I want to discuss how to invest the smart way.
In case you missed it, you should review this post that outlined the important first steps of smart investing.
To refresh your memory, it is all about cash flow…
This is not the most common premise of the experts, gurus and talking heads. The majority of advice focuses on growth.
I have nothing against growth, but when it comes to what is going to deliver you financial freedom the quickest…
…cash flow is the hero.
It should be clear to you now that in your investing activity, you will have to decide between cash flow and growth.
They can be achieved together, but the rate of growth or cash flow will differ depending on which one you target as your priority.
Simply put, if you target cash flow, it is likely that the rate of growth will be lower. If you target growth, the rate of cash flow is likely to be lower.
For now it is just important that you know this relationship.
Invest the Smart Way
The next steps in how to invest the smart way are where things get tricky for a lot of investors.
In fact these next two steps are significant reasons why a lot of people that I speak with don’t invest at all.
They find these steps too difficult and give up.
So before we get into them, let me start by saying that these steps can be complicated if you let them, but they don’t have to be…I find myself saying investing is simple a lot these days :).
The key is to understand what you are trying to achieve and then apply your goals to these steps, with a dash of tax advice from your accountant.
Before you freak out about tax, this is where I do recommend you get some advice.
So you are going to want to have an accountant looking after your tax affairs. It’s just a cost of financial freedom. However, make sure they are your accountant and not someone pretending to be your financial advisor.
So bite the bullet now and find a good one that understands what you are trying to achieve and can guide you through the murky waters of tax in your country.
How do you want to own your assets?
Before you jump in and start splashing your money into all types of assets, you need to make a decision that will have a significant impact on your cash flow.
How do you want to own your assets?
Your first reaction might simply be that YOU want to own them… That’s a fair response.
But this question has massive tax implications and is closely related to mitigating your risk.
There is not enough time or space in this blog to go through all the intricate details; that is what your accountant can do for you.
But to arm you with some information to discuss with your accountant, here are some of the options to consider.
Investments can be held in any of the following names or structures:
- Your name
- Joint names – that is with your spouse or family members
- A trust – there are multiple trust options as well, including a unit trust or family trust.
- A company
- Your retirement account – that could be in a superannuation account, 401k, Roth IRA or an employer sponsored retirement account.
Each of these options have different tax implications so it is a decision to make early in your investing career to ensure you protect your profits.
Now before you run for shelter in a cold sweat, this is where the accountant earns their money.
Gain an understanding of the differences between each option, and then select the best one for your circumstances.
Many years ago when I was making this decision, I came away from my accountant with three viable options…
Some investments were to be made in a family trust, some in my retirement account, and a small number could be made in my name.
But just to reiterate, please don’t let this step stop you from making progress toward your goals.
Once you have this sorted you can move on to the next step with confidence.
What Assets do you want to own?
The objective when deciding what assets you want to own can vary based on your goals.
You now know, you are looking for cash flow first and growth second.
Your first objective is to create enough cash flow to cover your living expenses.
This is what we refer to as your freedom number.
The world of investing is saturated with thousands of options when it comes to where to put your money…
But there are three main assets that should form the backbone of an ‘invest the smart way’ strategy.
They are stocks, property and fixed interest securities (or bonds)…
Each of these types of assets has their own pros and cons, tax implications and unique quirks.
So let’s have a quick look at each of them…
Investing in Stocks
The most popular way to own a stock is by purchasing through a stock exchange. These stocks are what are referred to as publicly listed stocks.
By purchasing a stock in a company you become a part owner of the business and therefore entitled to a share of the profits, or losses.
To invest the smart way, you want to find stocks that are making good consistent profits and paying dividends.
The dividends are where you access the cash flow.
You might already be saying one of two things, if not both…
First, I don’t have the time to scan stock reports to determine what are the best ones to buy; and
Second, I wouldn’t know what to look for anyway.
The good news is that in recent times there have been new products introduced that make this process far easier.
They are called Exchange Traded Funds (ETF)…
Effectively these stocks are designed to replicate the major index of the country that you want to invest in.
So if you are in the US, you might want to replicate the performance of the Nasdaq.
Investing the smart way means you would buy an ETF that replicates the Nasdaq and as the market increases over time you benefit from these gains.
You also receive dividends when companies within the index pay dividends. Awesome and simple right?
Investing in Property
To cover all the potential matters relating to property is a course in itself. Which is why I created one! 🙂
However, there is one significant consideration that is contrary to popular opinion when it comes to how people invest in property.
Our aim is cash flow…
So when you invest the smart way, you want property investments that generate cash flow.
To use some jargon briefly, this means you are looking for positively geared property investments.
Positively geared simply means your income from the property, the rent, exceeds your costs, such as interest on the mortgage, running costs and maintenance.
The good news is that if selecting properties is not something you think you would enjoy or want to undertake, there is an alternative.
There are property stocks and ETF’s that you can purchase that give you exposure to the property market, without having to own a property.
Now that is a pretty cool too.
Investing in Bonds
The final asset you should consider is bonds…
As part of your risk mitigation strategy it is wise to have some of your available investing dollars earning a fixed interest rate.
It is secure and stable cash flow.
As with the other asset types there are many options available, including Treasury Bonds, Corporate bonds, savings bonds and even simple fixed term deposits.
The key is that they provide a steady cash flow that adds to your freedom number.
Where to Start
Where to start when you want to invest the smart way is based on your goals…
To again simplify this process for you, it is prudent to have some money in each of the three asset classes discussed.
This is a form of diversification, which simply means spreading your risk.
There is nothing stopping you from having a favourite, using only one type of asset, or changing your allocation as time progresses.
As long as you are moving toward your financial freedom number you are doing the right thing.
And one final piece of advice, remember that you don’t have to pick the best time to buy any of these assets…
Since you are in for the long haul, the best time to invest is right now…
Just keep doing it month after month after month.
Let me know in the comments any questions you might have, I would be glad to assist and get you moving toward your goals.