This month, July 2018, I’ve decided to embrace my recent non-traditional and alternative thoughts on the personal finance space and talk about a number of things that I’ve been battling with internally about money, the markets and investing. This is the seventh post in this series. Before reading this one, please go back and read the fifth post on What Does it Actually Mean to Invest in Stocks?, and the sixth post on Checking your Investing Privilege.
We have covered a lot of ground in this series here in July 2018. We’ve talked about how the economy and environment are intimately related, talked about money, talked about economic systems, banking, stocks, and investing.
My goal in this series (but also in my writing in general) is to inspire and provoke new thoughts for you to think about in your head.
I’m searching for the truth, and through exploring, learning, and asking questions, I’m on the way to discovering the truth. Without sharing it with you though, the conversation ends. By sharing it with you, I can continue the conversation and look to improve my understanding.
In this post, I’m going to touch on something that has been bothering me a little bit, which may or may not be controversial, but is certainly not talked about as much in the personal finance space: it’s okay to own a number of assets. If financial independence is your goal, then it’s certainly important to consider this possibility.
First, Personal Finance is Personal
Something which is constantly talked about in the personal finance space, but ignored when giving recommendations, is the thought that personal finance is personal.
Personal finance is not about what your friends are doing with their money, what your parents are doing their money, or what some celebrity is doing with their money.
Personal finance is the science and application of how you earn, spend, save, track, invest, and build your wealth over time. It’s personal – taking control of your finances and doing what is necessary is on you.
When thinking about personal finance, thousands of questions come up:
How much should I save, how much should I invest, what should I be investing in, what companies or assets could give me the best return on my investments, what banks or credit cards should I be using, who can I turn to for advice with my finances?
Before asking any of these questions, we should first turn inwards and realize it’s crucial to realize that personal finance is personal. We must first ask ourselves the right questions and figure out what our goals are. Some possible questions are:
- What kind of lifestyle do you want to live?
- What do you love to do?
- Do you want to travel around the world?
- What about spending more time with your family?
- Would you want to eat out every week?
- Do you want to start your own business?
- Would you be interested in retiring at 45, 55, or 65?
- Do you want to pay for your children’s college?
- What is you relationship to money?
Once you’ve figured out where you want to go in life, then you can start crafting a plan and starting on your journey to living the life you dream to live.
My Problem with Traditional (and more recent) Investment Advice
When reading about personal finance, “financial independence plans”, and investing, I’m constantly running into the same “return projections”. To be specific, if I invest $10,000 a year for 30 years in something, then assuming the typical 7% market return, I’ll be a millionaire!
Second, this automatically pushes people towards stocks, as over the last 100+ years, the stock market has averaged roughly 7% per year!
Now, personally, I don’t have any problem with investing in stocks, and have a good chunk of my retirement accounts invested in stock market index funds.
The problem I have recently is about some of the advice regarding investing in stocks. Namely, when you are younger, you should overweight your portfolio with stocks (like 100% to 0% anything else) for a few reasons:
- By investing in riskier assets, you can hopefully get lucky and speed up the time to financial independence with bull market tailwinds.
- Even if there’s a market correction, you will have time to “recover” because the stock market always goes up (except the world is a closed system)
- and FOMO (I’m going to have to explain this one a little more…)
The FOMO is Real in 2018
I’m 26. I started getting into finances around the time I was 20, and didn’t invest my first dollar until 2015.
I’ve never seen a 2008, a 2001, or a 1987. I have no idea what it’s like to go through a crash; I was in 10th grade in 2008.
Why do I bring this up?
There are thousands of individuals who are between the ages of 22 and 30 who have never seen a recession. While it’s true that some of those people came out of college in a recession, they didn’t experience it in their investment portfolios.
For young people who are looking to improve their financial situation and build wealth, the push is to get into stocks because that’s what they are finding with a simple Google search.
This push is driven by #1 and #2 from above, but also the gambler’s fallacy of the last 10 years: we have experienced the longest bull market in history. This means we can’t lose (sarcasm)! 10 years is a long time, and now, people have forgotten the pain. There are seasoned investors pushing the stock narrative and everyone is rich.
The FOMO is real here.
Compounding on this (pun not intended), you have an investing environment which does not provide any yield in the fixed income market. Real estate investing has been tough to get into with downward pressure from student loans, and upward price pressure from low interest rates. Precious metals have been smashed since 2011, and cryptocurrencies are a gamble.
You can get into index funds for a few bucks. $10 a day times 7% times 30 years is mega dollars, right?
The FOMO is real and many people are piling into stocks without considering the advantages of putting cash in other investment classes.
Stocks are seemingly safe, always up and to the right, and are going to get me to financial independence in a few years. Why change? Why consider anything else?
The World is More Complex than This or That
The usual caveat applies in most cases: if it seems too good to be true, it probably is.
In the last section, I went on a little bit of a rant and I’ll admit that while it was fun to write, I left it opened ended.
One of my goals on this blog is to provoke new thoughts in your head to hopefully help improve your situation. Remember, this blog is called “The Mastermind Within” and within all of us is a mastermind which has the ability to think critically, make difficult decisions, and create a life for the better.
