the risky assets you are capable of owning. But under all circumstances you probably shouldn’t own 100% equities and real estate. Something like 75% makes sense if you can handle the risk. Otherwise, a 50%-50% split between bonds and equities is a good option.
As always, consulting with an investment professional is never a bad idea. In fact, even those of us with solid investment acumen should have a sounding board for their ideas.
All you have left is to get started.
Good luck and happy investing.