I just want to be wealthy, I don't care about the investment strategy! Well, it is a little bit more complicated than that, you have to understand what exactly your money are invested in and why it is invested certain way. So, which way is your way? Let's have a closer look at the different strategies and time frames when these strategies may be applied.
You should start with asking yourself “What are my goals?”. Most of the time the selection of investment options depends on a time horizon, your monetary possessions, and also on how involved you want to be with your investments.
Let’s elaborate on what I mean by each of these factors:
1. Time horizons for investing can be either short or long term. This means the amount of time you have before you will need your money back. If you start investing when you are 25 and you are planning to start withdrawing your funds when you are 65, then you have a long investing life ahead. Any period which is less than 5 years is considered to be short term investing
2. Cash that you have on hand, which is ready to be deployed in investing opportunities instantly. This category also includes money that you are able to save from your paychecks, which can also be invested on a monthly basis. However, this category does not include your emergency fund, because it is extremely risky to be investing without an emergency fund or using the “emergency-fund money”. Neither does it include any assets that are hard to liquidate (turn an asset into cash)
3. Time you are willing to dedicate to managing your investments. For example, investing in stock market using robo-advisors or managing real estate are two different ways of investing, but one can take an hour per month and the other can be a full-time job
So, let’s consider different combinations of the above mentioned factors:
Scenario #1: short time horizon; no $ available; no free time available
You should not invest in stocks. No mutual funds either!!! (Please!!!) Your strategy might be increasing your income, start saving and investing with every paycheck. Short-term bonds or GISs (Guaranteed Investment Contract), invested with a bank or a brokerage firm, might be your choice. As of today, the returns from GISs and bonds are very similar to what high-interest savings account with any online bank can give you. It’s very easy to execute a strategy – go to any bank and a financial advisor will do everything for you. This is still an investment, so risk is always there, even though it is very low
Complexity of the strategy - 2
Returns (gains) - 1
Risk level - 3
Scenario #2: short time horizon; no $ available; free time available
Stocks are not for you. Again, increase your income, save money, invest in short-term bonds or GISs. Since you have some free time, you can learn how to buy these investment products yourself, not through a bank or a broker. To be honest, DIY (do-it-yourself) approach doesn’t give you any benefits in returns when it comes to buying GISs and bonds. But, you will learn and understand how the world of finances works and it will help you in the future when you start buying other investment products, like ETFs or stocks
Complexity of the strategy – 5
Returns (gains) – 1
Risk level – 3
Some kinds of real estate strategies may work in this case as well. For example, make a partnership with somebody who has money. Then, you would have to find a good deal (since you have some free time) and split the returns with your partner. It is very complex approach, especially for inexperience people. The reward may be big too!
Complexity of the strategy 10
Returns (gains) – 10
Risk level – 5
Scenario #3: short time horizon; $ available; no free time available
No-no-no. We are not investing in stocks when a time horizon is less than 5 years! Short-term bonds or GISs as investment options will work in this scenario. Again, with a bank or a broker
Complexity of the strategy – 2
Returns (gains) – 1
Risk level – 3
Real estate is the best option here. For example, make a partnership with somebody who is doing a wholesale or flipping strategies. Let’s say he has access to great deals, but has no money. Here you come with money and let your partner do the “heavy lifting” by finding good deals. You just sit back and relax. When the deal is done, you split the profit. Everything related to real estate I consider as hard work, big risk and potentially high returns
Complexity of the strategy – 4
Returns (gains) – 10
Risk level – 10
Scenario #4: short time horizon; $ available; free time available
You should not invest in stock market yet. Investing in GISs and bonds are still there as an option. DIY approach, of course)
Complexity of the strategy – 5
Returns (gains) – 2
Risk level – 3
Again, real estate might be the best bet. Since you have time and money, there is no limitation to the strategies you can use in real estate.
