I was talking with a friend the other day, and he was sharing with me how inflation has eroded the purchasing power of people’s lives.
For example, in his grandfather’s time, his grandpa was the sole breadwinner, and his grandma stayed home and took care of the children. They lived within their means and were able to save money.
Life is much different today – at least in America.
In many parts of the world, basic necessities – food, clothing, shelter – still consume all of the people’s meager earnings. Although some people in America struggle to meet basic necessities, most do not.
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So why do they have such hard time saving money and investing for their future?
Because in America, we consider luxuries to be necessities, and these luxuries – which are now considered fundamental elements of many people’s lives – cost a lot of money.
Going back to my buddy’s example and compare it to today – his grandpa’s family likely only had one car, and not two (or 3!). They likely had only one TV, and it probably wasn’t a Smart TV. (The people who we bought our house from had a TV in nearly every room for a total of 8 TVs in the house!)
Today, every member of the family “needs” a cell phone. We need cable and internet. We need all the newest fancy technology, from laptops to tablets, to multiple video game systems. We need to wash the car every week and to eat out at restaurants multiple times a week, and travel is a necessity – pardon me, I have a plane to catch!
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But if you want to accomplish important personal financial goals, such as owning a home, starting a business, helping your children pay for college, retiring comfortably, and so on, you must learn to save and invest well.
Many people bury their heads in the sand when it comes to money. Because money, investing, and financial success can be a mystifying activity, many are tempted to look through envious eyes at people who appear to be savvy with money and investing… but take no action to improve their own situation.
Reality Check!
Most people aren’t savvy or knowledgeable. And even if they are, remember that everyone starts with the same level of ignorance & incompetence, and has to build their knowledge with education.
No one was born with an inherent understanding of this stuff!
So, before I discuss investment options, we must understand that when I say “invest,” I mean that you have to tuck money away for future use. You have to discipline yourself to do this.
You could educate yourself on tens of thousands of different investment options, from stocks to bonds, to mutual funds, ETFs, index funds, precious metals, real estate, cryptocurrency, and on & on.
You could be a verifiable expert in any of those fields, knowledge-wise, but unless you can discipline yourself to regularly put money away into these investments, it’s not going to matter.
So, for the rest of this blog, I’m assuming that you are disciplining yourself to be able to regularly put money away for the future.
Building Wealth With Ownership Investments
Observing how the world’s wealthiest have built that wealth is enlightening. More often than not, the rich have amassed their fortune through owning a successful company that they built (or bought and took over).
Starting and running your own company may not be practical for you. But that doesn’t mean that you can’t amass wealth of your own.
If you want to build wealth over the long term, and don’t mind a little bit of a roller coaster ride from time to time, then Ownership Investments should make up a key piece of your financial plan.
Ownership investments are where you own an interest in some company or other asset (such as stock, real estate, small business, etc.) that has the ability to generate revenue and produce profits.
Many well-to-do people have built their nest eggs by investing in real estate and the stock market. If you understand and are comfortable with the risks and take sensible steps to mitigate those risks & diversify, ownership investments are a key to building long-term wealth.
For normal folks who are trying to accomplish typical financial goals such as providing for a comfortable retirement, the money they save and invest needs to grow at a healthy clip to outpace inflation.
For example, if you dump all of your money in a bank account, where the little bit of interest that you’re earning isn’t even keeping up with the rate of inflation, you’re likely to fall short of your goals.
Investing in the Stock Market
One ownership investment is to purchase shares of stock, which is a tiny slice of ownership in a publicly-traded company. This allows you to share in the growth and profit of a company, like Under Armor, for example.
As the company grows, you may receive capital appreciation on the stock price (which you can sell later at a profit), and you may receive income in the form of dividends.
However, even if Under Armor makes money and is a profitable company in the future, that doesn’t guarantee that the value of its stock will increase.
You can also invest in a stock via stock mutual funds or exchange-traded funds, where a fund manager decides which individual stocks to include in the “basket of stocks” or fund.
In his book, Investing For Dummies, Eric Tyson, MBA teaches people the basics about investing and the stock market, but says: “However, I don’t think you should expect that you can ‘beat the markets,’ and you certainly can’t beat the best professional money managers at their own full-time game.”
Investing isn’t about comparing yourself to full-time professionals or trying to “beat the markets.” If you can practice some simple lessons, such as making regular, systematic investments, and investing in proven companies and funds while minimizing risks and taxes, you should make decent returns over the long run.
But how exactly do you choose proven companies and good funds?
How do you minimize taxes & risk?
Many have heard about the need to be diversified. They’ve likely heard that they don’t want to “put all their eggs in one basket” by putting all of their money in the stock of one company, or one mutual fund; or one market sector.
In addition to that, diversification can also mean that you may want to have exposure not only to different sectors but to different asset classes and to foreign markets as well.
That way, if one of those markets have a breakout – whether it’s the S & P 500, or the technology sector, or commodities like oil or gold, or international emerging markets, or small-cap stocks – you have some exposure to this growth, and not missing out completely.
The challenge for everyday people is that in the financial markets, things can change in the blink of an eye. One company that was doing great last month might be down 10% this month.
That hot fund or exploding sector can fall out of favor incredibly quickly as well.
For instance, as I write this, it’s September 2021. For the year 2020, technology stocks were the hot sector. For most of this year, energy was the hot sector that had the best returns Year-To-Date…
But by mid-summer, its returns had fallen a bit, and financials became the leading sector. Then just a few weeks ago, financials had fallen, and now real estate is currently the top performer Year-To-Date.
And so, for many people, they have the desire to be financially successful. And they have the discipline to put money away on a regular, systematic basis.
But they have absolutely no desire to learn about the markets, nor to manage their own investments, nor to watch the markets and analyze mounds of data on a day-to-day, week-to-week, month-to-month basis.
In fact, the very thought of that intimidates them, and they’d like to delegate all those responsibilities, and will happily hire help to do so. That way, they can get on with their lives doing what they’re good at, doing what they enjoy, and leaving money matters to money managers.
And not only can financial professional manage investments for his clients; he can give them coaching, help them stick to the plan during challenging economic times, and often, can become a financial resource and a friend.
As an investment adviser representative (IAR), I can help give guidance on all these things and more. If you’re looking for assistance in creating a financial plan, rolling over retirement funds, or just taking your investments program to the next level, feel free to reach out for a complimentary, no-obligation consultation.
I can be reached at ronald.sneller@snellerfinancial.com
Have a Great Weekend!
Ron
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