In the last blog we discussed why you simply must invest your left over income if you don’t foresee needing it in the immediate future. You need to outrun the rate which your money is worth less (Inflation) Lets take a look at some of the biggest and most common investment options.
Forget everything you’ve heard about the stock market, and start again from an objectively open minded perspective. Chances are, you have some preconceived notions of what the stock market is, how it works, and what FACTS you will learn about it.
The fact of the matter is that the stock market is the single biggest ticket to all but assured wealth you will ever have available to you… It is also the single biggest all but assured way to ruin if used recklessly. The question you must ask yourself is whether or not you can resist temptation to think you are smarter than the market. A lot of people every year THINK they are, and while some are successful, most lose badly.
We can’t remember where we heard it but a really fun question to ask yourself is “Am I Warren Buffet?” If the answer is NO to that question, then you need a really blunt thing told to you by an amateur observer (Us) of the stock market, as well as EVERY professional I have ever talked to or read about… STAY AWAY FROM PICKING STOCKS!!! Remember that piece of advice and we will save you countless hours of arriving at the same conclusion, hopefully without losing money in the process.
Didn’t You Just Dissuade Us From The Stock Market?
We hope not, because if you read the beginning of that section again you will see that we are big fans of the stock market. If used properly it will grow your wealth by 7-10% per year on average (averaged out over many years) That seems slow and steady, but we will explain in an upcoming blog about the power of compounding interest, and how quickly this nifty little accounting principle will make you wealthy beyond your wildest dreams. When you buy stocks you OWN a little part of that company.
The reason you lose picking stocks is because you are investing a lot of money in one particular company, in hopes (or what most people see as KNOWLEDGE) the company will continue to expand and be worth more and more. The problem with this idea is that it has been all but proven you will NOT choose wisely. If you choose a to buy a part of a company that fails terribly and files for bankruptcy, your investment vanishes along with the company. The way to mitigate the risk of you picking loser companies, is to invest in MANY MANY companies at the same time. Some will lose, some will win, but most importantly combined on average they will win 7-10%.
If you have read our goals for 2017 you will see that our investments are $18,000/year each in our 401k/403B plans, $5,500/year each in our Roth IRA’s, and $48,000 into our early retirement fund. ALL of these are invested in very diversified stock portfolios (With a little in Bonds) In fact, the $48,000/year is being put into VTSMX (Vanguard Total Stock Market Index Fund) which as we write this has 3619 different stocks as a part of it. That’s a lot of diversification! As you will see with this screenshot, the growth of this has been 14%+ in 5 years, and 7%+ over 10 years, since its inception in 1992 it has been 9%+, and that time period includes a few major market downturns including the 2008 “crash”. We will talk more in the future about how to perceive these periods as it relates to human behavior and fear.
Have a special skill you can sell or trade to someone else? Have a way you can turn an idea into a business? How about simply a way you can exchange your labor for money on your own time and choose the rate you want to get paid? All these ideas are very doable, and we have done them all with a reasonable degree of success. As we discussed in the income blog, a large degree of our family income (roughly $120,000+ a year comes directly from being entrepeneurs) there is a lot of opportunity to make money out there in non-traditional ways, you just have to find what works for you. Rory invested roughly $20,000 in his primary business and that business has generated about $1.6 million in cash flow since 2014. Most of that was paid back out in expansion costs, salaries for employees (us included so we consider that profit) and operating expenses, but even if we just consider Rory’s salary and no other “profit” including equity, he has achieved 450% return on his investment EVERY YEAR.
Now, that’s a bit of a skewed number, and let us explain why. He works 40 hours a week to get that money, and if he ceased (right now) putting his labor into this business the % profit would drop to 0% really fast. This is because of what we like to call “active income” meaning you need to “earn” it. The hope in the future is to either sell his 50% ownership in the business, OR have it managed for him in order to continue to make income from it, but in the meantime, he needs to keep working in order to have his income from this. Hopefully, this illustrates 1) how powerful of an income booster entrepreneurism can be, and 2) the value of “passive income” via the stock market and other options.
