Elite Investors: Strategies For Long-Term Wealth Creation

Elite investors are those who have honed their craft through detailed record-keeping, carefully chosen data sources, well-defined trading edges, and lifelong connections with mentors. They spend time and energy on buying stocks and are ultra-conservative in their projections, allowing their capital to grow with less downside risk. They also tend to invest in real estate, which provides stable cash flow and attractive benefits to owners and investors. Elite investors are also known to invest in cryptocurrencies and blockchain technology.

Real estate investing

Elite investors are committed to real estate as an asset class, recognising the high returns it can offer compared to other industries. They are "all in" from the beginning and are willing to bet on themselves and their ability to pivot when things don't work out. This commitment is underpinned by a core mission, which serves as a rallying call for their entire business.

Elite investors also understand the importance of systems and processes. They know that their focus should be on marketing and operations, with real estate being just their "widget". They let the business run behind them while they focus on getting "eyeballs pointed at the business".

Rental Properties

Rental properties are a good choice for elite investors with DIY skills, patience, and the time to manage tenants and the property hands-on. While financing can be obtained with a low down payment, substantial cash is needed upfront for maintenance and to cover periods when the property is empty or tenants don't pay rent.

Real Estate Investment Trusts (REITs)

REITs are ideal for elite investors who want exposure to real estate without the hassle of traditional transactions. They are bought and sold on major exchanges like stocks and pay out high dividends, making them a common retirement investment.

Real Estate Investment Groups (REIGs)

REIGs are ideal for elite investors with some capital who want to own rental real estate without the management hassles. They are similar to small mutual funds, pooling money from multiple investors to invest in rental properties. A company manages the properties collectively, handling maintenance, advertising vacancies, and interviewing tenants.

Flipping Properties

Elite investors may also choose to buy and flip properties, looking for undervalued homes that they can renovate and sell for a profit. This strategy requires a good eye for up-and-coming neighbourhoods and can be risky if the neighbourhood fails to catch on, leaving the investor unable to recoup their investment.

Online Real Estate Platforms

Elite investors can use online real estate platforms, also known as real estate crowdfunding, to join others in investing in large commercial or residential deals. This allows them to diversify into real estate without putting up a large stake. However, these platforms tend to be illiquid, with investors' money locked up for several years.

Overall, elite investors understand the value of real estate as an investment and are committed to making it work for them. They have systems and processes in place to ensure their businesses run smoothly, and they are always on the lookout for new opportunities to expand their real estate portfolios.

Tax advantages

Taxes can significantly reduce your investment returns. By implementing a tax-efficient investing strategy, you can minimize your tax burden and maximize your investment's growth potential. Taxes are one of investors' largest expenses, often cutting into returns.

• Buy-and-hold investing: You are only taxed on realized capital gains, so by not selling, you won't be liable for capital gains taxes, which can be substantial. You can hold your investments indefinitely and permanently defer any tax on gains. Research shows that passive investing tends to outperform active investing over longer periods, so you'll likely make more money and pay less to the IRS.
• Individual Retirement Accounts (IRAs): A traditional IRA lets you put money away on a pre-tax basis, reducing your taxes for the current year. You can defer any taxes on profits (capital gains or dividends) until after age 59 1/2, when you'll pay taxes on withdrawals. A Roth IRA, on the other hand, lets you put money away on an after-tax basis, meaning no upfront tax break, but your investments grow tax-free, and withdrawals in retirement are also tax-free.
• 401(k) plans: These offer similar benefits to IRAs, with the added benefit of an employer match. A traditional 401(k) defers taxes until withdrawal, while a Roth 401(k) operates on an after-tax basis, with tax-free growth and withdrawals.
• Tax-loss harvesting: The IRS allows you to write off realized investment losses against your gains, so you only pay tax on the net capital gain. For example, if you made an $8,000 loss on one investment and a $10,000 gain on another, you can offset them, resulting in a taxable gain of just $2,000. You can also offset more than you've gained, up to a net loss of $3,000 in any tax year.
• Asset location: Dividends and other cash distributions are generally taxable in the year you receive them. If you have a tax-advantaged account like an IRA and a regular taxable brokerage account, it may be beneficial to keep dividend stocks within the tax-advantaged account to avoid taxes on distributions. Stocks with probable capital gains could be held in the taxable account, allowing you to defer taxes until you sell.
• 1031 exchange: If you're a real estate investor, you can sell one investment property and defer capital gains taxes by quickly reinvesting the proceeds in another investment property.
• Long-term capital gains rates: The IRS taxes long-term capital gains at 0%, 15%, or 20%. These rates are typically lower than short-term capital gains rates, so holding investments for more than a year can result in a lower tax bill.

