Disclaimer: None of the following is legal or financial advice in anyway, and legal and financial advice should be sought from a legal or financial professional.
As the saying goes, ‘The best time to invest was yesterday, and the second best time is today.’ However, is that really the case? More appropriately, is it really that simple?
Investing at its core … is ‘simple’, ‘Spend’ money today in order to recoup increased gains and yields in future. But the unfortunate truth is, investing is and can be a ‘complicated’ issue, forcing especially first time would be investors to learn about various vehicles, methodologies, risk mitigation, protections, and a whole myriad of other factors so that the end goal of gains and growth can be achieved.
So where does one start? Let’s try to tackle this question below.
There are many ways ….
As mentioned a moment ago, there are many ways and places that an investor can put their money and trying to learn about all of the various options available can take months or even years of self-educating.
It’s a process that can take so long it can even get in the way of making progress, while the world moves on around you. I have also learnt there is also a point where the more you learn, the more conflict you encounter which can lead to ‘paralysis by analysis’ which only keeps you where you are … nowhere and stuck.
I’ve touched this subject previously, but before going any further, it has to be said, that when most people decide to invest it is out of need. Time and time again, there are too many stories about people who feel they’ve done the right thing, by working hard, playing it safe, only to watch their life’s work … and savings come to nothing.
The simple fact is this … playing it safe isn’t, and when it comes to financial strategies, there a number of vehicles one can choose, based on how much time [life] one has, but when looking to invest ones starting point comes down to three initial factors – Buying power, Risk appetite & personal will.
Risk & Goals
Playing it safe isn’t!
Let me explain. You don’t have to search too hard to find a report about an upcoming bubble, a predicted market collapse, or a forecast housing crisis, or international uncertainty. Negative speculation is rife, and anything positive is simply & obviously propaganda! To anyone who hasn’t gotten involved in investing there is more than enough reason to stay on the side lines, and to keep ‘waiting’ for the best time.
But while ‘they’ are waiting for the ‘best time’ what are ‘they’ doing?
They’re trading time for money, in the belief that it is safe and stable until they reach a critical tipping point – the realisation that there is no longer enough time or budgeting to achieve financial security. This is the point where people realise they ‘need’ to invest, and they will never get the time back. Being safe is almost guaranteed to result in financial failure and when the vast majority of people don’t have more than months worth of savings in their bank accounts to make the next mortgage repayment, and the majority of retiree’s end up on government support.
In order to achieve financial security, one has to ‘take a risk’, and that means taking action today to speed up potential results and outcomes tomorrow, and anything that offers reward comes with potential risk, and nothing is risk free. Don’t believe me?
If there was a something that was risk free, everyone would be doing it and … well … we aren’t!
So lets take a quick snap shot about some of the risk /reward profiles.
Statistically 45% of businesses fail within the first 5 years. Yet people playing it safe, filling a job, work for a business. Interesting right? Sort of. Anyone can start a business, but a swath of commercial factors mean that the about half of businesses either fail or fail to meet the initial goals of growth.
However, starting a business has also never been cheaper, and easier to reach a global audience. Care, strategy and innovation can keep you in the game, and achieve far more than any job!
What’s the metric? Well in failure, you can lose all of your start-up costs, and any collateral, but success can be infinite. Look at Musk or Bezos. To learn more about why businesses fail, you can learn more here.
Nothing is as safe as houses right? Well … maybe. There is a reason that mega rich love property. It barely ever goes down! Even Australia’s property ‘crash’ during the Covid-19 pandemic saw the market drop a paltry … 5%?
Boo hoo. Who did this really effect? The people that wanted to sell?
What about the rest of the market? What about the rest of the owners out there? Who cares! Property, residential or commercial is an asset. Okay maybe I’m being flippant, but the vast majority of landlords out there, weren’t ‘really’ effected.
Sure, 20% of Australian industry was put on governmental life support, during the worst of the pandemic lockdowns, but businesses still paid their rent, residential renters still paid their rent, so property still provided cash flow. Win!
