IN THIS PART âŚ
Get familiar with different types of investments, including stocks, bonds, real estate, small business, and funds.
Deepen your understanding of risks and returns so you can make informed investing decisions and react to changes in the market.
Make wise investing decisions that fit with your overall financial situation and goals.
IN THIS CHAPTER
Seeing how stocks, real estate, and small business ownership build long-term wealth Understanding the role of lending and other investments Knowing where not to invest your money In many parts of the world, lifeâs basic necessities â food, clothing, shelter, and taxes â consume the entirety of peopleâs meager earnings. Although some Canadians do truly struggle for basic necessities, the bigger problem for other Canadians is that they consider just about everything â eating out, driving new cars, hopping on airplanes for vacation â to be a necessity. Weâve taken it upon ourselves (using this book as our tool) to help you recognize that investing â that is, putting your money to work for you â is a necessity. If you want to accomplish important personal and financial goals, such as owning a home, starting your own business, helping your kids through university or college (and spending more time with them when theyâre young), retiring comfortably, and so on, you must know how to invest well.
Itâs been said, and too often quoted, that the only certainties in life are death and taxes. To these two certainties we add one more: being confused by and ignorant about investing. Because investing is a confounding activity, you may be tempted to look with envious eyes at those people in the world who appear to be savvy with money and investing. Remember that everyone starts with the same level of financial knowledge: none! No one was born knowing this stuff! The only difference between those who know and those who donât is that those who know have devoted their time and energy to acquiring useful knowledge about the investment world.
Getting Started with Investing
Before we discuss the major investing alternatives in the rest of this chapter, we want to start with something thatâs quite basic yet important. What exactly do we mean when we say âinvestingâ? Simply stated, investing means you have money put away for future use.
You can choose from tens of thousands of stocks, bonds, mutual funds, exchange-traded funds, and other investments. Unfortunately for the novice, and even for the experts who are honest with you, knowing the name of the investment is just the tip of the iceberg. Underneath each of these investments lurks a veritable mountain of details.
If you wanted to and had the ability to quit your day job, you could make a full-time endeavour out of analyzing economic trends and financial statements and talking to business employees, customers, suppliers, and so on. However, we donât want to scare you away from investing just because some people do it on a full-time basis. Making wise investments need not take a lot of your time. If you know where to get high-quality information and you purchase well-managed investments, you can leave the investment management to the best experts. Then you can do the work that youâre best at and have more free time for the things you really enjoy doing.
An important part of making wise investments is knowing when you have enough information to do things well on your own versus when you should hire others. For example, foreign stock markets are generally more difficult to research and understand than domestic markets. Thus, when investing overseas, hiring a good money manager, such as through a mutual or exchange-traded fund, makes more sense than going to all the time, trouble, and expense of picking your own individual stocks.
Weâre here to give you the information you need to make your way through the complex investment world. In the rest of this chapter, we clear a path so you can identify the major investments and understand the strengths and weaknesses of each.
Building Wealth with Ownership Investments
If you want your money to grow faster than the rate of inflation over the long term and you donât mind a bit of a roller-coaster ride from time to time in the value of your investments, ownership investments are for you.
Ownership investments are those investments where you own an interest in some company or other types of assets (such as stocks, real estate, or a small business) that have the ability to generate revenue and profits.
Observing how the worldâs richest people 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 2000s, 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. (See Chapter 2 for the scoop on investment risks and returns.)
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 donât put all your investment eggs in the same basket), ownership 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, youâre likely to fall short of your goals.
Not everyone needs to make his or her money grow, of course. Suppose you inherit a significant sum and/or maintain a restrained standard of living and work well into your old age 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. Chapter 3 helps you think through such issues.
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 Skechers (footwear), you can! You simply buy shares of their stock through a brokerage firm. However, even if Skechers makes money in the future, you canât 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. We discuss the various methods for buying stock in Chapter 6.
You donât 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, we donât think you should expect that you can âbeat the markets,â and you certainly canât 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. We explain more about stocks and mutual funds in Part 2.
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 propertyâs market value and debts secured by that property) over the past three decades. âOur parents owned rental property, and we could see what it could do for you by providing income and ...
