Yesterday it was a pleasant surprise for me to find an email from Eric Tyson’s PA, requesting a guest contribution on Eric’s behalf. I felt privileged and important. One of those bloggers’ satisfaction days. I read Eric’s books and always have been an admirer. This post is excerpt from his book. I am sure you’d get a lot of insight in to investing from this post. Enjoy the post!
If you want your money to grow faster than the rate of inflation over the long term and you don’t mind a bit of a roller-coaster ride from time to time in your investments’ values, ownership investments are for you. Ownership investments are those investments where you own a piece of some company or other asset (such as stock, real estate, or a small business) that has the ability to generate revenue and profits.
Observing how the world’s richest have built their wealth is enlightening. Not surprisingly, many of the champions of wealth around the globe gained their fortunes largely through owning a piece (or all) of a successful company that they (or others) built.
In addition to owning their own businesses, many well-to-do people have built their nest eggs by investing in real estate and the stock market. With softening housing prices in many regions in the late 2000’s, some folks newer to the real estate world incorrectly believe that real estate is a loser, not a long-term winner. Likewise, the stock market goes through down periods but does well over the long term.
And of course, some people come into wealth through an inheritance. Even if your parents are among the rare wealthy ones and you expect them to pass on big bucks to you, you need to know how to invest that money intelligently.
If you understand and are comfortable with the risks and take sensible steps to diversify (you don’t put all your investment eggs in the same basket), owner- ship investments are the key to building wealth. For most folks to accomplish typical longer-term financial goals, such as retiring, the money that they save and invest needs to grow at a healthy clip. If you dump all your money in bank accounts that pay little if any interest, you’re likely to fall short of your goals.
Not everyone needs to make his money grow, of course. Suppose that you inherit a significant sum and/or maintain a restrained standard of living and work your whole life simply because you enjoy doing so. In this situation, you may not need to take the risks involved with a potentially faster-growth investment. You may be more comfortable with safer investments, such as paying off your mortgage faster than necessary.
Entering the stock market
Stocks, which are shares of ownership in a company, are an example of an ownership investment. If you want to share in the growth and profits of companies like Apple, you can! You simply buy shares of their stock through a brokerage firm. However, even if Apple makes money in the future, you can’t guarantee that the value of its stock will increase.
Some companies today sell their stock directly to investors, allowing you to bypass brokers. You can also invest in stocks via a stock mutual fund (or an exchange-traded fund), where a fund manager decides which individual stocks to include in the fund.
You don’t need an MBA or a PhD to make money in the stock market. If you can practice some simple lessons, such as making regular and systematic investments and investing in proven companies and funds while minimizing your investment expenses and taxes, you should make decent returns in the long term.
However, I don’t think you should expect that you can “beat the markets,” and you certainly can’t beat the best professional money managers at their own, full-time game. This book shows you time-proven, non-gimmicky methods to make your money grow in the stock market as well as in other financial markets.
Owning real estate
People of varying economic means build wealth by investing in real estate. Owning and managing real estate is like running a small business. You need to satisfy customers (tenants), manage your costs, keep an eye on the competition, and so on. Some methods of real estate investing require more time than others, but many are proven ways to build wealth.
John, who works for a city government, and his wife, Linda, a computer analyst, have built several million dollars in investment real estate equity (the difference between the property’s market value and debts owed) over the past three decades. “Our parents owned rental property, and we could see what it could do for you by providing income and building wealth,” says John. Investing in real estate also appealed to John and Linda because they didn’t know anything about the stock market, so they wanted to stay away from it. The idea of leverage — making money with borrowed money — on real estate also appealed to them.
John and Linda bought their first property, a duplex, when their combined income was just $20,000 per year. Every time they moved to a new home, they kept the prior one and converted it to a rental. Now in their 50s, John and Linda own seven pieces of investment real estate and are multimillionaires. “It’s like a second retirement, having thousands in monthly income from the real estate,” says John.
John readily admits that rental real estate has its hassles. “We haven’t enjoyed getting calls in the middle of the night, but now we have a property manager who can help with this when we’re not available. It’s also sometimes a pain finding new tenants,” he says.
Overall, John and Linda figure that they’ve been well rewarded for the time they spent and the money they invested. The income from John and Linda’s rental properties also allows them to live in a nicer home.
Ultimately, to make your money grow much faster than inflation and taxes, you must take some risk. Any investment that has real growth potential also has shrinkage potential! You may not want to take the risk or may not have the stomach for it.
Running a small business
I know people who have hit investing home runs by owning or buying businesses. Unlike the part-time nature of investing in the stock market, most people work full time at running their businesses, increasing their chances of doing something big financially with them.
If you try to invest in individual stocks, by contrast, you’re likely to work at it part time, competing against professionals who invest practically around the clock. Even if you devote almost all your time to managing your stock port- folio, you’re still a passive bystander in businesses run by others. When you invest in your own small business, you’re the boss, for better or worse.
For example, a decade ago, Calvin set out to develop a corporate publishing firm. Because he took the risk of starting his business and has been successful in slowly building it, today, in his 50s, he enjoys a net worth of more than $10 million and can retire if he wants.
Even more important to many business owners — and the reason that financially successful entrepreneurs such as Calvin don’t call it quits after they’ve amassed a lot of cash — are the nonfinancial rewards of investing, including the challenge and fulfillment of operating a successful business.
Similarly, Sandra has worked on her own as an interior designer for more than two decades. She previously worked in fashion as a model, and then she worked as a retail store manager. Her first taste of interior design was redesigning rooms at a condominium project. “I knew when I did that first building and turned it into something wonderful and profitable that I loved doing this kind of work,” says Sandra.
Today, Sandra’s firm specializes in the restoration of landmark hotels, and her work has been written up in numerous magazines. “The money is not of primary importance to me,” she says. “My work is driven by a passion . . . but obviously it has to be profitable.” Sandra has also experienced the fun and enjoyment of designing hotels in many parts of the United States and overseas.
Most small-business owners (myself included) know that the entrepreneurial life isn’t a smooth walk through the rose garden — it has its share of thorns. Emotionally and financially, entrepreneurship is sometimes a roller coaster. In addition to the financial rewards, however, small-business owners can enjoy seeing the impact of their work and knowing that it makes a difference. Combined, Calvin’s and Sandra’s firms created dozens of new jobs.
Not everyone needs to be sparked by the desire to start her own company to profit from small business. You can share in the economic rewards of the entrepreneurial world through buying an existing business or investing in someone else’s budding enterprise.
About the author: This Post was written by Eric Tyson, author of Investing For Dummies, 7th Edition
Eric Tyson, MBA, is an internationally acclaimed, bestselling personal finance author, lecturer, and advisor. He is dedicated to teaching people to manage their money better, and to successfully direct their own investments. Eric’s most recent title, Investing For Dummies, 7th Edition, is a resource on all aspects of the topic, including how to develop and manage a portfolio, invest in stocks, bonds, mutual funds, and real estate, open a small business, and understand the critical tax implications of investing decisions.
Excerpted with permission from the publisher, Wiley, from Investing For Dummies, 7th Edition by Eric Tyson. Copyright © 2014.
No Nonsense Landlord says
I would highly recommend real estate as a solid way to produce income and build wealth. Mine has grown exponentially since I became a landlord, and the passive income is enough to be financially independent.
Just do it!
For me, I think when you decide in invest in the stock market, it is best that you use fund that you will not be touching in the near future and you have to look at a horizon of 10 to 20 years. You must not have any emotion with the up and down of the market.
True, trading a risky proposition and not everyone’s cup of tea. Investment needs to be on solid stocks where you can rely on long term potential vs short term fluctuation.