The Investment Legacy: Unraveling The Intricacies Of Wealth Creation

Investments are a way to grow your money over time. They are assets or items acquired to generate income or appreciate in value. The expectation of investing is to generate a positive return in the form of income or price appreciation. The core premise of investing is to put money to work today to obtain a greater amount of money in the future.

There are many types of investments, including stocks, bonds, real estate, precious metals, and more. You can invest with money, assets, cryptocurrency, or other mediums of exchange.

It's important to understand the risks and returns associated with different types of investments. Low-risk investments typically yield lower returns, while high-risk investments can yield higher returns.

When deciding how to invest, it's crucial to consider your financial goals, risk tolerance, time horizon, knowledge of investing, and the amount you can invest. Diversifying your investments across different asset classes can help reduce risk and improve returns.

By understanding the basics of investing and conducting thorough research, you can make informed decisions about where to allocate your capital to achieve your financial objectives.

Stocks & Bonds

Stocks and bonds are two of the most common investment types. Stocks represent partial ownership in a company, while bonds represent loans made to a company or government.

Stocks

When an investor buys shares of stock, they are buying a small slice of the company. The more shares they buy, the more of the company they own. Stocks are also known as corporate stock, common stock, corporate shares, equity shares, and equity securities. The value of a company's stock tends to reflect the earnings experience of the company—up during profitable periods and down during periods of loss. Generally, the higher the potential return, the higher the risk.

Bonds

Bonds, on the other hand, are loans made by investors to companies, municipalities, states, or governments. A bondholder, in effect, holds an IOU. Bondholders do not share in a company's profits but receive a fixed return on their investment, known as the coupon rate. Bonds are issued for specified time periods, and when the bond expires and the principal is returned, it is said to have matured. Bonds can take as long as 30 years to mature.

Stocks vs. Bonds

While both stocks and bonds seek to grow an investor's money, the way they do it and the returns they offer are very different. Stocks are generally considered riskier than bonds but can offer higher returns. Bonds, on the other hand, provide a more predictable and steady stream of income, with a fixed interest rate that promises a certain return.

Additionally, stocks and bonds tend to have an inverse relationship in terms of price. When stock prices rise, bond prices tend to fall, and vice versa. This is because when stock prices rise, more people want to buy stocks to capitalize on that growth, leading to lower demand for bonds. Conversely, when stock prices fall, investors tend to turn to the traditionally lower-risk, lower-return option of bonds, leading to an increase in demand and price for bonds.

When it comes to investing, there is no one-size-fits-all answer. Many investors benefit from having a mix of both stocks and bonds in their portfolios to add stability and diversification. The right mix of stocks and bonds will depend on an investor's financial goals, risk tolerance, and time horizon.

Real Estate

Rental Properties

One of the most common ways to invest in real estate is to become a landlord and rent out properties. This can be a good choice for individuals with DIY skills, the patience to manage tenants, and the time to manage the property. While financing can be obtained with a relatively low down payment, it requires substantial cash on hand to finance upfront maintenance and cover periods when the property is empty or tenants do not pay their rent.

REIGs are ideal for people who have some capital and 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 single investor can own one or multiple units, but the company operating the investment group collectively manages all the units, handling maintenance, advertising vacancies, and interviewing tenants. In exchange, the company takes a percentage of the monthly rent.

Flipping Houses

House-flipping has become a more popular avenue for investing in real estate. It requires a keen eye for value and more operational expertise than becoming a long-term landlord. Flippers find undervalued properties that need to be cleaned up or renovated and then charge market value for the houses, profiting off the difference. This approach can help realize a quicker profit than being a landlord if done right.

A REIT is best for investors who want portfolio exposure to real estate without making a traditional real estate transaction. A corporation or trust uses investors' money to purchase and operate income properties, and REITs are bought and sold on major exchanges like stocks. A corporation must pay out 90% of its taxable profits in the form of dividends to maintain its REIT status and avoid paying corporate income tax. REITs are a solid investment for investors who seek regular income, and they can afford investors entry into non-residential investments such as malls or office buildings.

Online Real Estate Platforms

Online real estate platforms such as Fundrise or Crowdstreet can help investors get into real estate on bigger commercial deals without needing to put down hundreds of thousands or millions on a deal. These platforms connect developers with investors looking to fund real estate projects and take advantage of potentially attractive returns. The big advantage for investors is the potential to get a cut of a lucrative deal they may not have been able to access otherwise.

Business Ventures

• Starting a business: This is a direct way to invest your money and involves using capital to start and grow a business over time. This could include opening a storefront, offering a service, or selling products online.
• Real estate: Investing in real estate is a popular business venture. This could involve purchasing property to rent out, such as residential homes or commercial spaces, or buying and reselling properties at a higher price.
• Stocks: Investing in stocks means purchasing a share of ownership in a company, becoming a fractional owner. Stocks can provide returns through dividend distributions and capital gains when the stock price increases.
• Bonds: Bonds are debt obligations where investors lend money to entities like governments or corporations. They typically offer recurring interest payments and the return of the invested amount upon maturity.
• Funds: Investment funds, such as mutual funds or exchange-traded funds (ETFs), pool money from multiple investors to purchase a variety of assets like stocks, bonds, or commodities. These funds are managed by investment professionals and can provide diversification and potentially lower risk.
• Trusts: Real Estate Investment Trusts (REITs) are a popular type of trust investment. REITs invest in commercial or residential properties and provide regular distributions to investors from rental income.
• Alternative investments: This includes hedge funds, private equity, derivatives, and commodities. These investments often require a higher level of expertise and carry higher risk, but can also offer higher potential returns.

