Invest in high demand unique assets
Have you read about how some wealthy families will decorate their homes with very expensive artwork. I mean, pieces which are in the hundreds of thousands and even millions of dollars in cost.
How utterly ridiculous. Of course, it seemed more practical to decorate a lot more cost-effectively. Certainly, even limited editions of art would not cost nearly as much. Either way, few are in a position to pay millions for anything, let alone artwork.
I’ve seen, however, some of these “limited edition” art pieces, selling for pennies on the dollar. Conversely, the million-dollar art pieces are now worth many, many millions. Did I miss something?
No one increases their net worth by buying depreciating assets. They increase their net worth by investing in unique assets which are in high demand. Of course, one may need to scale the cost of the investment to a reasonable price point. But, the principle is true nonetheless.
Invest in unique assets with high demand.
Don’t sell your investment portfolio
I worked for someone who was extremely well off. One thing, however, that struck me about this man is that he never sold any assets. He would buy assets, stocks, etc., but he never sold. Never.
Of course, he had enough of an income stream to not worry about the rise and decline of asset values.
You can see this same principle practiced by Warren Buffett. He simply buys and holds. He’s not a trader.
Selling incurs at least two significant costs. First, there are selling expenses, commissions, transaction fees, etc., and second, selling incurs taxes. Each transaction, therefore, dilutes the value of your investment portfolio.
Another article that explains this concept is “Buy, Borrow, Die” from The Wall Street Journal.
But what if you need additional capital? That leads to the third wealth principle.
Borrow from your investment portfolio
Now, this may seem counterintuitive but borrowing against your investment portfolio can open up a number of opportunities which include compounding your investment returns with readily available low-cost capital.
Your portfolio remains intact and continues to appreciate while the collateralized loan against the portfolio will be at a much lower interest rate than what will otherwise be available.
Of course, if you spend this borrowed capital on worthless expenses you’ve defeated the purpose of this wealth principle. On the other hand, if the funds are invested in appreciating assets and reducing higher interest debt, you’ve now compounded your investment growth.
Diversify your investments
Most understand the concept of “not putting all your eggs in one basket.” This is the wealth principle of diversification.
But diversification is a little more complicated than most understand. The idea is that if investors add non-correlated assets to their portfolio, they can both increase returns and lower risk. It may be best to have someone, who understands this principle, manage your portfolio. There are ways, however, to do this very cost-effectively. Advisors who are being paid on the value of assets under management are more prone to follow this principle than those advisors who are being paid by commission. (Regardless of what they say.)
The risks of 2 common investments
Of course, all investments have risk.
Many will conclude that the asset they should gravitate to is real estate and certainly, many will at least own their home or plan to do so.
There are a few caveats, however, that you should be aware of.
First of all, real estate is illiquid. Second, borrowing against your real estate investment is complicated.
Finally, you should note that a real property appreciates the same whether fully mortgaged or fully owned. Especially in a low-interest environment, it may be more beneficial to be more leveraged and have the equity redirected to other investment opportunities which can compound your returns and facilitate easier loan opportunities.
We’ve also seen recently where the government’s interest in tenants has almost devastated the holdings of some real estate investors. It certainly has exacerbated the problem of liquidity.
Many also will have their portfolio invested in tax-deferred retirement accounts.
These accounts restrict and define what you can and cannot invest in.
Also, upon retirement, the tax rules require you to sell and liquidate portions of your portfolio (for example the IRA required distribution rules) which make the distribution subject to taxation.
Finally, prohibited transaction rules severely restrict your ability to borrow against your tax-deferred retirement account.
I’m not suggesting that you not utilize tax-deferred retirement accounts but it is interesting to note that these investments violate the first three of the wealth principles listed above. (Hmmm, I wonder why?)
I would suggest that you also consider ROTH plans and taxable investment portfolios.
2 Considerations for your investment portfolio
None of the following are affiliated recommendations and you may want to give them your consideration.
Using a Robo Advisor, such as SPIC insured Wealthfront, you can have them manage your taxable and tax-deferred accounts for 25 basis points in low-cost ETF risk profiled portfolios. You will also have the ability to borrow against your taxable accounts, which are larger than $25,000, at interest rates as low as 2.40% – 3.65% (currently). Finally, Wealthfront also offers a free interest-bearing checking account with a debit card and a number of other benefits.
Consider a Cryptocurrency financial institution that allows the purchase, holding, interest-paying, and collateralized borrowing of cryptocurrency. BlockFi comes highly recommended and is the firm that Fidelity Investments uses. You can earn up to 8.6% interest on your cryptocurrency holdings and collateralized loans at 20% LTV incur an interest charge of only 4.5%. If you don’t understand cryptocurrency, this might be a good time to get up to speed. There are several good YouTube videos that cover this subject.
Obviously, there is a lot of planning that will go into developing and managing your investment portfolio. I mention the above two financial institutions because they allow you to adhere to the four wealth principles listed above. So many institutions and investment types do not allow this planning flexibility.
Please understand that I am not acting or recommending as an advisor or professional. The risk of any investment choices remains with you and your advisors.