Complexity of the strategy – 10
Returns (gains) – 10
Risk level – 10
Scenario #5: long time horizon; no $ available; no free time available
Yes, yes, yes! Finally, investing in stock market is your option. You have nothing to invest in this scenario though))) Working on an emergency fund first, and then investing into well-diversified index funds with low commission from every pay check is the strategy in this case. Since you don’t have much time for Do-It-Yourself approach, a robo-advisor is your go-to option. These services create an investment portfolio for you, according to your goals and risk tolerance. Most of the times, the products they offer have a very low fees which is waaaaaay lower than what banks offer. You can set up your account and start investing in no time, it is very convenient. Yes, you pay more than a DIY investor, but the difference is not huge. The risk level depends on the asset allocation of your portfolio, which is the percentage of stocks (risky investments) and bonds (safe investments) that you buy
Complexity of the strategy – 3
Returns (gains) – 7
Risk level – 3
Scenario #6: long time horizon; no $ available; free time available
This is a scenario lots and lots of people are in: they are young, working a full-time job, with some free time. Spend your time to learn about DIY investing, start saving for an emergency fund and then proceed to investing in stock market. Your choice is, as always, well-diversified, broad market index funds with low commissions (low MER – management-expense ratio)
Complexity of the strategy – 8
Returns (gains) – 8
Risk level – 3
Real estate strategy is as discussed in scenario #2
Complexity of the strategy – 10
Returns (gains) – 10
Risk level – 5
Scenario #7: long time horizon; $ available; no free time available
Invest long-term with a robo-advisor as we have discussed earlier is the best option here
Complexity of the strategy – 3
Returns (gains) – 7
Risk level – 3
Create partnerships for investing in real estate where it doesn’t require your time. Chip in some money and split the profit at the end. Beautiful !!!)))
Complexity of the strategy – 4
Returns (gains) – 10
Risk level – 10
Scenario #8: long time horizon; $ available; free time available
Invest in stock market using DIY approach. A little bit time consuming (especially in the beginning), fairly safe in the long run, and will potentially pay you back great returns
Complexity of the strategy – 8
Returns (gains) – 8
Risk level – 3
The power of real estate is hard to overestimate. The safest strategy in real estate for long term is the BRRRR strategy, which stands for BUY, REHABILITATE, RENT out, REFINANCE, and REPEAT. We may talk more about this one in the future posts
Complexity of the strategy – 10
Returns (gains) – 10
Risk level – 10
Closing thoughts:
Overall, it all comes down to your goals, the state of your finances at the moment, length of your investment life ahead, your risk tolerance and time you are willing to spend, managing your portfolio.
Real estate strategies are tempting, but the risks are high too. You may be well-off with real estate much quicker, than investing in stock market, for example. At the same time, you have to be prepared for spending a lot of time finding good deals, meeting with agents and clients, applying to credit institutions for loans and paying off several mortgages, as well as maintaining a perfect credit score, dealing with tenants and doing much more.
A very good solution for most fairly young people may be robo-advisors. It is a solid, long term option for those who don’t want to manage their portfolio too much, as it is created and maintained for you automatically. Fees for using these services are rather low, and your funds are secured by the government up to a certain amount.
I am purposefully avoiding discussing such “get-rich-quick” options as crypto currency or day-trading stocks, because it appears to me as gambling. If you have dependents, those who count on you financially, you are going to put your family in a vulnerable position by making risky investments. It is a totally different story if you are doing this full-time, like a portfolio manager, but you won’t be reading this post in this case. So, think twice before making shady financial decisions.
In my opinion, the best option is investing on your own terms (DIY approach). Yes, it takes months to understand how the market functions, study all the investing options and different brokerages available. The long term results from following this strategy is hard to overestimate. In the end of the day it is you who makes conscious decisions and pays almost nothing in fees and commissions. The best perk is the mindset that you get - understanding of a delayed gratification. That is exactly what we are discussing in this group. The idea of investing any fraction of your income, but doing this EVERY SINGLE MONTH, will get you to your goals. The size of your portfolio will grow in accordance with the dreams and goals you have in your mind and in accordance with your ability to make conscious decisions. FINANCIAL INDEPENDENCE IS REAL.
Always yours, SA
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