Now in 2021, demand for property is driving prices ever higher. What a difference 12 months makes! Auction prices are reporting 30% higher than the reserves and sellers are winning big. With annual growth now forecast at double digits, it’s never been a better time to get in or have property, but it’s not all ‘risk-free.’
It only takes a bad tenant to rattle what is otherwise one of the safest and most secure markets out there. Damages to property can cost landlords much of their rental yields and can even leave them cash negative during the financial year, meaning the asset only grows in capital value while remaining negatively geared. Urgh!
Properties work differently depending on the type, but residential property can yield between 4-10% in rent, while gaining +8% (Historical Average) per year. Expenses will eat into your cash flow. Commercial Property – well these work differently again and are commonly directly proportional to the rent taken, at between 5-7% rental yield, and the capital value is calculated directly from the rental percentage.
I make no secret – I’m a fan of the markets. Unlike business, there are no customers, no monthly reports, no emails, no management … just pure self-accountability.
Also … When you’re on the right side of the trade … 2-4% per week is possible. That beats the brains out of any bank, property and most businesses, with far less headache, for much less time invested.
What’s not to like? Sounds perfect?
Yeah well, it’s not always the case.
The markets can be like a game of chess, and no matter what the technical, fundamental, psychological analysis or press say, the moment you establish a position all bets are off, and when it comes to ‘your’ early days, market movement can shake confidence, leading to objective or emotional decisions that can leave you managing losses.
This is part of the process. The long term trends do point upward, but it doesn’t mean that there aren’t downturns, sell-offs, corrections and even the odd crash along the way. In fact these can be good things, especially when navigated the right way.
But despite having such a wild and broad range of possibility, it comes down to risk appetite and tolerance and furthermore strategic discipline. If you fear negative numbers or make rash decisions, the markets are not the place for you, despite needing far less to get started, and having the potential to make all other investment vehicles look lazy by comparison.
Jobs aren’t bad, and I’m not anti-job, but beyond starting off, and saving, it’s not a course of action I would recommend long term.
The Investing Pyramid …
So where should you start and how should you grow? Like everything this is a subjective topic, and like everyone I have my own opinion. Hell I even ‘disagree’ with one of the people I follow most closely for information and knowledge, not out of spite, but for potential.
When it comes to investing, nothing is better than knowledge … to a point. The more you know, the more you can achieve. And with the endless volume of data and information out there, knowledge has never been cheaper. But there is a risk of over doing it. As I like to say, get in the game, learn the language, learn the moves, and start taking action.
The only downside of knowledge is trying to have it all while failing to act on it.
Number 2 off the rank is business. Whether you invest into a business or invest in your own enterprise, nothing generates cash flow like business. Especially with the ability to source, hard product, create digital products, create subscription or licensed content, or provide a service, a business with a robust business model has no limits to what it can achieve, and when they are built with scale in mind, the sky is the limit.
Okay I said it earlier, I ‘disagree’ with the sequence here, and in my opinion stocks come ahead of property. Why?
Cost of entry. Property can take 6 figures of savings or equity to enter into, and being highly ‘ill-liquid’ settlement and cash flow can take months.
Stocks require far less to enter, and offer faster yields, are highly liquid, and start performing much faster. Couple this with an education and you can be outperforming your superannuation fund in months.
Once again purely due to the cost of entry, I put property as number 4. Property historically never fails, and aside from the buying the first … once you’re in the market you’re in! Once you’re in never get out.
But perhaps the best thing about property is the idea of leverage. Despite requiring a mortgage, depending on the property itself, you gain access to an asset whilst only needing between 10-30% deposit, and this leads to ‘good debt.’
Let’s look at a commercial example. Let’s take a $1 million dollar commercial property. You would need $300,000 to secure it. With a rental yield of … 7% on the value, that’s $70,000 per year in income or $5,830 per month. Now if we factor in a 2.5% interest rate, that’s repayments of $1,458 per month leaving, $4,375 net cash flow per month or … $50,500 per year.
