On this episode of The Impatient Investor, Andrew discusses the misconception that to get rich, you will need to invest in the next big thing, the next Amazon or Facebook and that you should be saving your money to invest when the opportunity arises. But what would really be considered wise investing? To answer this, Andrew takes a look at where the ultra-wealthy allocate their money.
“Savvy investors pursue religiously passive income and not just from one source, but multiple streams. Not only can multiple income streams be compounded to accelerate wealth, but diverse income streams insulate against downturns.”
Investors should forget everything they think they know about investing for financial freedom. The common misconception is that to get rich, you will need to invest in the next big thing. Be it the next Amazon or Facebook or the next investment craze like Bitcoin, or that you should keep your powder dry for that next amazing opportunity. And that to be ready, you should be saving, throwing your money under the mattress or in a savings account waiting for that day to come.
So the advice from so-called investing experts is you should be saving for the next big thing that may or may not pan out. For every Amazon, there are 99 other sure-fire hits that never make it. That’s a poor strategy for investing for freedom, it’s gambling. There are new rules for investing for freedom, but before getting into the nitty-gritty of the rules for investing for freedom, let’s talk about financial independence.
Financial independence is generally considered when you are in a situation where you can meet all of your expenses and needs without having to work at a traditional job and where you’re trading time for money. In other words, when your passive income meets or exceeds your expenses, you’ve achieved financial independence.
But let’s start here. Passive income equals expenses. There is more than one way to look at your financial independence equation. And there is more than one way to accelerate the timeline. You can either increase passive income, reduce expenses, or do both to achieve equilibrium sooner. Most people only focus on the income side when the expenses side is just as important. Saving will not make you wealthy. When we were young, our parents constantly instilled in us the need to save, but didn’t offer any advice beyond that.
And as I’ve gotten older, I’ve realized that savings for the sake of savings with no plan will not make you wealthy. It will lose your money when factoring in inflation, which is averaged about 3.1% over the long term. And even if you put your money in a CD, paying a top rate of 0.6%, you will be losing money. Don’t believe the hype, saving alone will not make you wealthy. Save to invest wisely.
Even if your parents went one step beyond saving and taught you to save to invest, that advice needs to be qualified. If you’re investing in the wrong assets, it doesn’t matter if you save to invest, if your investments lose you money. There are two go-to investment strategies for the average investor, A, the 60 40 portfolio, and B, the timing strategy. For those relying on a 60/40 portfolio that 60% stocks and 40% bonds over the past 20 years, a 60/40 portfolio delivered on average, an annual return of 5.4%. When taking into consideration inflation, that’s an average of 3.3%.
For retail investors playing the timing game. One study found these investors averaged a return of 2.6% a year, a money loser when factoring in inflation. If you’re saving to invest in a 60 40 portfolio, or with a timing-based strategy, you’re not investing for wealth.
So what would be considered wise investing? For the answer, look no further than how the ultra-wealthy invest their money. These investors are wealthy because they don’t go with the crowds. They ignore the 60/40 portfolio, and they don’t speculate with timing. So what do the ultra-wealthy invest in? They allocate to long-term assets with a reliable cash flow and appreciation. There may be down years, but those down years get ironed out over time by investing long-term. What assets do these investors prefer? Like the members of investing social club Tiger 21, the ultra-wealthy consistently allocate more than 50% of their assets to private equity and commercial real estate.
A hundred dollars of passive income is worth more than a hundred dollars of labor income. Let me elaborate. Would you rather have made a hundred dollars in your sleep or a hundred dollars from toiling at a job? That’s why $1 of passive income is not the same as $1 of labor income. When you factor in the blood, sweat, and tears that go into earning a hundred dollars of labor income, the value of this type of income is diminished. And that’s why savvy investors pursue religiously passive income and not just from one source, but multiple streams. Not only can multiple income streams be compounded to accelerate wealth, but diverse income streams insulate against downturns.
Avoid bad debt. Bad debt carries two types of costs, actual costs from interest expense. The opportunity cost of losing out investing in income-producing assets when potential investment capital is going towards debt servicing. Is there good debt? Yes. Debt that is used to leverage investments in income-producing and appreciating assets. Elite investors use leverage to multiply investment opportunities and expand passive income streams. Your best investment is you.
If you want to break away from the middle-class pack, invest in yourself and soak up the knowledge and surround yourself with successful investors to learn what it takes to achieve financial independence. An investment in yourself is the most important investment you can make right now. And for the ultra-wealthy, none of these rules are new to them for investing for freedom, but for everyone else, looking to break away from the pack and do more than get by these new rules should put you on the right track for achieving your financial goals.
If you’re looking for more information on creating multiple streams of income, go to www.stoptradinghours.com.