Recently I shared about the 7 Gears of Wealth and focused on the first gear; which is cash flow. There is an old saying among investors that says, “Happiness is a positive cash flow”.
The second gear of wealth is investing. In its simplest form, investment is a place to put money where the money can grow, lose value, or stay the same over a certain period of time. Some of the most common investments are:
- Stocks and bonds
- Mutual funds from many different asset classes including stocks and bonds
- Gold and other precious metals
- Real Estate, in all its many forms
- Commodities; such as oil, frozen orange juice, wheat and many others
- Annuities (some have up and down risk and some don’t)
Some other areas people choose to invest in that are less common:
- Private placements (money is pooled and invested in properties, venture capital, inventions, etc.)
- Limited Partnerships (money is pooled to invest in something a general partner usually has expertise in a certain field developed over many years)
- Notes and income streams (if you are collecting payments on a note, private contract, annuity, etc. those income streams are bought and sold every day for investment purposes)
- Tax Deeds and Tax Liens (a form of real estate investment with different rules)
When you look at all these choices it can be mind-boggling and intimidating. Investments boil down to two types:
1. Passive investments are places you put money where you have no say in what is done with the money once you invest the funds. With these types of investments, you are relying on other people’s expertise to make these transactions successful. Examples from above would be:
- Stocks held for the long term which does not include stock trading which is more of a business venture rather than a long-term investment. This does include Motley Fool stock picks
- Mutual Funds
- Private placements (assuming you are just a cash investor and not the principal in the deal)
- Limited Partnerships
2. Active investments are places that require more of your time and expertise to make them successful ventures. These kinds of investments will require you to educate yourself and spending time making sure they are successful. Some examples would be:
- Real estate will require you to study acquisition techniques as well as values, rents, and liquidation strategies among other requirements. To be a successful real estate investor you must think in the term of building a team of professionals to aid your success
- Business investing will require you to understand the business and the industry you are investing money into for a later profit. This investment will also require a team of professionals and maybe even joint venture partners to make this type of investment success. Potential for huge returns and potential to lose your entire investment
- The general partner in a limited partnership investment. In this scenario, you are the one with the expertise and the time required to make this a success. Many times you will not invest money (although every arrangement is different) but you will put in all the time and expertise. You will need a power team and the ability to raise private capital
- Discounted notes and income streams will require knowledge of collateral, cash flow, figuring rates of return on discounts and the ability to find private notes for sale.
- Tax Deeds and Tax Liens are available through local counties all across the country. These are parcels of land (mostly unimproved land) that are auctioned off for their back taxes. Great deals are possible but you need to know the rules (every state and most counties in the state are different) and values, possibilities for land, and guarantees offered by the local government
Your choices for investing are many and how much you would like to be involved is up to you. As a general rule the more effort and specialized knowledge required to make the investment successful means the bigger potential returns. You should make more money based on your time and expertise in the transaction. If that potential was not there why wouldn’t you just invest in the hands-off options and have none of the headache or responsibility?
Recommended Stock Investing Posts:
- PE Ratio: The Best Market Timing Tool of All?
- 6 of the Most Popular Instruments for Financial Traders
- A Review of The Intelligent Investor by Benjamin Graham
- How to Supplement Your Income with Stocks
- Why Blue Chip Stocks Should Be Your First Investment
- Pros and Cons To Investing In The Stock Market Today
- Traditional IRA vs. Roth IRA vs. 401k
- Using The Graham Formula to Find Underpriced Stocks
Maybe splitting up your investments between hands-off and hands-on investing programs might make the most sense. You might need to spend some time educating yourself to make hands-on investments but it is entirely possible to achieve that goal. Simply book time in your schedule to read (such as Modest Money), listen to CDs, and attend workshops that will help your eventual goal of solid hands-on investing returns.
You might be thinking I have left out a few investments such as Certificate of Deposits, Savings Accounts, Options on stocks or commodities, and life policies. Options are very short-term (most of the time) cash flow plays. They require the stock to move a certain way to be successful (up for call options, and down for put plays) and are much more a business cash flow generator rather than a longer-term investment strategy. To be successful you must buy at one price and sell quickly at a larger price much like a retail store selling products. This is why I have left it out of the investment category.
The other products mentioned above are all guaranteed products that don’t have the downside risk of a typical investment. These are all important parts of your 7 gears of wealth and will be discussed more in future articles. Since these other products lack downside risk they will fall into other gears.
The goal of the 7 gears is to work together to create a rock-solid financial fortress that will grow and protect wealth for generations to come.
MORE THAN JUST INVESTING
Far too many people make the mistake of just focusing on their investment gear while letting their other gears fall into disrepair. Picture the 7 gears of wealth operating and turning together in a very balanced way. When one of the gears is not greased or has a tooth broke, all the other gears suffer. When you understand this (and so few people ever do) you can take steps to fix the gear(s) and create a financial fortress that is a cash machine and bulletproof.
Author Bio: John Jamieson is the best-selling author of two books on finance and wealth creation. His latest book is entitled “Wealth Without Stocks or Mutual Funds” is available at the website above. John has trained thousands of people who live all over North America on how to grow and protect wealth and incomes. He has been asked to speak by some of the biggest names in wealth education such as Donald Trump, Robert Kiyosaki, and Robert Allen. He has also written dozens of articles both for online outlets and magazines. You can visit him at Facebook.com/perpetualwealthsystems.