Do you want to be rich? Well, first you’ve got to get hold of some wealth. To do that you need to earn it or (if you’re lucky) inherit it. But, however you come into money, if you want to stay wealthy then you need to invest it. There are lots of ways to do that, so to be successful you need to be organised. OfWealth has created a free infographic to help you.
It’s one thing to have wealth. It’s a totally different thing to know what to do with it. Most people spend it or lose it pretty quickly because they don’t think about what they’re doing.
The world of investment can seem daunting. Investment experts use complicated jargon and try to sell you fancy sounding products. Your only option, if you want to survive and thrive, is to start learning what to do.
Our mission at OfWealth is to help you with this. We don’t expect you to always agree with what we say. But, at the very least, we hope to get you thinking about the most important issues in investing.
As I wrote on 31st March, there are five simple things that I believe every investor must do. Number one on that list is to diversify. That just means spreading your wealth around between different assets and investments.
But what are those different assets and investments? And how do you make sense of all the choices that are out there? How do you prioritise?
Know your choices: the Wealth Tree
Your first step is simply to know your choices. As you become wealthier, your choices will expand. If you’re reasonably affluent then you’re unlikely to own a private island. But if you’re a billionaire then it becomes an option. So the more money you have, the more you need to know.
Here at OfWealth we’ve created a free infographic 50 ways to invest which we believe will help. We’ve called this the “Wealth Tree”, because it has many branches and sub-branches of choice. Starting with just five main categories we ended up with nearly 50 total ways to hold your wealth.
You can see this all laid out for you in the Wealth Tree. I’ll explain some of the main categories. But if you have any questions then we encourage you to contact us at firstname.lastname@example.org.
Start with an “Iron Reserve”
The first, and most important, type of wealth is what we’re calling the “Iron Reserve”. This is made up of cash notes or bank deposits, plus gold or silver coins. It’s the money you use for day-to-day living, plus an amount put aside in case of emergencies. It’s there to make sure you can always cover your bills in a crisis, whatever happens.
Having an iron reserve should be your top priority. I recommend everyone has an absolute minimum of three month’s living costs put aside. This is especially true for anyone relying on one paid job that they could lose in future. But if you’re rich enough then ideally somewhere between one and two years’ of outgoings should be held in your iron reserve.
Next come homes, which are properties for your private use. Homes are an example of illiquid hard assets. When something is “illiquid” it means you may not be able to sell it quickly, especially in a crisis. “Hard assets” are real things that you can see and touch. Homes are real things that can take months or even years to sell.
You’ll need a main home, which most people prefer to own instead of rent. In fact, for most people their main home is also their biggest asset, net of any mortgage loans.
However, as you become wealthier, your main home is likely to become a smaller percentage of your overall assets. After all, billionaires don’t live in billion dollar houses.
If you have enough money then you may have additional private homes. These could include a beach house…a ski chalet in the mountains…a country retreat in a quiet place…or even your own personal island, for the billionaires among you. It just depends how much money you have and if the idea of extra homes appeals to you.
And, of course, these extra private homes could be rented out when you aren’t there, to generate some additional income (or just to cover the maintenance costs).
The long view
Then we have what we’ve called “long term investments”, which are split between financial investments and liquid hard assets. Wealth in these categories isn’t needed in the next few years, so can be invested patiently for the long run. These types of wealth are what most people would think of as an investment portfolio, including pension accounts.
Liquid hard assets are things like gold bullion stored in a vault, or other precious metals, and valuable gemstones like diamonds. They’re “liquid” because they’re easy to convert into cash if it’s needed quickly.
Financial investments break down further into liquid savings and investments, which are easy to trade, and illiquid investments which aren’t.
Liquid savings and investments include cash deposits (in addition to the Iron Reserve), bonds, listed equities (stocks and shares) and equity funds, precious metal and commodity funds, and financial derivatives such as futures and options.
Of course many people attempt to speculate with liquid financial investments. They make lots of short term trades as market prices swing up and down, racking up high trading costs in the process.
We strongly recommend that you avoid this temptation. Leave it to the full-time, professional traders that work at investment banks and hedge funds. They’re highly trained, have better market information, get better pricing and pay lower transaction costs. Successful private investors need to buy at attractive prices and expect to hold investments for the long run.
The second category of financial investments are illiquid financial investments. These include funds or products that lock you in for a period of time, often many years. They also tend to be expensive, ripping off investors with high fees. For that reason they are usually best avoided, with occasional exceptions. But we’ve included them for completeness. They include hedge funds, private equity funds, and structured products (packaged financial derivatives).
The art of collectibles
Next we move away from financial assets and into the world of collectibles. These are rare and usually beautiful items, subject to personal taste. Because owning them is often a great pleasure in itself, they are more than just investments. But to be successful with collectibles you need to be an expert in each specific field.
Examples of collectibles include art, rare stamps, fine wine, antique jewellery, rare coins and classic cars. Collectibles pay no income to you, and often have storage and maintenance costs, including insurance. But the idea is that because they are in limited supply, and desirable, they will gain value over time. Just beware that fashions change!
It’s the business
The final branch of the tree is made up of private businesses. These include properties that aren’t for your personal use, but that are owned mainly to generate income and capital gains. Examples are rental properties for residential use (houses, apartments) or used for commercial activities (shops, offices, hotels, farms etc.)
Finally, there are any other businesses that you own or run to earn a living and build your wealth. These are a part of your overall wealth tree, since you have to decide from time to time whether to inject more capital, or to pay out profits to yourself.
The best businesses will make you rich. The worst ones, even if they’re well run, could bankrupt you. If you own a business then chances are that it makes up a substantial portion of your overall wealth.
There are many different ways to invest your wealth. And you don’t need to invest in all categories to be a successful investor. But the general aim should be to make sure you don’t have all your eggs in one basket. This is especially true as your wealth grows over time, which makes it easier to branch out into new areas.
We hope that our Wealth Tree will be a useful reference tool to help you to get organised. And our ongoing aim is to help you decide where to invest in future.
If you find the Wealth Tree helpful, then please share it with your friends, family and colleagues. And don’t forget to recommend that they sign up for the OfWealth Briefing if they haven’t already click here to subscribe.
Stay tuned OfWealthers,