Last week I wrote about several ways which might lead one to riches. People break through different avenues but as mentioned before in the previous article dreams, perseverance and wisdom will land you there.
It’s a personal decision, and you have many choices when it comes to choosing the type of assets to make you rich. Asset Management Companies might help you buy these kinds of assets but you need to know which one will lead you to wealth creation. Each asset class has advantages and disadvantages and requires different levels of time, effort and education.
That’s why most people invest in paper assets, or the stock market. These are the easiest assets to get in and out of. And even though your financial planner or advisor may tell you that your retirement funds or pension investments are diversified, they really aren’t. Why? To be truly diversified means to diversify, and that means to invest in more than just one asset-class.
What are the top four asset classes?
There are numerous ways to invest and build wealth. And once you increase your financial education, you’ll have a better understanding of the best investments for you.
The best education one can get can come through practically doing it together with reading and researching more about the products. But to help you get started, here are some of the most popular asset-classes.
As I mentioned above, these are assets like stocks (shares, Bank Windhoek is about to list its shares now), bonds, Unit Trusts, and retirement accounts (Pension like the ones being run by GIPF), Derivatives where you can invest in stock options, stock futures and foreign exchange. Paper assets also include real estate investment trusts, or REITs, and exchange-traded funds (ETFs). Whether you are investing for capital gains or for cash flow via stock dividends, there are many, paper assets to choose from.
Commodities include metals (gold, silver, copper, etc.) food (grains, corn, coffee, and sugar) and raw materials (oil, gas, cotton, etc.). Commodities are generally a capital gains, or loss, investment, and you can buy future contracts of any commodity through the future exchanges. If you are a new investor, start small and build your financial education. For example, purchase a silver coin and then watch its value increase or decrease in your daily news. Your financial IQ will go up.
This is an asset that people are becoming more aware of with television shows like “The Apprentice,” “Shark Tank,” and others. You can invest in your own business or someone else’s private business or company. In more sexy financial language will call it Private Equity, Mergers and Acquisition. The whole point is to generate a return back to you, the business and your investors and/or lender. Just be sure to do your due diligence and analyze the project, the partners, the financing, and the business and management team before making a business investment.
I saved my favourite asset class for last – rich people invest primarily in real estate because it fits the formula for financial freedom. Real estate investments either provide cash-flow from rental properties or capital gains from buying and selling (flipping) a property.
With real estate, you use leverage, or the ability to use other people’s money (OPM) to purchase the asset. A property that is highly leveraged means there is a lot of debt on the property compared to the equity, or current market value minus the debt. The higher the debt on the property, the lower the cash flow. The lower the debt, the higher the cash flow.
What Assets Will Give You Financial Freedom?
When it comes to choosing investments for your financial freedom, it’s a personal choice that depends on your specific goals in life. And while it might be overwhelming at first, start small, Aspire, Acquire and Apply (AAA). Set your goals, research and increase your financial education and then take action. Many people (including me) have changed their life for the better by investing in assets, and you can too.