We haven’t ventured down this path too much yet to be able to comment much on the particulars of it, but it’s important to realize that by both rental properties, and “flipping” houses, it is possible to build great wealth in this investment. It requires real estate knowledge, time to do fix it projects yourself, and cash in order to do this investment well, but many a person have made their riches with real estate. Including our own house we own 2 single family houses, and through Rory’s businesses we own 50% of a multi-unit rental house, and another single family house. However, it is important to point out, these are cash NEGATIVE assets at this point, but are strategically placed towards reducing business expenses, building equity, and future income from rentals. We picture at some point in our retirement owning one or two rental properties located close to where we live, which we anticipate providing cash flow during times the stock market is down and we do not want to pull from our portfolios.
Bonds and CD’s
We will talk more about these in the future, but let’s break down what they are, and what the pros and cons are.
CD’s basically function like a savings account, but you agree to a deposit term (How long you cannot touch them) They are a step up from a savings account in terms of how much you can yield from them, but it’s still inflation range of 1.7%, the pro is that they are very safe (you’re not going to lose money on them) the drawback is that you will probably only keep up with inflation, AND your money may be tied up for upwards to 5 years. If you need access to your money before that time, you not only won’t get your interest gain, but will likely also be punished for your early withdrawal.
Bonds are similar to CD’s in that you are essentially loaning your money to an institution (private and governmental) for them to fund their projects, in exchange for that loan period, they return your money along with an interest bump for your troubles. Just like stocks, its best to diversify. Vanguard offers the VBMFX (Vanguard Total Bond Market Index Fund) which is comprised of 8571 different bonds (62.8% in the US Government for stability) The pros of this is that they yield more than CD’s (2%+ in the last 5 years, 4%+ in 10 years, and 6%+ since the fund’s inception in 1986) They are relatively low risk and yield a better return than savings accounts and CD’s but still don’t get the returns of stocks.
This is a new one to us, and we aren’t going to use it yet because of how it is set up, but we will using this in the future if it still exists. Kasasa checking and savings accounts are available through only credit unions as far as we can tell. And they are not available everywhere (The closest physical bank to us is 3 hours away) They are just like regular checking accounts with a few added benefits making them absolutely superior to other checking accounts. The one in our state requires you to have at least 12 debit card purchases post and settle during the month, Have 1 or more automatic payments post and settle each month, and be enrolled in their paperless statements… That’s it… I’m pretty sure everyone does those things anyway right? And the benefit to doing what you likely do anyway? 3% returns on your checking account up to $10,000! So if you had $10,000 or more in your account every month, met their qualifications, and spent less than $300 on those 13+ purchases, you would get all of them for FREE once you got your $300 back each month (That’s how we think about it anyway) Another way to look at it is you could EARN $300/month just for using their banking system, thats $3,600 a year! Not an “investment per se” but certainly worth looking into if you aren’t ready to invest your money into longer term investments.
Peer to Peer Lending
We have not done this yet, but will probably dabble in this in the future. Peer to peer lending or P2P lending is online investing that pairs your ability to lend money, to others need to borrow money, and allows that borrowing to take place directly. So, if someone needs to borrow $20,000 to start a business, refinance their home, buy a diamond ring etc. You can make your own assessment of their ability to pay you back, agree upon a rate etc. and you’re off to the races. The downside to this is obvious, it’s risky because it inherently isn’t very diversified. However, the big lending clubs claim 5-7% returns to investors on average and do offer ways to lend small amounts to multiple members, thus diversifying your risk and reward.
Thats it folks, investments in a nutshell. We are confident there are 100’s of other types of investments we are not covering here, but the ones listed here are the biggest and most common. We will keep you posted if we find any more worth talking about, and of course will let you know how our investments do over the years.