Today, I'm going to break down how to choose what type of investment is right for you. We are going to look at it in terms of three different factors to consider when looking at investments. Check out my video below if you'd like to listen along!
The first thing to consider when determining what type of investment is right for you is risk tolerance. There is a positive correlation between risk and return, so before getting into investing you need to look within and decide for yourself how much risk you are comfortable with and can tolerate with your investments.
If you are highly risk tolerant, you are more likely to be comfortable investing your money in investments that could potentially lead you to losing much or all of your initial investment, but that could also lead you to making a whole lot more than an investment with lower risk. Real estate development, day trading, and venture capital are a few examples of high-risk, high reward investments that all have a good chance of pressing the 'delete' button on your initial investment if things go sideways.
On the other hand, someone who is less risk tolerant is going to invest in something that has a lower likelihood of losing money, and is almost always going to get their money back plus a small return. A great example of a low risk investment that has a high level of certainty of providing a (albeit small) return and getting your money back is a savings account at a bank or a treasury bill with the federal government. In the future, we will discuss why in the long term it is not wise to sit on large sums of cash in a savings account as your money will lose value through inflation quicker than it will increase from the abysmally low interest rates that banks are paying on savings accounts these days.
Examples of investors that would be considered highly risk tolerant would be anyone who invested in companies like Apple, Tesla, Amazon, Google, and Facebook right at the beginning of the companies before the world knew they would succeed. There was a high likelihood they would never see their investment again, but also a chance for them to see exponential returns on their money invested. The money they put in back then is worth far more now than it would have been had they put it in a traditional savings account, mutual fund, or treasury bill.
Involvement - How Much Time and Energy Do You Plan to Commit?
The next thing to consider when deciding what type of investment is right for you is how much time you are able, willing, and going to spend both on and in them. If you have lots of time to spend focusing on your investments and want to be involved with the process, something like fixing and flipping properties within real estate can be a good option because of the time required to track down deals, walk the properties, and put in the work necessary to fix up the property and get it back on the market and eventually sold. The amount of time and energy required for fixing and flipping makes it seem almost like a full time job to some! On the securities and stock market side of things, day traders are a similar breed of investor dedicating much of their time to researching companies and making strategic trades based on their findings, aiming to spend the majority of their time and workdays monitoring the stock market.
On the other hand, if you do not want to spend your time on your investments and you have higher ROI (return on investment) activities that require your attention (your day job, spending time with your family, travelling, consulting, etc.), managed funds like index funds, REITs (Real Estate Investment Trusts, which are a great way to be diversified by investing in real estate without needing to be hands on), and investing with a joint partner are great alternatives.
In the case of a joint venture, perhaps you have the money needed to invest or do property renovations but you do not have the time necessary in order to track down these deals and actually execute your vision, so you bring in someone in the opposite position who has the time and capacity but not the financial capital necessary. A partnership such as this is incredibly common in the real estate investing world, and allows both parties to split the returns and invest in real estate. Typically, the partner who is putting in the work on the ground receives what is called, "sweat equity" as compensation for their hard work on the deal and to get a reasonable split on the returns. Often times, these deals are structured to be 50/50 between the capital and sweat equity partners.
Financial Capital Required
The third thing to consider when determining what kind of investment is right for you is how much financial capital you actually have available to invest. Do you have $200, or do you have $200,000? Regardless of where you are at in your life and on the financial spectrum, there are investments that you can participate in. Whether you have $200 and want to start an online business or find stocks of companies that are quickly growing but aren't in the hundreds of dollars, you can hop on board and invest in things like this without being a multimillionaire.
If you have $200,000 cash to invest, you can obviously do a whole lot more with that, but my suggestion would be to diversify that and spread it across real estate, stocks, and maybe even starting your own business. Your options available to you are really limitless regardless of how much financial capital you have, as at the end of the day it ultimately comes down to creativity. This is one of the more limiting beliefs of my generation that limits them from getting into investing, thinking that they cannot invest in the stock market or real estate because they do not have hundreds of thousands of dollars saved up in the bank.
What kind of investment is right for you? Let me know in the comments below! If you're into stocks, are you going to be spending your time day trading and finding companies that you think are about to explode, or are you going to put your money in index funds or mutual funds so that you don't have to worry about it until you pull it out down the road?
Are you going to invest in real estate? In real estate there are tons of options. Whether you are into fix and flips, buy and holds, maybe some BRRRR (buy, rehab, rent, refinance, repeat) action here and there, or multifamily syndication -- the sky is seriously the limit.
Alternatively, maybe you aren't interested in either stocks or real estate. Maybe you have a great idea. You have a solution to a problem that a lot of people have, but that nobody has come up with yet. So you want to start a company and provide your solution to the world. Let me know below!