The main point of this article is not to bash stocks and say it’s a bad investment.
If you live in a country with a great economy (the United States for example), investing in stocks is a fantastic way to build wealth.
That being said, just because stocks has been one of the best ways to build wealth in the past, this does not mean that it will be going forward. (The adage past performance does not guarantee future results)
What I want to get across in this post is to argue that all assets are worth considering (and owning).
True financial independence includes defensive positions as well as offensive positions. Financial independence is the goal, but if you are over exposed to one asset class, then a turn for the worse will create stress and headaches.
Financial Independence Redefined
In my opinion, financial freedom and financial independence is the ability to do what you want with your time and money because you don’t have to work for your money anymore. Being financially free means having “enough” savings, money, and income to live how you want to live.
But going a step further, I’d argue that true financial independence is being able to weather any financial storm and still be able to live your life the way you want. If you are 80-100% invested in equities (even if you are diversified across sectors, across borders, and across company size), there’s certainly a possible of running out of money due to sequences of returns (if things go south way in the future, your lifestyle could take a hit in a big way.)
True financial independence would be protecting yourself and your wealth from these storms. What I mean then is to consider (and own) other assets which may or may not be thought of as your traditional wealth building assets.
Look, it’s great to go for $1,000,000, $2,000,000, $5,000,000 in net worth, but I’d rather have some money left over than $0 if a certain asset class went caput.
Let’s talk about some assets worth considering other than stocks to become truly financial independent.
A Brief Overview of Other Assets to Invest In
I want to stress this again, investing in stocks, especially in low fee index funds, has been a tried and true method for building wealth. Over time, investing in companies which are successful should give a solid return.
That being said, there are a number of other assets which make sense to own to bullet proof your finances:
- Bonds and Cash
- Real Estate
- Insurance Policies
- Precious Metals
- Digital Assets
Bonds and Cash
Bonds and cash have a place in everyone’s portfolio. In recent times, owning bonds and having cash has under-performed the stock market. However, these assets are typically less volatile and should be uncorrelated to the stock market (when stocks goes down, bonds go up and vice versa).
Having short term maturity cash positions (either in an emergency fund or in a CD type product), will help in times of trouble because if you get laid off, lose your job, need cash fast, you’ll be able to access these funds. This will ensure you don’t need to sell your future financial investments (long term investments such as bonds, stocks or real estate).
While it is true the returns are typically lower than stocks, there is still a case to be made for owning bonds and having cash on hand.
Real estate, both housing and land, will always have value. Shelter and a place to live is one of the basic necessities of life.
In countries which respect property laws, owning real estate will protect your wealth from inflation, give you a place to live, and allows for the potential of income (through rentals).
Going a little bit bigger, commercial real estate can provide solid returns as well (either through REITs or by buying a larger property and renting it out).
This one is pretty obvious for any one who owns a home, a car, or has a business. Having insurance is very important in case of disaster.
Insuring your house, car and life are all things which make sense for certain people, but I’d even include getting insurance above and beyond that with an umbrella policy.
Wealth preservation is as important as wealth creation and growth. One mistake or string of bad luck could lead to financial ruin.
Having the right protection in place can help if this were to occur.
Thinking along the lines of capital preservation and protection, owning precious metals could be your saving grace in the event of civil unrest or some other crazy event.
If you have to leave the country, these metals would be transportable (in theory), but also, over time, the use in industrial production has grown – leading to an increase in price.
Think about it this way: if the internet were to go away (highly unlikely but possible), would you have any wealth?
The reasons why I started this blog were twofold:
- To look to build a following and at some point, put advertising on the website to create a stream of income for myself.
- To secure a place on the internet which I own and can do whatever I want with it.
Similar to real estate, by owning a website, you can potentially create income and value which isn’t in traditional investments.
Why do digital assets make sense to own? If in some crazy scenario you have to leave the country or have to transfer wealth across borders, all you need to do is remember your passwords and you can access your websites. The internet does not have a border.
I would also put cryptocurrencies in the digital assets category. Even if you think they are the biggest bubble in the world and a joke, they still is worth considering.
At the end of the day, remember: wealth preservation is as important as wealth creation. If things goes south and you need to flee the country, or think having exposure to things unrelated to traditional assets makes sense, then owning digital assets could be a great choice for you.
All Assets are Worth Considering for Financial Success
True financial independence is being able to do what you want with your time, but also being able to protect yourself and your wealth in all financial situations.
Stocks are great, but if you want to be completely financial independent, I believe that it’s crucial to consider all assets for your portfolio.
First, remember that personal finance is personal and your portfolio should reflect these personal preferences and thoughts.
Second, look to understand the current economic environment and look at which asset classes make sense for you.
Finally, put your plans into action and look to continue to build wealth in the long run with additional learning and consistency.
Again, I hope this post has been enjoyable and thought provoking. In the next post, I’m going to talk about investing some more and some other thoughts which are alternative to traditional personal finance advice.
Thanks for reading,
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