Today, some one had asked me, is trading every day stressful? I smiled and replied that I enjoy the process as it helps me achieve the goals I had set myself by following a trading plan. As I had mentioned in trading vs investing post, trading generates income whereas investing creates long term wealth. I also talk about how I invest my profits from trading into long term investing. Though I love trading, I understand that I trade my time to generate income in trading and know that I should generate residual or royalty income to achieve financial freedom. In this post, I want to share about 5 types of long term investment strategies I use to secure my financial freedom.
Equities are the most popular among all investment strategies as it is very liquid ( can buy and sell quickly) and is very easy to invest in todays world with plethora of platforms and tools available. Equities alias stocks e always appreciate over a period of time. Also, if you take a calendar year, stocks are on a rise 53% of the time and and are down 47% of the time. Unless you are a technical trader with strong technical analysis skills, it is very difficult to time the market. Though I am a technical analysis trader, I do not trade in my long term portfolio and do dollar cost averaging ( I also buy leaps to hedge and leverage the power of options which is a topic of separate discussion). I contribute fixed amount in each of the stocks and ETFs chosen to invest on a weekly basis. This is a very stress free approach and am pleasantly surprised with the portfolio growth I had in the recent years.
Growth equities focus on applications and products that can make the world a better place. These stocks appreciate a lot anticipating future growth. So, what stocks and ETFs do I invest in? some of the growth stocks that I have invested in are Upstart, Nividia, Google and ETFs. like Data Defenders etc ( Have about 15 of them dollar cost averaged every week). When I was young,100 % of my investments were in growth equities as I did not know anything better and thought it was the fastest way to riches. As I became older and more knowledgeable, I diversified into other kinds of investments as mentioned below.
As mentioned in the book Rich Dad and Poor Dad, we all should be in the investor quadrant and strive to generate income through assets that can be used to pay expenses. Dividends generated by stocks and ETF can provide you steady stream of income over a period of time. Basically, there are three kinds of companies out there that I would like to have in investment mix. - one that focusses on research and looking to make the world a better place ( these are the stocks that appreciate well). Second, there are companies that have piles of cash but not sure what to invest in at the moment). These companies buy back and provide increased dividends over the years like AT&T, Oil companies (XOM , CVX etc. Third, there are some biotech companies and retail companies that have decent growth trajectory and also increased dividend growth year over year like PFE, ABBV, MCD etc. FYI , Sin companies such as Phil Morris pay good dividends too but I do not personally invest in them directly. Personally, I have invested in good dividend ETFS such as Delicious Dividends and stocks such as Pfizer, Realty Income corp ( real estate), Abbvie, McDonalds ( Have them dollar cost averaged weekly). I would highly encourage you to reinvest your dividends to buy more shares until you generate sizable dividends to meet your expenses.
2. Real estate
More than 80% of millionaires in US are from real estate. It hedges you with inflation and provides you a steady appreciation along with cashflow and tax breaks. Generally, If you play it right, a real estate investment can fetch you around 22% return per year ( principal pay out, tax breaks [depreciation, cost segregation &expenses] and finally cash flow). There are multiple ways to generate income through real estate. In this post, we will look at popular ways to generate income passively in the order of difficulty.
Photo by David Gass in Anderson Advisors
Real estate investment trusts are the easiest way to invest in real estate if you are already investing in equities. REITS were formed in 1960 as part of cigar excise tax extension to give common man opportunity to invest in large scale diversified portfolios of income producing real estate. A company is qualified as a REIT if it invests more than 75% of their assets in real estate and give away at least 90% of their income as dividends to investors.
REITS are of 3 kinds
Equity REITS : These own underlying real estate and generate income through rent. Equity REITS are further classified based on the space they are invested in such as health care, storage, apartments etc. Equity REITS are available on popular stock exchanges
M REITS: also known as mortgage REITS. Income is through interest generated by providing financing to income producing real estate. Even Mortgage backed REITS are available as stocks and ETFs
Public non listed and private REITS: These are not available in popular stock exchanges and are available through crowd funding platforms such as FundRise, RealtyMogul etc.
Now lets talk about income generated by REITS
Ordinary income: Most of the income generated by REITS is passed through to investors and also give you a tax breaks due to tax cut and Jobs act (TCJA)
Qualified dividends: This income is passed through when an asset is sold and capital gains is realized
Return of capital: if the portion of REITs income comes from selling assets, some of the distributions can be considered as return of investor capital which is not taxed.
This decade has opened up plenty of opportunities to invest in real estate through crowd funding platforms. As per Investopedia, Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. just like REITS, there are variety of crowd funding platforms available to diversify. I personally invest in a few crowd funding platforms such as Yieldstreet, Sharestates, Crowdstreet. This is truly passive approach and can generate consistent returns if you can identify the platforms that align with your investing goals and principles.
