There are three major wealth building vehicles:
- Paper assets (stocks, bonds, cash)
- Real Estate
- Business
Wealth Building Vehicle #1: Paper Assets
In terms of paper assets, you already have money invested in stocks and bonds through your retirement fund. If the market declines around the time you want to retire, you may not be able to withdraw the funds you need to retire. Here’s an example of portfolio allocation according to risk tolerance, courtesy of Charles Schwab & Co., Inc.
Aggressive | Moderate | Conservative | |
stocks | 80% | 60% | 30% |
bonds | 15% | 30% | 50% |
cash | 5% | 10% | 20% |
If you’re the type of person who looks at the stock market daily or weekly and lose sleep each time it goes down, you are a conservative investor. If you’re able to put your money in the market for the long term and you think, “The market averaged 10% and will go up and down,” then you may be a moderate or aggressive investor. Always consider the time element. The longer time you have to withdraw the money, the more aggressive you can be.
In my opinion, not taking any risk is the most risky thing you can do. If you have 30-40 years to grow your money and you decide to just put it in a money market, I consider this the most risky thing you can do. Take outrageous risk if you’re young and lessen your risk as you get older.
Ric Edelman, the chairman and co-founder of Edelman Financial Services, LLC, and the author numerous finance books, including “The Truth About Money,” says you can do these three things to minimize your risk:
- Diversify: put your money in many different stocks and bonds
- Balance your portfolio regularly: sell winners and buy losers so you will have a constant mix of stocks to bonds that is right for your situation and age
- Invest in the long term
Wealth Building Vehicle #2: Real Estate
Real estate can add diversity to your portfolio.
With real estate, you can vary the risk by adding years you would own the house. If you buy, flip, and sell in a short time frame, you increase your risk. I purchased a house in 2005 with the idea of flipping it in just few years. I increased the value of the house by renovating the kitchen and the bathrooms.
When I wanted to sell it in few years, the market had turned upside down. I couldn’t sell the house for a profit. Fortunately, I had a nice paying job and wasn’t in an urgent need to sell. I had to hunker down for another seven years for the market to turn. This venture ultimately paid off for I ended up walking away with over $400,000 in profit. The bottom line about real estate is that if you can hold onto it for 10 years or longer, you can lower your risk.
Advantages
Here are some reasons why real estate is my favorite place to park my money:
- Anyone can do it. Over 60% of American households own their own home and so can you. You need a down payment or creative ideas to buy a house without one.
- Interest and property taxes are tax deductible. This is valuable when you are making an active income. As of 2019, the maximum deduction is up to $750,000 mortgage.
- More tax benefits. You can sell your primary residence for 2 years, sell it and keep the profit up to $250,000 (single) or $500,000 (couples) completely tax-free.
- Your costs are predictable if you get a fixed-rate mortgage. While the rents will continue to go up, mortgage is fixed. If you pay off you mortgage by the time you retire, you’re likely to retire more comfortably.
- Appreciation: Homes typically increase in value at about 3% a year.
- You can buy a house for just 20% of the cost. By allowing your tenant to pay for the 80%, you can own 100% of it in 30 years or less. Can you buy a purse then take possession of it the following day by just paying 20% of the cost? My point, exactly.
Disadvantages
There are some challenges to consider when purchasing a house:
- Upfront cost of down payment
- Long term commitment
- Maintenance and repair costs
- Lack of flexibility- illiquidity
- Usually more expensive than renting
- Chance of foreclosure
Some will argue that you can put money into a savings account or invest it instead of buying a home. How many people do you know who saves money that is equivalent to a mortgage each month?
You can build wealth and achieve financial security during retirement using real estate:
- Buy a starter house
- Build equity
- Purchase another house
- Rent out the first house
- Pay off the rental
- Supplement retirement with the rental income
Wealth Building Vehicle #3: Business
More than 72% really wealthy and people who earn more than $1million own businesses.
There has never been a better time to create an online business than now. About 16 million or 30% of the work force are self-employed. I suspect this number will increase as more younger generation continues to dominate the online business. The younger workers are choosing remote and virtual work that suits their lifestyle. Just as John Lee Dumas of Entrepreneur on Fire who grew his podcast into a $2M a year business. Successful businesses can generate a lot more income than W-2 earners.
“Rule No. 1: Never lose money.
Rule No. 2: Never forget rule No. 1”
– Warren Buffet