Before the pandemic, I delivered dozens of investment talks around the world every year. Sometimes, I spoke at businesses. Other times, I spoke to teachers at international schools. In 2020, my sessions migrated to Zoom. But no matter the medium or location, people ask similar questions.
Should I invest in cryptocurrency?
My quick answer is, don’t invest anything in a cryptocurrency that you can’t afford to lose. This isn’t an investment; it’s a speculation. Crypto-currencies were designed as a medium of exchange. But even if you could buy a television with Bitcoin, the price would change several times while you were taking out your wallet. It’s more volatile than an Argentinian peso on speed. Unless it stabilizes, it will never be a widely accepted currency.
As for an investment, cryptocurrencies don’t serve a unique purpose or create cash flow. As such, they can only increase in price when somebody else is willing to pay more for them than you did. Some people call this, “the greater fool theory.” This price appreciation differs from stocks and real estate because stocks (on aggregate) increase their business earnings; therefore, their intrinsic value rises. Real estate produces rental revenue and land is the only entity we can put a home, farm, restaurant or manufacturing enterprise on. That’s why stocks and real estate are investments.
Sometimes, a speculation can earn people money. But if you want to build wealth for your future, investing (not speculating) offers better odds of success.
How Much Money Should I Invest Every Year?
This question should be flipped. Instead, people should ask, “What is the least I can spend each year while still enjoying life?” After answering that, and subtracting that sum from your annual income, you’ll know how much you should be investing after paying off high-interest debts.
But let’s get back to that question about how little you could spend. To answer that, start by examining where your money goes. Each time you spend money, document and categorize that expense on an app (until the day you’re pushing daisies). Before long, you’ll have enough data from which you could ask hard questions: “How much am I getting out of expensive, take-away coffees?” “Do I smile more, laugh more or have better friends because I bought a new car?” “Do I smile or laugh more because I upgraded my kitchen or my phone?” Behavioral research says the answer to these questions is almost always no.
Material acquisitions don’t typically boost our life satisfaction, so our living costs should be less than most people think.
Here’s a prioritized order of where money should go:
- Pay off any high-interest debts (anything charging more than 5 percent interest).
- If you have high-interest debts, only invest if your employer will provide you with a matching contribution. Don’t say no to free money in a 401(k).
- After paying off high-interest debt, put six months of living expenses in an accessible emergency account.
- Invest as much as you can as soon as you get paid.
Make it automatic.
Treat it like a monthly tax and then live on what remains, after donating to charity of course. After all, charitable giving boosts life satisfaction.
Why should I include bonds in my portfolio? They pay such lousy interest.
Bond interest rates are not important. What’s important is the purpose bonds serve in a diversified portfolio. For a dozen years, stocks have only risen. But stocks are due for a big decline. It might come this week. It might come three years from now. But it will come. And when it does, investors will freak out. Those without bonds will see their portfolios drop in direct proportion to the stock market’s plunge. As a result, many people will sell or cease to add new money.
Bonds do two things. They temper the portfolio’s fall. That helps prevent investors from panic selling at a low. Bonds also provide fresh powder when investors rebalance their portfolios back to their goal allocation. For example, if someone had a portfolio with 60 percent stocks and 40 percent bonds, a stock market crash might cause the allocation to swing to 40 percent stocks and 60 percent bonds. At year-end (or on your dog’s birthday) the investor can re-balance back to their original allocation: selling some of their bonds while adding those proceeds to their lower-priced stocks.
Many new investors believe stocks always rise. But that isn’t true. US stocks, for example, didn’t make money for more than a decade: January 2000 to November 2010. However, anyone rebalancing once a year with stocks and bonds did make money. I explain that in, Why Keep Bonds At Your Portfolio Party?
What’s Better, Stock Market Investing or Real Estate?
First, the hard-core truth: your home is not an investment. Your home is shelter. Full stop. If you sell it and earn a profit, you still have to live somewhere. Unless you sell your home and buy a cheaper one in Guatemala, you haven’t really made a profit. Second and third homes, however, are investments. You can rent them for cash flow, and you don’t need to live in them. That makes them an investment.
There’s no way of knowing whether rental properties will beat investing in the stock market. Nobody can see the future. Too many variables exist. However, I wrote this story to offer some perspective: What Would Make More Money? Stocks, or Real Estate?
How Do I Learn The Basics of Investing?
This is easier than you might think. Just spend a few hours with a couple of good books about low-cost index funds. I’ve listed the top-rated relevant reads based on Amazon rankings and Goodreads’ reviews. Wet your feet with a light, popular one, such as The Simple Path to Wealthor Millionaire Teacher. But for a wiser, in-depth understanding, study Burton Malkiel’s, A Random Walk Down Wall Street. Everyone should read that book…at least twice. After that, you’ll know more about investing than most financial planners.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas