There are only 4 types of investment asset that investors invest into, each have a variety of sub-classes and have their own benefits and disadvantages. As such different strategies are used when investing into each category.
Owning a business can be anything from a one person operation up to hundreds if not thousands of employees. However there are distinct differences that must be considered when looking at what kind of business to invest into.
There is the question of whether you intend to work in the business. Will you manage it on a day to day basis or have a trusted team who does this for you.
Knowing the difference between what is self employed and the owner of a business system is vital. If you are familiar with the writings of Robert Kiyosaki then you will be familiar with what he calls the Casfhlow Quadrant. When Robert talks about being a business owner I have heard him refer to a business of 500 or more employees as being a clear determining line.
I personally think that it is more to do with the systems in place in the business rather than a number of employees. Ultimately I think that the determining factor is a simple question.
‘If I go on holiday and don’t touch the business for one month, will it be in better shape or worse shape when I return.’
A good business system is one that will continue to generate profits with or without the owners input.
There is a lot that goes into developing a business that will meet this criteria. In our modern economy it is possible to run a business that is entirely online, that minimises the capital input for plant and equipment. Old industries can take advantage of new technologies that allow them to extend their customer and client base to the far reaches of the world. Manufacturers can sell to customers & clients overseas, while business and management consultants can engage in meetings with clients in any location through digital communications technology.
Real Estate is one of the best known and most easily understood investments the world over. It is easy to understand because it is a physical item that we all have some experience of.
As an asset class real estate comes in several sub-classes that each have different advantages and disadvantages. They also have different strategies that will suit each type.
When it comes to real estate the goal is to receive more cash flow from rent and depreciation than the cost of owning the property.
The sub-classes that Real Estate falls into include the following:
Residential real estate is the one that the vast majority of people can most easily relate to. We all require a place to live, many of us rent and some have managed to scrape together enough to buy their own home. Kiyosaki famously said and was proven right when the sub-prime mortgage bubble burst back in 2006 and 2007. “Your house is not an asset!”
This is because even if you do not have a mortgage then your personal home will still cost you money.
So do not count your personal home as an asset. You want to own residential properties that other people live in and pay you rent that contributes to a positive cash flow on the property.
Commercial Real Estate
Commercial real estate refers to properties that are generally used by businesses fro running their day to day business. This will be things like offices and retail outlets that generally have a business to consumer model of operation.
Industrial Real Estate
Industrial real estate typically houses industrial processes such as manufacturing or warehousing. These tend to be businesses that favour a business to business model of operation.
Agricultural Real Estate
Agricultural real estate is land that is used for primary industries like farming. Farming is something that is absolutely essential to society for the production of food. However it does come with a number of challenges that are ever changing as the climate changes around us.
Paper assets are the ones that people think of when they think of the stock market. Movies like Wall Street, Boiler Room, The Wolf of Wall Street and The Big Short made these kinds of assets famous. However these are also some of the most volatile assets when it comes to value.
There are a vast number of asset sub-classes within the paper assets group that include:
A Stock is a part ownership in a public or private company, owning stock in a company gives the owner a right to a portion of the companies profits. In some cases these will come in the form of dividends paid at regular intervals throughout the year. In other cases companies may hold onto profits for reinvestment which which can be realised by the stock holder as a gain in the capital value of the stock.
Bonds are fixed income instruments that are generally issued by corporate or government entities. An easy way to understand them is to think of them as being a loan between the issuing authority and the lender. If a person buys a bond from the government or from a company then they are providing a loan to that organisation in exchange for a guaranteed return for a set period of time. Throughout the course of the bond term the holder will generally receive a predetermined amount of income. At the end of the period known as the maturity date the original value of the investment is returned to the owner.
Mutual funds are a type of investment that is made up of a collection of handpicked investments such as stock, bonds and other money market investments. These are overseen and managed by professional investment managers and will collect pools of money from a variety of investors in order to buy various assets. The professional money managers aim to either increase the capital value of the assets or generate a regular income from them. These are a way for smaller investors to get access to larger professionally managed investments they would not otherwise have access to.
Commodities are basic goods that are used in commerce and are interchangeable with other goods of the same type. They are primarily items that are grown or extracted from the earth and used in the production of other goods and services. The general quality of a commodity will not differ greatly between producers however some producers may have better production methods resulting in a higher grade product.
When traded on an exchange there are minimum standards that a commodity needs to meet in order to be eligible for trade.
Traditional examples of commodities include; grains gold, silver and platinum group metals, beef, oil and natural gas.
This is not an exhaustive list and commodities will not tend to generate an income through strategies that involve holding the asset. Income is generated through the buying and selling of the items themselves or through the buying and selling of derivatives such as futures contracts on an exchange.
A are variety of strategies are used when building investment portfolios. There are professional and successful investors who specialise in single asset classes and never stray from those classes.
People like Robert Kiyosaki who advocate for Real Estate, and precious metals like gold and Silver as a form of wealth preservation. While others like Warren Buffet who buys and sells shares in different companies.
There are those who only day trade in stocks bonds or derivatives while there are those who invest into, build and sell businesses.
There are successful people who advocate strongly for having a diversified portfolio while there are others who advocate for knowing a specific asset class intimately and never straying from that.
These are all people who have had success doing these things however a strategy that works for one investor is not guaranteed to work for another.
Developing a strategy that works is something that is very personal to the individual investor in order to get the best returns. Working with a team of people who are subject matter experts is always going to be the best way to develop a strategy that achieves the investors goals.