When considering business ventures, it's important to evaluate your financial situation, risk tolerance, and investment goals. Diversifying your investments across different asset classes and industries can help manage risk and maximize returns.

Commodities & Crypto

The world of cryptocurrencies is ever-evolving, and so are the regulations and definitions surrounding it. Cryptocurrencies like Bitcoin were invented as digital currencies, but their categorisation as a currency, security, or commodity remains a grey area.

Commodities

Commodities are raw materials or physical goods that are traded on exchanges in wholesale quantities. They are used as inputs in the production of other goods or services. Examples include agricultural products, precious metals, and energy products. Commodities are typically traded based on their current market value, and their prices are volatile.

Crypto Commodities

Crypto commodities are crypto tokens representing a physical commodity on a blockchain. The underlying asset's value is tokenised on a blockchain, and the asset is secured or held in reserve. Crypto commodities can be traded like any other cryptocurrency or commodity wherever it is legally accepted.

Cryptocurrencies as Commodities

The debate over whether cryptocurrencies should be defined as securities or commodities has implications for their regulation, sale, listing, and investor access. The Commodity Futures Trading Commission (CFTC) has long argued that cryptocurrencies such as Bitcoin and Ether are commodities and can be regulated as such under the Commodity Exchange Act (CEA). The CFTC's determination that cryptocurrencies are commodities is solidified by the fact that they are interchangeable on exchanges, with each unit being of identical worth.

However, the Securities and Exchange Commission (SEC) has indicated that most crypto tokens are securities. Cryptocurrencies can also look like securities when they are issued like stock in "initial coin offerings" (ICOs), which are capital-raising processes similar to initial public offerings (IPOs) in the securities market.

Regulatory Landscape

The regulatory landscape for cryptocurrencies is complex and ever-evolving. In the US, the SEC and the CFTC are the main regulatory bodies involved in the debate over the classification of cryptocurrencies. While the CFTC has argued for the classification of cryptocurrencies as commodities, the SEC has indicated that most crypto tokens are securities. The categorisation of cryptocurrencies as securities or commodities will determine how they are regulated, sold, and listed, as well as who can invest in them.

Global Perspective

Different countries have different approaches to the regulation of cryptocurrencies. For example, the Government of India is planning to define cryptocurrency as an asset/commodity for all purposes, including taxation, payments, investment, and utility. In the European Union, the Markets in Crypto Assets (MiCA) regulation sets out the steps to be followed by crypto issuers, wallet providers, and exchanges to protect consumers and ensure fair trading.

The classification of cryptocurrencies as commodities or securities has significant implications for the market. Commodities are generally regulated less stringently than securities, and the classification of cryptocurrencies as commodities could make them more lightly regulated. However, the regulatory landscape is complex and evolving, and it is difficult to predict how it will unfold.

Retirement Planning

There are two types of retirement plans: defined benefit plans and defined contribution plans. Defined benefit plans promise a specified monthly benefit at retirement, which is usually based on a formula that considers factors such as salary and years of service. Defined contribution plans, on the other hand, do not promise a specific amount of benefits at retirement. Instead, the employee or employer contributes to the employee's individual account, which is then invested on their behalf. The balance in the account, including investment gains or losses, is what the employee will ultimately receive upon retirement.

• 401(k) Plan: This is a cash or deferred arrangement where employees can elect to defer a portion of their salary, which is contributed on their behalf before taxes. Employers may also match these contributions. There is a dollar limit on the amount an employee can defer each year, and employees are responsible for their retirement income by contributing part of their salary and directing their investments.
• 403(b) Plan: Similar to a 401(k) plan, but offered by public schools, charities, and some churches. Employees contribute pre-tax money, and funds can grow tax-free until retirement. Withdrawals are treated as ordinary income, and early distributions may result in additional taxes and penalties.
• Individual Retirement Account (IRA): This is primarily for self-employed individuals and those without access to a 401(k). Anyone with earned income can invest in an IRA. Contributions are deducted from income, lowering taxable income and tax liability. There are limits on how much can be contributed annually, and distributions must be taken at age 72.
• Roth IRA: Funded with post-tax dollars, eliminating the immediate tax deduction of a traditional IRA. However, there are generally no taxes owed when withdrawing money, including on investment gains. There are income restrictions for contributing to a Roth IRA.
• SIMPLE IRA: A retirement account available to employees of small businesses as an alternative to a 401(k). It allows employees to save money automatically through payroll deductions, with the option of an employer match. The annual contribution limit for 2024 is $16,000, with catch-up contributions for those aged 50 and older.

When planning for retirement, it is important to consider your income sources, expenses, savings plan, and asset management. Additionally, your retirement plan should take into account your estimated future expenses, liabilities, and life expectancy. It is never too early or too late to start, and the earlier you begin, the more time your investments have to grow and compound.

• Income Annuities: A contract with an insurance company where you pay a sum of money in exchange for regular income payments. Annuities can provide a guaranteed income stream for a certain period or for life.
• Diversified Bond Portfolio: Investing in various types of bonds, such as U.S. Treasury securities, corporate debt instruments, government-backed bonds, mortgage-backed securities, and overseas market bonds. Bond yields have become more competitive due to recent interest rate increases.
• Total Return Investment Approach: This approach involves investing in a diverse mix of stock and bond funds, adjusted for your risk tolerance. It focuses on spending a portion of the average annual rate of returns over a longer period, rather than specific annual return rates.
• Income-Producing Equities: Some equities provide income in the form of dividends. While not all stocks pay dividends, those that do can offer competitive dividend yields and the potential for capital appreciation.

It is recommended to consult with a financial professional to determine the most appropriate retirement income strategy based on your circumstances, time horizon, and risk tolerance level.

Frequently asked questions