Until you’re a millionaire, investing should be limited to stocks and real estate. That’s it, plain and simple. Those investments are the easiest to get started in, and should be your focus when you’re first investing.
Your approach should be as follows:
- Invest in your Company 401K Plan up to the annual limit;
- Invest in a Non-Qualified Stock account; and/or
- Buy Single Family Home for Real Estate Rentals.
I’m not going to comment, or try to persuade you, about whether stocks or real estate is a better investment. I have both, and they’re both really great investments. I know that some people only like real estate, because it’s a tangible asset they can touch. Then again, some hate it because they don’t want to deal with renters. Some love stocks because they’re easy, some hate them because they’re volatile. It doesn’t matter, and is not an argument worth having.
Whatever you think is fine by me, as long as you invest. Some people have a negative thing to say about any type of investment, and usually those people are broke. People talk about “risk” as if it’s inevitable that you’ll lose all the money you invest to some huckster or market crash. That’s silly.
In reality, risk is what you must take on in order to get a return. There’s a risk that the companies you hold stock in will go out of business. So, they must earn you a return in order to get you to invest. There’s a risk tenants will leave and not pay the rent. So, you must earn a return in order to invest in real estate. Otherwise no one would invest.
While you can’t get away from risk entirely, especially in the short run, you can eliminate the chance that your investments will evaporate by investing wisely, for the long term, in the manner I’m going to describe throughout this book. Don’t fear risk, but understand it, and realize that most risk is short term in nature. Risk can also be countered completely with your emergency fund, which prevents you from needing to liquidate assets that have declined in value to cover your short term cash needs.
The main point here is that you need to invest, wisely, and accept some risk to get a reasonable return. Your goal should be to generate enough of a net worth so that at some point down the road you can retire, and have your investments pay for your living expenses.
This brings up a great point about how you will eventually live off your assets in retirement. You need to understand the difference between income, growth, and total return for any investment. The income of an investment is the cash it generates each month (or quarter). The growth is the increase in the value of the asset, should you sell it. The total return is the combination of the two.
The optimal scenario is that the income generated from your investments will provide enough cash to meet your monthly expenses. That way, you don’t actually have to sell assets to meet your living needs. This is stressful, because you’re in essence killing the goose that laid the golden egg (to borrow an overused cliché).
Generally speaking, real estate generates a higher amount of income (and less growth), and stocks generate higher growth (and less income). This is not always the case, but will generally hold true for the investment advice I give in this book. This does not necessarily mean you should choose one approach or the other, but you should be aware of both your growth and income for your investment choices, and how that will affect you when you ultimately decide to retire.