Let me start off by saying that there is no one answer to the question “What is the best way to invest my money?” It really is a unique, individual choice because there are several variables involved in making the decision, such as:
- amount of money available for investing
- knowledge about the different types of investment vehicles
- advantages and disadvantages of each investment vehicle
- comfort level in dealing with a particular investment
- advice given by professionals, family, and friends
In order for you to make the right choice, I will discuss the different types of investment vehicles as well as the pros and cons of each.
The Four Basic Types of Investments
The 4 types of investment vehicles to invest in are:
- Real Estate
- Paper Assets
To own a business whether it is a franchise, small business or corporation, is an excellent asset to have because it provides a steady cash flow of income. This is how many of the wealthy 1% of the population–the Donald Trumps and Bill Gates of the world– make their money. These people build businesses, they don’t work as employees. Owning a business allows you to leverage people (employees) to control cash flow and it offers tax advantages that you would not otherwise get if you were employee of that business instead of the owner.
The main disadvantages of owning a business is that you must have excellent people skills and adequate financial intelligence. Excellent people skills are essential for business owners to be able to manage employees, clients, and customers. Otherwise, the business will most likely fail. The most successful businesses are run by people who are the most talented and can work well together as a team. Another disadvantage is that the start up costs can be expensive, especially for franchises. On average, it takes several years before a new business will begin to make a profit, provided the business owner knows what he/she is doing. Therefore, if you decide to invest your money in a business, be aware that while this may be the most profitable out of all the investment vehicles, it also requires the most financial intelligence and experience.
The main advantage of owning real estate is that you can receive a high ROI (return on investment) by using OPM (other people’s money–ie. bank loans or investors). Other advantages include:
- steady cash flow if the property is a rental
- tax advantages such as depreciation, and interest paid on a mortgage loan
- Very management intensive–if you do not manage your property correctly, it can cost you a lot of money. For instance, if you have a tenant living on your property who either stops paying rent or damages your property, it can end up costing you a lot of money– either in eviction proceedings or in repairs to fix the property damage.
- Not easy to liquidate–takes time to sell a property
Next to owning a business, owning real estate is the most profitable investment vehicle. Should you choose to invest in real estate, you need to have the proper financial intelligence in order to be successful. There is an option however, for people who want to invest in real estate but lack the financial knowledge. They can instead invest in real estate mutual funds called REITs (real estate investment trusts). They simply put their funds into a mutual fund for investments that involve only real estate.
Paper assets include stocks, bonds, savings, and mutual funds. Advantages of investing in paper assets include:
- Very easy to invest in
- High liquidity–easy to sell if you need cash right away
- Does not require a lot of money to get started
- Does not require a high degree of financial intelligence
- High liquidity–in this case, if the market is losing money and you don’t sell fast enough, you could end up losing a lot of money
- Have to constantly monitor
- Fees and taxes–ie. redemption fees, fund manager fees, capital gains taxes. This can add up over time.
If you should choose to invest in paper assets, be aware that investing in these assets require the least amount of financial intelligence because you simply invest your money and trust that the fund manager who is handling that fund knows what he/she is doing. This is probably why most people invest in paper assets.
Commodities include assets like gold, silver, and oil. The advantage of investing in commodities is that it is a good buffer or protection against inflation–they are tangible assets that are purchased with money. If the government keeps printing more money, it takes more and more money to purchase the same amount of commodities. This in turn causes the price of those commodities to inflate or increase. As a result, the value of the commodities are worth much more now than they were a few years ago. For example, the price of gold has skyrocketed due to inflation.
The main disadvantage of investing in commodities is that they are physical assets and you have to properly secure and store them.
How Do I Choose the Best Way to Invest My Money?
Now that I have given you the advantages and disadvantages of each investment vehicle, you should be better able to come to a informed decision as to what is best to invest in. My suggestion is to do the following:
1. Decide which asset class you are most comfortable with and start there. For instance, if you have the most experience with investing in paper assets, then start there. However, to minimize the risk of losing a lot of money investing in stocks and mutual funds, study as much as you can regarding stocks and mutual funds before actually investing money. Remember there is no such thing as having too much financial intelligence, so the more informed you are about stocks and mutual funds, the better off you will be.
2. Focus on investing in one asset class first; then diversify later. If you are just starting out, it is better to pick one asset class, learn all you can about that asset, and then invest your money in that asset. Once you are successful in making money in investing in that asset, only then consider investing in another asset class. Remember the acronym FOCUS–Follow One Course Until Successful. For more information about diversifying your investments, click here.
It is my sincere hope that by reading this post, that you will begin improving your financial future by making the right choice regarding which asset to invest in. If you have any questions or comments, please put them in the comment field below. I welcome much discussion on this topic. Have a great day,