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When you break it down, there are essentially 4 basic categories of investments. There are thousands of variations within the categories but, at a high level, if you understand the four categories, you can begin to analyze and decide what suits you best.
1. Savings – bank account, CDs, money market, bonds, etc.
- The great news about this type of investment? It tends to be very SAFE. The interest rates are low and steady. It can be a very good tool, once you have acquired the amount of wealth you desire and now need a safe and secure way to KEEP it. That said, as an investment strategy, it will not make you wealthy – in fact, it may barely keep up with inflation.
2. Stock Market – mutual funds, individual stocks, shorts, options, etc.
- There is a lot of money to be made in the stock market. People who have the ability to analyze the financials statements, understand the statistics and fluctuations of the market are able to generate substantial gains. My first few years of investing were spent in the stock market. After ups and downs, I realized that I’m just not that smart! Either that, or unwilling to commit the extensive time/research, while performing a full time job. These days, there is the added concern that a company showing a profit one day may be claiming bankruptcy the next. Historically, the average annual return of the Dow Jones Industrial Avg. is roughly 10%. The stock market can be a solid approach for retirement investing but it is not likely to make the average person wealthy.
3. Small/Private Business – pizza shop, coffee shop, car wash, etc.
- You can invest in your own start-up business, your cousin, Sally’s, start-up business or you might even become an angel investor for someone you barely know, who appears to have the next great idea. If structured correctly, the upside on a small business investment can be extremely profitable – well over 50% returns are often possible. The downside, however, is that over 50% of start-up businesses fail. Great risk and great reward.
4. Real Estate – single family, multi-family, commercial, etc.
- I don’t know of a way to get rich overnight, investing in real estate. Historically, appreciation averages 4-5% annually and cash-flow can typically add an additional 5-10% return. The basic approach is simple - buy a property and, over time, either you or a rent paying tenant will pay off the mortgage for the property. The power is in the LEVERAGE. You need only invest a portion of the purchase price (the rest is borrowed money), yet you control and reap the rewards of 100% of the asset. Real estate has the ability to provide monthly cash flow, while creating long term wealth. Significant tax advantages can also be had, when investing in real estate (particularly for W2 employees). Does it require some management/education? Absolutely! However, over time, real estate investing has proven to create more millionaires than any other type of investment.
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