Investment assets for diversification in the Long-Term
With the uncertain global economic condition in recent times, it is quite imperative for individuals to understand Investment assets for diversification in order to build a well-diversified portfolio for amassing wealth in the long run.
The term “diversification” implies investing in a range of assets to reduce exposure to risk.
Diversification aligns perfectly with this idiom that says “do not put all your eggs in one basket”. An investor needs to be tactical in investment decisions to avoid having all investments in a class of assets.
In contrast to investing in a single asset, investment assets for diversification enable you to minimize your overall risk. The risk is spread over all the assets in your portfolio.
As a result, if any of the assets are exposed to high risk, thus, affecting your return, you will leverage the benefits from other investment assets.
Another interesting thing about these assets is that some of the richest people in the world invest profusely in some if not all of these assets.
Below are investment classes you can start investing in and build your wealth around them.
Buying a company’s stock makes you a part-owner of the company and in turn, you benefit from the growth and profitability of the company. For instance, if a company is worth $100 million and issues 10 million shares. If you own 500,000 shares in the company, it implies you own 5% ($5 million) of this company.
There are two main ways people get rich through stocks. Firstly, through value growth, if the company you own its stocks increases in value for example, from $100 million to $200 million, then the value of your 5% ownership also increases from $5 million to $10 million.
For instance, Amazon was worth about $81 billion dollars at the end of 2010 and about ten years after, in April 2020, the company’s worth was about $1trillion. That’s about 1135% growth. If you had invested $10,000 in 2010, your investment would worth around $113,500 as of April of 2020.
The second way to make money using stocks is through dividends. Many companies distribute part of the profits as dividends to their shareholders, un-top of their investment growth.
Investors can either spend the dividend they receive or re-invest to buy more stocks. If they re-invest, that will compound their earnings even further.
This is an investment that people use as part of their get rich strategy.
Real estate means income-generating assets such as lands, offices, multifamily residential dwellings, retail and industrial properties, and hotels. Therefore, this does not include owner-occupied property as that is not an income-generating investment.
Real estate is an investment tool that has made many people rich. One of the reasons why real estate will continue to be an important investment vehicle is population growth.
As the population continues to grow, the need for more shelter will also rise. For instance, the world’s population was 6.1 billion in 2000 and increased by 25% to 7.6 billion in 2019. It’s projected to hit 9.8 billion by 2050.
There are different categories of real estate investment, this includes land, offices, residential, retail properties, industrial properties, hotels, and so on.
One classic example is the residential dwellings that generate monthly rental income.
The property can be acquired through a mortgage or an out-right purchase. If it’s an outright purchase, it’s about estimating how long it will take to recover the initial capital investment.
However, if acquired through a mortgage, it allows investors to buy a property with just a portion of the total amount. Then, they can use the rental income to pay down their loan and build up their equity in the process.
For instance, if the property costs $250,000 and you have 20 years to pay back, this means you have a mortgage payment of $1,042 per month excluding interest, taxes and your monthly rental income is $3,500.
This implies that tenants are paying for your mortgage and at the same time you are making an extra income. In addition, property value grows over time and it will be much higher than the purchase price after some years.
Real Estate Investment Trust (REITs)
Real Estate Investment Trust (REITs) are investments through public markets. REITs are companies that mainly own and operate income-producing real estate.
REITs are for investors that want to invest in real estate but don’t want to deal with all the management and logistics of owning a real estate property.
Investment assets for diversification in REITs can be likened to investing in a company as a shareholder. So, investing in REITs means you are investing in a company that owns and operates a real estate business and receive dividends.
The company deals with the operation, management, and logistics involved in the properties; collects the cash flow generated from the properties, and distributes their earnings as dividends.
REITs are traded on exchanges such as the National Association of Securities Dealers Automated Quotations System ( NASDAQ).
A bond is a debt instrument. A loan made by an investor (individual or institutional investors) to a borrower (companies or government).
If a company or a government needs to raise capital to finance a project, they raise capital externally. It’s usually through the financial markets.
They issue securities generally called debt securities or bonds. Then, the investors (bondholders) buy the bonds with the pre-specified maturity date and at a coupon rate.
At maturity, the investor gets back the par value (principal amount) plus the coupon payment.
The advantage of a corporate bond is that it’s a debt that a company must pay back in the event of losing market value. It is a low-risk investment and the return on investment is low, at an average rate of 3% per annum.
Therefore, most investors use bonds to diversify their investment portfolios and minimize their total risk.
Index funds are mutual fund types with a portfolio that tracks the performance of a section of the financial market like the Standard and Poor’s 500 Index (S&P 500), that is, the 500 biggest companies in the US.
They have a broad market exposure which reduces risk compared to buying a company’s stock.
In addition, Investment assets for diversification in index funds have a low operating expense such as transaction fees, payment to advisors and managers, and accounting fees.
Digital products are an intangible product that exists in digital form, examples include e-books, software, and so on.
They are fast becoming a massive asset for businesses and individuals. For example, celebrity like Daymond John is into the digital information business because of its potential to keep earning income passively. A digital product is only created once and profit keeps flowing day in and day out.
Patents and Trademarks
A Patent is a form of intellectual property that provides an individual with the legal right to restrict other people from making, using, selling, or importing its invention. While a trademark helps to differentiate a product or service to others, through its design or sign such as logos and names.
If you have an invention that’s potentially lucrative, you can file for a patent to protect your invention. Companies will have to pay you to use your inventions, it could be an idea of a product or software.
If your invention has a marketable value, you can license your patent to companies and make residual income from it.
For instance, have you ever heard of Slinky?. This simple invention was accidentally made by Richard James and has made around $3 billion in profits. Similarly, Furby an electronic robotic toy that was released in 1998, has made around $500 million per year at its peak.
Read Also: Basic Guiding Principles on Investment
Copyright is the exclusive legal right granted to an individual who created an original work of art such as books, music, poetry among others to reproduce, sell or license, publish or perform the work.
Therefore any work of art or creative work is a great asset as it can also be licensed out for royalty, a typical example is J.K. Rowling, the author of the popular book series of seven Harry Potter novels, who made serious money from the royalty from the novels as well as the movie series.
The highlighted assets are very good investment vehicles to have a well-diversified portfolio and build wealth. One of my favorites is real estate. This is because its a traditional investment vehicle and still remain evergreen.
I would like you to assess your current portfolio and think about how you can expand it. Which one of the above is your favorite and why?