Purchasing Power: Exploring The Best Assets To Buy For Long-Term Wealth

There are many types of assets to buy, each with its own pros and cons. Here are some of the most common ones:

- Real estate assets: Investing in rental properties can generate consistent revenue over long periods. This can be done by purchasing a home or multi-unit property and marketing it to tenants. The income generated from this property can then be used to purchase another rental property, thus expanding your investment portfolio.

- Stocks: Stocks refer to investments in business equity and allow investors to generate income through dividends. Dividend stocks are derived from companies that are well past their growth state and exhibit much more stability than younger, growing companies.

- Savings accounts: Savings accounts are one of the most straightforward assets that generate passive income. Depending on the type of account and interest rate, investors can expect varying levels of returns. While low-interest rates may result in lower returns compared to other income-generating assets, savings accounts offer the benefit of liquidity.

- Certificates of Deposit (CDs): CDs are considered time deposits and are similar to savings accounts, but with a set amount of time before investors can access the funds without penalty. Due to the required time frame, CDs generally offer higher interest rates than savings accounts.

- Private equity investing: Private equity investing involves investing in private companies, often in their early stages of development. While this can be attractive, it's important to research the companies as many private companies fail in their first few years.

- Peer-to-peer lending: Peer-to-peer lending has become a multi-million dollar business. It replaces banks and helps denied borrowers receive loans at lower rates. According to leading peer-to-peer lenders, investors can make around five to seven percent in annual returns, but there is a moderate risk as some borrowers may break their contract obligations.

- Building a business: Opening your own business is a great way to increase your cash flow while pursuing something you're interested in. It can be a side project that supplements your regular income and eventually turns into your main focus.

- Farmland: Farmland is a good income-generating asset because, unlike many other investments, it doesn't experience the same level of volatility as it has a low correlation with the stock market.

- Annuities: Annuities are a lump sum investment paid to an insurance company and are popular with retirees as the funds can only be withdrawn after a certain age.

- Websites: Investors can purchase domains related to popular topics or upcoming trends and sell them to interested buyers. Alternatively, they can build up the website through content creation and use paid ads and sponsorships to earn income through affiliate marketing.

- Money market accounts: Money market accounts are similar to checking accounts but offer higher interest rates. Account holders can use the account with a debit card while earning interest on their funds. These accounts are highly liquid, and account holders can usually close them at any time.

Real Estate Assets

Real estate is a critical component of a well-diversified portfolio, and for good reason. It is a distinct asset class that does not usually correlate closely with stocks, bonds, or commodities, making it an excellent hedge against inflation.

Rental Properties

Rental properties are a good choice for individuals with DIY skills, patience, and the time to manage tenants and the property. Financing can be obtained with a low down payment, but substantial cash is needed for upfront maintenance and to cover periods when the property is empty or tenants do not pay rent. Once the property starts generating income, it can be leveraged to acquire more properties, creating multiple income streams to offset unexpected costs and losses.

Real Estate Investment Groups (REIGs)

REIGs are ideal for those with some capital who want to own rental real estate without the hassle of managing it. They are a pool of money from multiple investors, similar to a small mutual fund, that is invested in rental properties. A company buys or builds a set of apartment blocks or condos, and a single investor can own one or multiple units. The company collectively manages all the units, handling maintenance, advertising vacancies, and interviewing tenants, in exchange for a percentage of the monthly rent.

House Flipping

House flipping is for those with significant experience in real estate valuation, marketing, and renovation. It involves finding undervalued properties and quickly selling them for a profit, usually within six months. Some flippers buy reasonably priced properties and add value by renovating them, which is a longer-term investment.

Real Estate Investment Trusts (REITs)

REITs are best for investors seeking portfolio exposure to real estate without making a traditional real estate transaction. They are bought and sold on major exchanges like stocks, and a corporation must pay out 90% of its taxable profits in the form of dividends to maintain its REIT status. This makes them a solid investment for regular income, and they can provide entry into non-residential investments such as malls or office buildings, which are generally infeasible for individual investors.

Online Real Estate Platforms

Online real estate investing platforms, also known as real estate crowdfunding, allow investors to join others in investing in large commercial or residential deals. They provide an opportunity to diversify into real estate without a large stake, but they are often illiquid with lock-up periods and management fees that reduce profits.

Self-Storage Units

Self-storage units have seen huge growth nationwide due to their attractive investment characteristics for real estate investors. They involve low construction costs and upkeep expenses, and many require little to no staff. They also have short-term leases and minimal emotional attachment, allowing investors to benefit from rent increases with each new lease.

Stocks

Types of Stocks

There are two main types of stocks: common stock and preferred stock. Common stock is the most common type, where each share represents ownership in a company and a claim on a portion of the profits. Common stockholders usually have voting rights, typically one vote per share, and they elect the board members who oversee major decisions made by the company's management. Common stock tends to offer higher returns over the long term but also entails more risk. If a company goes bankrupt, common shareholders will be the last to receive money after creditors, bondholders, and preferred shareholders.

Preferred stock, on the other hand, represents some degree of ownership but usually doesn't come with voting rights. Preferred shareholders have priority over common shareholders when it comes to receiving dividends and payments in the event of liquidation. Preferred stock often provides a fixed dividend, whereas common stock dividends are variable and not guaranteed. Preferred stock is generally less volatile than common stock and is considered less risky.

Choosing Stocks

When choosing stocks to invest in, look for companies with low debt, a strong competitive position (or "wide moat"), and healthy cash flow. These characteristics indicate a solid business that can weather economic storms. Additionally, consider seeking out stocks that pay dividends, as these can provide a steady source of income and help you ride out market turbulence.

