Money without financial intelligence is money soon gone – Robert T. Kiyosaki
Last week’s post covered the number one basic understanding of financial literacy: the difference between an asset and a liability. If Robert Kiyosaki advises spending your life acquiring assets, then I think it makes sense to dive a bit deeper into this topic.
First things first: understand assets so that when you’re ready to invest, you have an idea of how to diversify across asset classes and within asset classes.
Assets put money in your pocket
Businesses that do not require your presence are assets.
- As soon as you start working for the business, you are now an employee and it becomes your job.
- Businesses are assets when you own them, yet they’re managed by others.
Stocks: Stock’s are not lottery tickets.
- When you purchase a stock you are becoming a part owner of a real operating business, you’re shifting from being a consumer to being an owner.
- The value of your shares will rise or fall based on how the company is fairing.
- Unless you’re a very experienced investor, it is advised to NOT look at stocks as your QUICK MONEY or GET RICH QUICK scheme.
- On average the market is down one in every four years, which is an important viewpoint so you avoid taking excessive risks. An equally important viewpoint is that the market makes money three out of four years.
- The stock market has returned 9% to 10% a year for over a century.
- In the short term, the stock market is entirely unpredictable
“Over the long term, the stock market news will be good” – Warren Buffett
Bonds: Bonds are loans to the government, a company or some other entity
- Treasury bond: when you lend money to the government
- Municipal bond: when you lend money to the county
- Corporate bond: when you lend money to a company
- High-yield/junk bond: when you lend money to a less dependable company.
- The money you make off loans are based on risk/reward
- If you lend money to the US government, it won’t make you much, but if you lend money to an unstable government it’s way riskier and the payout (interest rates) will be much higher.
- The duration of the loan is a critical factor
- The US government has an interest of 1.8% a year for a 10-year loan. For a 30 year loan, the government will pay you 2.4% because it’s riskier to lend money over a longer period.
- Bonds are much safer than stocks because the borrower is legally required to repay you.
It’s important to note that if you keep your money as cash you are LOSING money due to the current rate of inflation. So even though a 1.8% yearly return seems low, it is still essentially savvier than keeping your money as cash.
Alternative Investments: investments other than stocks and bonds
- Many alternative investments are hard to sell and come with expenses.
- Tangible items are considered alternatives, like your rare painting collection, signed jersey, vintage cars, jewels, and your property. (Rich Dad Poor Dad doesn’t consider these ASSETS until they are making you money)
- Two positive attributes of Alternative Investments
- They sometimes can generate superior returns
- They’re not correlated to the stock and bond markets, therefore they’re diversifying your portfolio
- Real Estate Investment Trusts: No hassle, low-cost way to diversify broadly without having to have the extra money to invest in multiple homes or properties.
- Private Equity Funds: Operates in the private market, adding diversification. Private Equity firms use pooled money to buy all or part of a running company, then they cut the company’s operating expenses, and then sell it at a much higher price.
- Downside: these funds are hard to sell, risky and charge high fees
- Master Limited Partnerships: MLPs are publicly traded partnerships that invest in energy infrastructures, like oil and gas pipelines
- They pay out a lot of income in a tax-efficient way
- They’re best for an investor who is over 50 and has a large, taxable account
- They’re not for the young, or those that have money in an IRA. **
“What I realized is that nobody knows and nobody ever will. So I have to design an asset allocation that, even if I’m wrong, I’ll still be ok” Ray Dalio in Unshakable by Tony Robbins
**Asset descriptions are summarized from Ray Dalio’s section in Unshakable, by Tony Robbins. You can purchase the book below:
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