If you are in real estate for a considerable period of time like me, you will be amazed at the number of hidden opportunities available. t's fairly common for real estate investors to branch outside of traditional lending programs and instead use private money lending to finance investment properties. Using private funds to invest in real estate can be beneficial for both the investor and the private lender, allowing the active investor to purchase a new investment property while the private lender receives a return on investment. Usually, there is a written contract called note between the investor and lender that details the contract details like time of the contract, interest paid by the investor etc. I personally lend money to investors who are involved in development.
Real estate syndications. ( property syndications) is a partnership between multiple investors. They combine their skills, resources and capital to purchase a property that they cannot afford individually. There are two kinds of investors - sponsors and investors. Sponsors are responsible for the property acquisition ( also involved in raising capital from investors ) along with the operational aspects of the property. Investors are mostly passive and collect cashflow for their capital investment. Sponsors may or may not invest in the property but will be entitled to receive acquisition fee and a share of profit along with investors.
Single Family homes
So far, we talked about ways to earn in real estate without owning an asset ( property). Real estate properties appreciate over a period of time and can create a lot of wealth along with cashflow for generations. There are different types of individual homes that can be purchased leveraging the conventional lending programs offered by banks - Condos, townhomes, single family homes, multiplexes ( up to 4 for conventional lending. More than 4 units falls under commercial lending and is little bit different).
If you had owned a home, it is a well known fact that there is regular maintenance associated with the property and can drain your wallet sometimes. Then, why so much interest in investment properties? Key word is leverage. Usually, most of the investors pay only 20-25% down payment and finance the investment properties through lending programs available. Then, they rent it out to tenants who pay the mortgage ( principal, interest and property taxes ) and may also generate additional cashflow ( rent - mortgage - expenses) to investors. Also, if you are a landlord, you can deduct your expenses and get lot of tax breaks ( through depreciation and cost segregation). In a nutshell, investors own assets leveraging the lending programs for capital appreciation, cashflow and tax breaks.
Any property that has more than one unit is considered multi family. In this section, we will consider 4 plus units as multi family as it requires a commercial loan and acquisition process is little different. However, Investors receive all the benefits mentioned above in single family homes.
In real estate, land in a good location is considered gold. Acquiring land is relatively cheaper compared to buying properties . However, you may not be able to leverage the lending programs for acquiring land like in properties. I consider buying land as little risky as there is no immediate cashflow and tax breaks. So, why do investors buy land? To satisfy development needs at a good location. Land investors profit by either selling their land to property developers or by getting involved in development and later selling it to retail investor.
Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Crypto currency is becoming popular because of the decentralized secure approach possible through the block chain technology and cryptology (Private and public key pairs). Crypto currency is a topic of separate discussion
Photo by Vildana Hajric and Claire Ballentine at Bloomberg
I am totally sold out on the block chain and decentralized financial applications possible on Ethereum and other platforms. I am also excited about having digitalized currency ( bitcoin) that can be used anywhere. However, these markets are very new and is volatile. Whenever, I am in doubt, I do dollar cost averaging. Currently, I invest in Bitcoin, Ethereum and other alt coins ( ADA, DOT, SOL, LINK) regularly.
How much do I allocate for each of these coins? Today crypto currency market cap is around 2 Trillion (can get this info at coinmarketcap). I allocate percentages in each of the coins based on the ratio of their market cap with respect to the total market cap. For example, bit coin market cap ratio w.r.t. to the total market cap is around 45%. So, I invest 45% of my crypto currency allocation in bitcoin.
4. Precious Metals
Recently, Uranium prices took off as there was not enough supply available. Uranium is not a precious metal but mentioned it to say that you cannot increase the supply of metals unlike the money being printed in huge amounts regularly by the Fed and the government.
So, what are precious metals? Precious metals are elements that are considered rare and inert (chemically inactive). Currently, Gold, Silver, Platinum and Palladium fall under this category. Unlike fiat currency that can be printed, these metals have intrinsic value and offer inflationary protection. I currently invest in coinage metals gold and silver regularly.
5. Insurance and Annuities
Photo at Beamalife
Life is very unpredictable and we should always protect our families by taking an insurance providing death benefit. However, some products like whole life insurance can provide death benefit as well as cash surrender value that increases over a period of time. You have the option of collecting this cash value either as a lump sum or regular payments after a predetermined period of time as defined in your policy. And, usually, the cash surrender value is tax free at the time of collection.
There are other types of investments such as treasuries, corporate bonds that can protect you against inflation and provide regular income. I have not personally invested in it but is worth researching as per your investment needs.
How much allocation in each type of investment. It depends on your risk appetite. Personally, I allocate around 40% in growth equities and 40% in dividends and real estate . Rest is shared between crypto, precious metals and insurance.
How to start investing? Before investing in any of the assets, I would highly recommend to invest in yourself. Discover what kind of investor you are and learn about different investment vehicles available that aligns with your investment philosophy. This post intent is to provide you a glimpse of investments available and can be used as a starting point for your investment research.
Would appreciate if you could share what is your favorite investment vehicle and why. Do subscribe to our blog by scrolling down and filling your email below to receive timely updates on market trends, trading opportunities, crypto updates, short term and long term investments and much more.