Examples of Stocks to Buy

• Walmart (WMT): Walmart has survived the retail apocalypse and evolved to thrive in the new retail landscape, including building out its e-commerce presence.
• CVS Health (CVS): CVS is a one-stop shop for healthcare needs and is well-positioned to benefit from the focus on lowering healthcare costs.
• Waste Management (WM): Waste Management owns landfills and waste collection vehicles, and its revenue stream is fairly predictable due to low customer turnover.
• Wells Fargo (WFC): Wells Fargo has been working to recover from a scandal and could be a good value investment, offering a dividend yield close to 8%.
• AT&T (T): AT&T is a telecom giant that now also owns media company Time Warner, positioning it to offer unique bundles to customers as a streaming service.
• Apple (AAPL): Apple has a strong cash position and loyal customers, and it could benefit from buying up less-prepared peers during economic downturns.
• Starbucks (SBUX): Starbucks has a successful loyalty scheme and mobile app, and its management has shown the ability to pivot quickly, such as by beefing up its food offerings.
• Disney (DIS): Disney's long-term story remains strong, with its new streaming service, Disney+, taking the industry by storm.
• Berkshire Hathaway (BRK.A, BRK.B): Warren Buffett's holding company is known for its patience and restraint, and it has a large war chest of cash to take advantage of market downturns.
• Alibaba (BABA): Alibaba is a safer pick among Chinese companies, with a top spot in the country's retail market and a growing cloud business.

Savings Accounts

• Interest rates: Savings accounts typically pay a modest interest rate, but some offer higher yields than others. Online banks, for example, often offer more competitive rates than traditional brick-and-mortar banks.
• Accessibility: Savings accounts offer flexibility and easy access to your funds, which can be ideal for emergency funds. However, some accounts may limit the number of withdrawals you can make per month without incurring a fee.
• Minimum balance requirements: Some savings accounts require a minimum balance to avoid monthly fees or to earn the highest interest rate.
• Tax implications: The interest earned on a savings account is typically considered taxable income.
• Account type: There are several types of savings accounts to choose from, including traditional savings accounts, high-yield savings accounts, money market accounts, and specialty savings accounts.
• Shop around: Compare the offerings from different banks and credit unions to find the best interest rates and account features that meet your needs.
• Avoid unnecessary fees: Be wary of accounts with promotional rates that only last for a short time or charge excessive fees that can eat into your earnings.
• Consider your goals: Choose a savings account that aligns with your financial goals, whether you're saving for a short-term expense or building an emergency fund.
• Diversify your savings: In addition to a traditional savings account, consider other types of savings vehicles, such as high-yield savings accounts or money market accounts, to maximise your returns and work towards your financial goals.

Certificates of Deposits

Certificates of Deposit (CDs) are a type of savings account offered by banks and credit unions. They are a low-risk, low-volatility investment option that can provide a steady income stream for investors. CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and the National Credit Union Administration (NCUA) for credit unions, up to $250,000. This makes CDs a safe investment option as your money is protected by federal insurance.

When you open a CD, you agree to lend a certain amount of money to the bank for a fixed period, known as the term length or maturity date. During this time, you earn interest on the principal amount, with rates typically higher than those offered by savings accounts. The interest rate varies depending on the length of the term, and you can choose from various options, including 3-, 6-, or 12-month terms or longer-term options of 4-, 5-, or even 10-year terms. Generally, the longer the term, the higher the interest rate. However, you won't be able to withdraw your money during the term without incurring an early withdrawal penalty.

CDs are a good option if you want a conservative, low-risk investment that provides peace of mind and a guaranteed, predictable rate of return. They are ideal if you have cash that you don't need immediate access to but will require within a few years. For example, you can use CDs to save for a vacation, a new home, or a car. Additionally, CDs can help you avoid spending temptations since withdrawing funds early triggers a penalty.

However, one of the drawbacks of CDs is that your money is locked into the investment, and you may lose out on higher interest returns if the federal funds rate increases. While you can withdraw your money early, there will be penalties, and in some cases, these penalties can cut into your principal. Moreover, CDs typically earn less than stocks and bonds over time, and inflation can erode the value of money locked in at a fixed rate. Therefore, it is crucial to consider your financial goals and needs before investing in CDs.

Private Equity Investing

Private equity is a form of investment that takes place outside of the public stock market. It involves investors gaining an ownership stake in private companies. Private equity funds are managed by private equity firms, which pool together money from investors to invest in companies on their behalf.

Private equity firms typically focus on long-term investment opportunities, with an investment time horizon of 10 or more years. They often take a controlling interest in an operating company and engage actively in its management to increase its value.

• Buyouts: Private equity firms buy a target company, which can be public or private, with the aim of selling it later at a profit. They may identify a mature company with room for improvement, make operational and financial changes, and then sell the company for a profit.
• Venture Capital: This involves investing in early-stage startups in exchange for equity in the company. The goal is to identify companies with high growth potential that can be sold at a later date or taken public through an initial public offering (IPO).
• Distressed investing: This specialty focuses on investing in struggling companies with critical financing needs. Private equity firms in this area may have expertise in helping companies in financial distress and can implement operational improvements to turn them around.
• Growth equity: This strategy involves funding expanding companies beyond their startup phase. Private equity firms providing growth equity typically have experience in scaling businesses and can help companies navigate the challenges of growth.
• Sector specialists: Some private equity firms focus solely on specific sectors, such as technology or energy. They develop deep expertise in these areas, which can help them identify attractive investment opportunities and add value to their portfolio companies.

Remember, private equity investing is typically reserved for institutional investors or high-net-worth individuals due to the high minimum investment requirements. It is important to carefully consider the risks and ensure you meet the criteria for being an accredited investor before exploring these opportunities.

Frequently asked questions