We all want to make money. Some of us want it for shopping, some of us want it to create a secure retirement, but regardless of why we want money, a key factor in amassing wealth is making your money work for you with investments! We can generally categorize opportunities to put money to work as investments, speculation, gambling and scams. I don’t have much money, therefore I stick to long term investing and the occasional speculation. If you want advice on the risky options, catch one of those get-rich-quick videos on YouTube or talk to your local comic collector.
Long term investing requires patience to allow the investment to grow and the discipline to not sell every time you get nervous or the stock takes a dip. Keeping an eye on the long-term view and understanding what type of investment suits your personality is the key. In order to address that in a future blog, we must first discuss what long-term investment options are available to you.
Generally, there are two types of long-term investments. Those that provide growth and those that provide income. For my purposes, a growth investment increases in value, but you cannot recognize that value unless you sell the investment. An income investment pays you regularly for owning the investment but may not appreciate significantly in value.
The stereotypical growth investment consists of stocks sold on the stock market. Netflix is an excellent example of such a stock (Disclaimer: I own this stock). In the beginning of 2012, the stock dropped from nearly $20 to below $10 and short-term investors dumped the stock. Long-term investors held on and by the end of 2014, the stock was at $50 a share. For those of us who continued to hold the stock, we now enjoy a per share value of more than $350 a share! This stock does not pay a dividend to provide income, instead, you can only recognize the appreciated value if you sell the stock.
In areas with strong real estate, your primary residence (ie: your house, condo, etc.) can also fit into the growth category. I live in Southern California. Despite periodic dips during recessions, home values here have been climbing steadily for a half century! House flippers take advantage of this, but rely upon the quick sale, so that is more of a short-term speculation. With my 15 and 30-year mortgages on my primary residence, I’m definitely invested for the long term. My father does not consider the house an investment since he figures he has to live somewhere, and he cannot sell his home without rendering himself homeless. Still, considering the amount of money we spend on houses, it seems like an investment to me.
Some people might also include collectibles (artwork, comics, etc.) in the growth category because you hold the investment and let the value appreciate; you also cannot recognize any of that value unless you sell the collectible. However, you must be an expert AND get lucky to be successful. I don’t consider them investment worthy because I am too risk adverse. You are welcome to your own opinion – just don’t ask me to value your speculation to be a wise investment!
The most common income investment is the interest-paying bank account. For every month that you let the bank hold your money, they pay you! Since the financial crisis of 2008, these interest payments have been pathetically tiny so many people may not even be keeping up with inflation. Not a great investment! Still, the flexibility of cash in the account is the key benefit of bank deposits, so interest is just a bonus.
For true income investments, most investors will think of bonds (municipal, corporate and government), investment real estate, income stocks, and mutual funds that focus on one or more of these categories.
Bonds are loans that have been broken into $1,000 chunks and sold to the market. Bonds carry ‘coupons’ that pay interest to the holder of the bond and the coupon varies depending upon the confidence investors have in the bond issuer’s ability to pay back the loan. The US government is considered a nearly risk-free investment and at the time of this writing (May 2019) currently pays 2.32% on a 5-year bond and 2.52% on a 10-year bond. On the other hand, Frontier Communications Corp. issued bonds to help them buy Verizon’s US internet services and they pay 10.5% interest on their bonds due in 2022 (3 years). As if that wasn’t enough indication that Frontier is risky, consider also that the $1,000 bond is also trading at below $700 per bond! If we assume Frontier is able to pay off the loan in three years, then this will be both a growth and an income investment that will yield a combined 24.43%, but the very high return suggests that perhaps this bond might not be paid back in full… If you want to browse available bonds, you might want to check out Markets Insider’s bond finder app. Personally, I don’t feel like I have enough information to evaluate the risk of bonds. Additionally, you need to have a good relationship with a broker to feel like you are getting a good value in the murky bond market, so I usually buy funds instead of buying bonds directly.
Real Estate often is out of reach for most investors, but there are many partnerships and stocks that open opportunities for investors to fund investors with less risk. Companies like FundRise allow for people to purchase a slice of a portfolio, but investors need to keep their money in the fund for at least 5 years (there are options for dividends, but the principle is stuck). Personally, I prefer the flexibility of publicly traded stocks and mutual funds that are a bit more liquid. My two favorite income stocks (Disclaimer: I own both) are Realty Income Corp (NYSE: O) and Brookfield Infrastructure Partners L.P. (NYSE: BIP). These stocks do go up a little, so there is a growth aspect, but I primarily own them for the dividends: 3.85% yield for O and a 4.79% yield for BIP. Yield is the percent return an investor would receive based upon the current dividend and the current price. For both of these stocks, I have purchased them at lower prices and their dividends have increased since I purchased the stocks so my personal yield is over 5%. Be careful about buying BIP in a normal brokerage account, because it is a partnership which can make taxes a real pain! Fortunately, I purchased it for my IRA so I don’t have to worry about that headache…
There are many different stocks that pay a dividend that are not related to real estate. Many ‘income’ mutual funds will own a mix of these stocks and bonds so investors don’t have to pick and choose. Any stock that pays a dividend has an income component, but yields lower than 1% are not that attractive. Just keep in mind that the dividend yield is also a proxy for the perceived risk of the investment, so a yield more than 5% may be an indicator of a risky investment!
There are many investments that combine elements of growth and income, but most investments tend to be mainly growth (stocks, etc.) or mainly income (bonds, higher dividend stocks, etc.). In future blogs, I’ll cover risk, personality styles and how that might affect what works best for you.