If my math is right, that’s 17.5% annual return on the initial $300,000 invested. Factor in Growth, & property is immensely powerful, and the tenant pays for it.
But if you can’t afford to get in … well … that’s why I [Me] place it at number 4.
Commodities, Dividends and Bonds.
Okay … I haven’t previously talked about these, except for dividends. Why? Well … they just don’t float my financial boat.
There I said it. They don’t appeal to me. Why? Well when we get to this end of the investing spectrum … we’re talking ‘Big’ or ‘disposable’ money and … I’m not there yet. But when it comes to commodities lets say … in the futures market, you need big money to join the game. You can invest in gold or other precious metals but these investments do have minimum trade quantities.
Crude Oil as an example where one future contract represents 1,000 barrels is worth big money, but if you have a business that requires it, it’s a place where you can secure pricing early if the price is right … like if you’re an airline company.
Dividends, I make no secret … don’t bother. Commentators talk big about dividends, but when a company simply offers … 3% per year, think about the amount you need invested to make that 3% per year worth something. You can do far better navigating the markets on your own, in far less time.
Then … there are bonds. If you needed truck tins of cash to make dividends viable, then bonds take this to a new level. The current rate on a 10 year treasury bond [US] is now ‘up to’ 1.64% and Australia’s at 1.7%. That’s ‘huge’ considering last year the return was less than 1%. Why are they so low? Well because their guaranteed by the government that issues them, and that means stability and stability means …. Low returns.
Related: Why Nothing and No one is safe
Start Small, Smart and Get Market Ready.
So after deciding to take the plunge, take control and get rich … what do you do now?
To this point, and perhaps with a bit of my own bias, my intent is to give you some of the high level information about what is out there, and what it can give you. But even if you have the cash lying around, I wouldn’t go out there buying whatever you can find, because of what is ‘possible’, I would …
Learn the Rules
As I said earlier, investing is about buying power, risk appetite and personal will. Each vehicle requires and has a cost of entry, risk and a need to get involved. Stocks and the market do demand that you get involved, otherwise let someone else manage your money.
But whatever your capacity, appetite and energy converge on – learn the rules. Property is (in Australia) is the type of thing you need approvals and a legal eye to fully exploit. Despite the TV shows, you can’t just ‘staple’ an extra room to the house and try to sell it at a profit.
Just like a board game, you need to learn the rule book, and stick within your limits of operation. Businesses have to be legitimate and trades aren’t reversible. Learn what you can do, learn what you can’t and …
Start Virtual …
Especially when it comes to the markets, which don’t have the high cost of entry of property, start virtual. Start to follow the markets, make real decisions on paper, and track the results and assess them objectively. When it comes to the markets in particular, there are many moves that you can make, so give them a try.
If they work, record them. If they don’t … record them, track net results and see what happens over a period of no less than 6 months and make sure to extract lessons from virtual failures. Get used to negative numbers. When it comes to property … use a gantt chart, lay things out to see what real time lines look like, and keep track of what is happening in the real world.
And be Honest with yourself.
Virtual trading and simulating property deals is a great way to learn. Its also a great way to scope out your next upcoming position, but while you’re virtual with no real consequence … for the love of god be honest with yourself.
If you ‘buy’ a stock or establish a position on Monday, and the market tanks on Wednesday … Don’t just scrub the record in your spreadsheet and pretend it didn’t happen. Calculate your current values … don’t fear the negative number or virtual value loss.
Follow it through, let the situation play out. This is the best and only way to navigate troubled waters when you do it for real, and if you can’t then you’ve lost no real money and gained your own personal insight to guide future decisions. You might even confirm that the strategy isn’t for you, and when you have your own insight there is Nothing wrong with that conclusion
If you can navigate your way out, you have real world data, and the timelines to prove it, and thus will be less emotional when it happens for real, so that you can do what most simply won’t … take control and succeed.
Related: Setup for life – What is Seed Money?