Tax-efficient investments

Some investments are more tax-efficient than others. Here are some considerations:

• Taxable vs. tax-advantaged accounts: Taxable accounts, such as brokerage accounts, offer flexibility with contributions and withdrawals but are subject to taxation on returns. Tax-advantaged accounts, like IRAs and 401(k)s, allow you to save on taxes but have annual contribution limits and penalties for non-qualified withdrawals.
• Tax-efficient investment strategies: Municipal bonds, Treasury bonds, tax-managed funds, and exchange-traded funds (ETFs) are generally more tax-efficient. Municipal bonds are often exempt from federal, state, and local taxes. Treasury bonds are exempt from state and local income taxes. Tax-managed funds and ETFs minimize capital gains distributions, resulting in lower taxes.
• Mutual funds vs. index funds and ETFs: Active mutual funds tend to generate more taxable capital gains due to frequent trading. In contrast, index funds and ETFs are passively managed, buying and holding their positions, resulting in lower turnover and, consequently, lower taxes.
• Real estate: Real estate investing offers tax deductions, write-offs, and favorable capital gains tax treatment.
• Life insurance: Proceeds from life insurance policies are usually paid out without income tax. Permanent life insurance policies accumulate cash value while deferring taxes, and policyholders can borrow against the policy without tax consequences.

Tax-efficient investing strategies

• Managing capital gains: The length of time you hold an investment affects the taxes you'll pay. Short-term capital gains (held for one year or less) are taxed at ordinary income tax rates of up to 37%. Long-term capital gains (held for over a year) are taxed at lower rates of 0%, 15%, or 20%, depending on your income level.
• Fund distributions: Mutual funds distribute earnings annually, and shareholders may incur a tax liability if they own the fund on the distribution date, regardless of how long they've held it.
• Charitable giving: Donating appreciated securities, real estate, or business interests to charity can provide tax advantages. You can deduct the fair market value of the donation and eliminate capital gains taxes, resulting in a larger donation and a higher tax deduction.
• Qualified charitable deductions (QCDs): In retirement, individuals who don't need their required minimum distributions (RMDs) from their traditional IRAs can directly donate up to $100,000 per year to charity, reducing their taxable income.
• Tax diversification: Using a combination of Roth accounts, QCDs, deferred compensation, and other vehicles with varied tax treatments allows for flexible tax planning in retirement.

Final Thoughts

While market volatility and inflation are likely top concerns for investors, improving tax efficiency can also play a significant role in enhancing your after-tax returns. It's essential to understand the tax implications of different investments and accounts to make strategic decisions that minimize your tax burden.

Alternative investments

• Private Equity and Venture Capital: This involves investing in private companies or startups, often blurring the lines between alternative and traditional stock investments. It includes venture capital, which focuses on early-stage ventures, growth capital for expansion or restructuring, and buyouts of companies or their divisions.
• Hedge Funds: Hedge funds are exclusive investment funds that employ various strategies to achieve high returns. They are available only to institutional investors and high-net-worth individuals. Hedge funds can serve as an alternative to fixed income, offering low correlation to traditional asset classes and mitigating portfolio losses.
• Real Estate: Real estate is a common alternative investment, offering potential for capital appreciation and stable cash flow through rental income. It can be invested in directly or through real estate investment trusts (REITs) or crowdfunding platforms.
• Commodities: Commodities are tangible investments in raw materials such as gold, silver, oil, or agricultural products. They are considered a hedge against inflation and offer stable demand due to their real-world uses.
• Art and Collectibles: These investments include art, sports memorabilia, entertainment memorabilia, high-end watches, and other collectibles. Their value may increase over time or due to the historic significance of associated parties.
• Cryptocurrency: Cryptocurrency is a form of digital currency that falls outside the traditional scope of stocks and bonds. It offers potential for capital appreciation and passive income through staking rewards.
• Peer-to-Peer Lending: This involves making loans to individuals or businesses through online platforms that connect borrowers and investors. It is similar to investing in bonds but often involves transacting with riskier clients.

Venture capital

The decision-making process in venture capital involves evaluating various factors, including the management team, business concept and plan, market opportunity, and risk assessment. The quality of the management team is often considered the most critical factor, as VCs invest in the team's ability to execute the business plan.

Private equity

There are several types of private equity investments, including:

• Buyouts: When a private equity firm buys a target company, often with the intention of selling it later at a profit.
• Venture capital: Identifying early-stage startups and investing in them in exchange for equity in the company.
• Distressed investing: Specialising in struggling companies with critical financing needs.
• Growth equity: Funding expanding companies beyond their startup phase.
• Sector specialists: Focusing solely on deals in a particular sector, such as technology or energy.
• Secondary buyouts: The sale of a company owned by one private equity firm to another.
• Carve-outs: The purchase of a corporate subsidiary or unit.

Frequently asked questions