GMR 92: Four Places to Invest
Episode 92
To build significant wealth, you have to invest. Whether you're trying to be better prepared for the future or grow wealth to make a more substantial impact in the world, without leveraging the power of investing, it's unlikely you'll achieve your goal. In this episode of GMR, we'll examine the four primary areas you should be investing in.
SHOW NOTES
Four Places to Invest
Personal Education
Personal Business
Other People’s Businesses (Companies | Stocks)
Property (Real Estate)
Foundational principle - Never invest in something you don’t understand.
The point is that you have to educate yourself before you invest in something.
You have to understand enough to feel confident in the investment choices you’re making. It’s not about becoming an expert, but it is about being knowledgeable.
Diversification
No matter what kind of investment you choose, don’t put all your eggs in one basket.
By having your investments in different baskets (places) you’re minimizing the risk because although some of your investments might be losing money in one season, others will make money.
Diversification ensures you’re growing your wealth over time.
Stocks - Lawn Care Company Example
$5,000 Lawn Mower | Equipment
$4,000 Trailer
$1,000 Flyers/business cards (door to door advertising)
$10,000 cost upfront …. 1 year later …. $40,000 Profit – enough to feed my family.
My friend Leo invests $10,000 ….. For 50% Ownership ….. He has now bought stock in my company.
He bought in for $10,000, in a company that made $40,000 a year, but now the company is making $80,000 a year. Next year it might make $160,000 a year.
If someone wants to buy half the company from Leo they will need to pay more than the original $10,000 that Leo paid. Let’s say someone offered Leo $40,000 for half the company, then Leo quadrupled his investment. He invested $10,000 but got $40,000 out of it.
The value of “stock” goes us as the value of a company goes up.
High Risk of Single Company Stocks
The company fails making the stock worthless.
New competition comes in and charges less, taking most of the business.
The government imposes new licenses that all lawn care workers have to pay fees on and go to school for lawn care. Raises the cost of employees and hurts profits.
A hurricane comes through, all the lawns are underwater for a month, and we can’t afford to keep the business going.
I do something dishonest and the company fails.
Mutual Funds
A large number of people all put their money into one fund, which then buys hundreds of stocks so that they are well diversified.
Large Cap ($10+ Billion)
Mid Cap ($2-$10 Billion)
Small Cap ($300 Million - $2 Billion)
International (Non-U.S. Stocks)
Investing Long Term
Mutual Funds well diversified across a number of stocks are a great place for investing long-term.
“The stock market returned an average of 11.31% from 1928 through 2010.”
“Over the long term, stocks do better than bonds. Since 1926, large stocks have returned an average of 9.8% per year; long-term government bonds have returned between 5% and 6%.”
Disclaimer: Past performance isn’t a guarantee of future performance in stocks or bonds, but with 100+ years of data, it should make you more comfortable with long-term stock market investing.
“I have most of my long-term savings invested across my Roth IRA, Traditional IRA, and Roth 403(b). These are simply the tax-advantaged accounts that I put my money in, then buy mutual funds.”
Can you become wealthy by investing in stocks and mutual funds?
If you put $600 a month in a fund that earns 8% a year from age 30-70, then you’d have $2,109,168.73
Compound Interest
An Example:
Invest $10,000 and earn 10% interest.
A year later you have $10,000 + the $1,000 earned in interested making the total $11,000.
One year later you have the $11,000 in the account and at 10% interest, you gain $1,100. That’s an extra $100 just from the interest on the interest.
Allowing this earned interest to compound over and over will build great wealth.
Index Funds
Index Funds are Mutual Funds.
Index basically means list…. So there are a list of stocks and the index fund uses a computer to buy that list of stocks and only buys or sells when the list changes.
S&P 500 is an index of 500 of the largest companies in the United States.
These are companies you’ve heard of, here are the top 5 currently:
Microsoft
Apple
Amazon
Facebook
Berkshire Hathaway (Warren Buffet’s Company)
This means that by just buying an S&P 500 index fund, you’re invested in 500 of the top companies in the U.S.
Since Index funds are managed by computers mostly, they are very cheap to buy and hold, the expenses are very low compared to other mutual funds.
Investing in an index fund is a form of passive investing. Because a person isn’t actively managing and trying to find the best stocks, it’s just a computer picking off of the list.
A majority of actively managed mutual funds fail to beat broad indexes, like the S&P 500. We know that some hedge fund and mutual managers will beat the overall market, we just don’t know which ones it will be. We don’t know who the next Warren Buffet or Philip Fischer will be.
“My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”
What to look for when buying index funds
•10 year track record or more
Average 9%-11% or more
Minimal fees/expense ratio
.25% = low
.75% = medium
1.25% = high
Don’t get sold, get educated
Why Invest in Real Estate?
Diversification - multiple streams on income
More control than stocks or bonds - less volatile
Multiple tax benefits not available with other types of investments
Types of Real Estate Investing Options:
Single-Family Home
Duplex/Multi-Family - 2 or more units
Fix and Flip
Many, many, other types of real estate investing -
Commercial (offices, retail)
Wholesaling - deal-making (find a buyer and connect to a seller)
Mobile home parks - rent lots - long tenant relationships = good cashflow. Plus very low maintenance for the landlord.
Multiple benefits of Real Estate Investing
Equity - Value of property increase.
Write off for depreciation - fewer taxes/more income (explain this).
Cashflow - make money each month to reinvest or pay down the principal.
Returns are usually higher than investing in the market and you have more control (12-15% or more).
Real estate associated costs and requirements
20-25% down.
Loan Payment - Principal and Interest (online mortgage calculator).
Insurance - Agent quote.
Taxes - County Tax Assessor.
Maintenance - 1% of property value per year for maintenance. Ex. $200,000 value = $2,000 in maintenance cost.
RESOURCES
Budgeting and Debt Elimination Tools
Jesus on Money by David Thompson - stewardshippastors.com