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Education

4 of the Most Important Asset Classes

Hard Assets Alliance was created as a cooperative of investment professionals who believe there’s a better way to invest in precious metals. This is a guest perspective on the markets from one of these partners; we hope you enjoy it.


Rather than keep their money moving, most people park their money. They park their money in a bank, a retirement plan, or at their broker’s office. Rich dad taught his son and me to keep our money moving. If we were not investing in our business, we were taught to invest in real estate.

If the real estate market was not favorable, we were taught to move it into a hedge fund or fast-moving stock for short-term gains and liquidity. Rich dad did not like his money sitting idle. He wanted his money working hard, moving fast, and with as much safety as possible. He knew that markets moved, so he wanted to keep his money moving. That is why he spent so much time looking for new investments to move his money into, and eventually out of.

The comment I often hear is, “Real estate is not as liquid as stocks and mutual funds.” I reply, “Every month, Kim and I receive tens of thousands of dollars in rental income as well as income from tax advantages. That is the kind of real liquidity we want.”

John Maynard Keynes, the famous economist, once said, “The markets can remain irrational longer than you can remain liquid.” Small real estate properties can provide you liquidity until the market crash is over, regardless of how long the recovery takes.

After August 9, 2007, many homeowners, flippers, and real estate developers with overpriced condos are finding it hard to become liquid again. Instead of selling to get out, all most can do is watch helplessly as the value of their real estate sinks into the sunset. The lesson is the less liquid an investment, the more trend information you need. Many people bought high and now are faced with selling low. An astute investor knows how to follow trends in order to buy low and sell high.

The investment philosophy for Kim and me is the same as it’s always been. We invest in assets that cash flow and hedge against inflation, things like businesses, real estate, oil wells, and more. Additionally, we keep our liquid investments in gold and silver instead of dollars. This is because gold and silver rise when the dollar falls. This has worked well for us over the last decade.

For you, what Kim and I do may not be safe. Our investing takes a high level of financial education. You have to decide for yourself where your safe harbor is.

Below are each asset class and its pros and cons.

Businesses Advantages:

A business is one of the most powerful assets to own because you can benefit from tax advantages, leverage people to increase your cash flow, and have control of your operations. The richest people in the world build businesses. Examples are Steve Jobs, founder of Apple; Thomas Edison, founder of General Electric; and Sergey Brin, founder of Google.

Disadvantages:

Businesses are “people intense.” By that, I mean that you have to manage employees, clients, and customers. This means it’s illiquid. People skills and leadership skills, as well as talented people who can work as a team, are essential for a business to be a success. In my opinion, of all four asset classes, a business takes the most financial intelligence and experience to be successful.

Real Estate Advantages:

Real estate can have high returns due to using a bank’s money for leverage via financing and other people’s money (OPM) via investors, capitalizing from tax advantages like depreciation, and collecting steady cash flow if the asset is managed well.

Disadvantages:

Real estate is a management-intensive asset, is illiquid, and if mismanaged can cost you a lot of money. After a business, real estate requires the second-highest level of financial intelligence. Many people lack the proper financial IQ to invest well in real estate. That is why most people who invest in real estate invest in real estate mutual funds called REITs.

Paper Assets: Stocks, Bonds, Savings, and Mutual Funds

Advantages:

The primary reason paper assets are best for the average investor is because paper assets are “liquid” which means you can buy and sell quickly. If you make a mistake, you can sell almost immediately. Paper assets have the advantage of being easy to invest in. Additionally, they are liquidity-scalable, which means investors can start small by buying only a few shares, and thus it takes less money to get into paper investments than some of the other asset types.

Disadvantages:

A major disadvantage of paper assets is that they are very liquid, meaning they are easy to sell. The problem with liquid investments is that once the cash starts flowing out of a market, it is very easy to lose money quickly if you do not sell soon enough. When there is a crash, a panic, mass selling can wipe out an average investor’s portfolio in minutes. Paper assets require continual monitoring.

Since most investors have little financial education, most people invest in paper assets.

Commodities: Gold, Silver, Oil, Etc.

Advantages:

Commodities are a good hedge or protection against inflation—which is important when governments are printing a lot of money, as they are today. The reason they buffer against inflation is that they are tangible assets that are purchased with currency. So when the currency supply increases there are more dollars chasing the same amount of goods. This causes the price of the commodities to rise, or inflate. Good examples of this are oil, gold, and silver, all of which are worth much more than they were a few years ago thanks to the Fed’s printing presses.

Disadvantages:

Because commodities are physical assets, you have to make sure they are stored properly and that they have proper security.

Once you decide which asset class is best for you, and which asset class you are most interested in, then I suggest studying that asset class and investing your time before investing your money. The reason I say this is because it is not the asset itself that makes you rich. You can lose money in any of the asset classes. Rather, it is your knowledge of each asset class that makes you rich. Never forget that your greatest asset is your mind.

No Investment Is Good or Bad

Your investment is only as good as you are.

Business and real estate are the riskiest of all assets because they are the least liquid. If the investor makes a mistake, the asset drags him or her down. That is why businesses and real estate require the most financial education—and the best teams.

Paper assets and commodities such as gold and silver are liquid. If the investor makes a mistake, the investor can cut his or her losses quickly.

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