Investors should forget everything that they think they know about investing for financial freedom…
The common misconception is that to get rich, you will need to invest in the next big thing – be it the next Amazon or the next Facebook or the next investment craze like Bitcoin. That you should keep your powder dry for that next amazing opportunity, and that, to be ready, you should be saving – throwing your money under the mattress or in a savings account, waiting for that day to come.
So the advice from so-called investing experts is you should be saving for that next big thing that may or may not pan out? For every Amazon, there are 99 other “surefire hits” that never make it. That’s a poor strategy for investing for freedom. It’s gambling.
There are new rules for investing for freedom. But, before getting into the nitty-gritty of the rules for investing for freedom, let’s talk about financial independence.
Financial independence is generally considered when you are in a situation where you can meet all your expenses and needs without having to work a traditional job and where you’re trading time for money. In other words, when your passive income meets or exceeds your expenses, you’ve achieved financial independence.
Passive Income = Expenses
There is more than one way to look at the financial independence equation, and there is more than one way to accelerate the timeline. You can either increase passive income, reduce expenses or do both to achieve equilibrium sooner. Most people only focus on the income side when the expenses side is just as important.
Saving Will Not Make You Wealthy.
When we were young, our parents constantly instilled in us the need to save but didn’t offer any advice beyond that. As I’ve gotten older, I’ve realized that saving for the sake of saving with no plan will not make you wealthy. It will lose you money when factoring in inflation, which has averaged 3.1% long-term. Even if you put it in a CD paying a top rate of .6%, you will be losing money. Don’t believe the hype. Saving alone will not make you wealthy.
Save To Invest Wisely.
Even if your parents went one step beyond saving and taught you to save to invest, that advice needs to be qualified. If you’re investing in the wrong assets, it doesn’t matter if you save to invest if your investments lose you money.
There are two go-to investment strategies for the average investor:
- The 60/40 portfolio.
- The timing strategy.
For those relying on a 60/40 portfolio (60% stocks/40% bonds), over the past 20 years, a 60/40 portfolio delivered on average an annual return of 5.4%. When taking into consideration inflation, that’s an average of 3.3%. For retail investors playing the timing game, one study found these inventors averaged a return of 2.6% a year – a money loser when factoring in inflation.
If you’re saving to invest in a 60/40 portfolio or with a timing-based strategy, you’re not investing for wealth. So, what would be considered wise investing?
For the answer, look no further than how the ultra-wealthy invest their money. These investors are wealthy because they don’t go with the crowds. They ignore the 60/40 portfolio, and they don’t speculate with timing.
So what do the ultra-wealthy invest in?
They allocate to long-term assets with reliable cash flow and appreciation. There may be down years, but those down years get ironed out over time by investing long-term.
What assets do these investors prefer? Like the members of investing social club Tiger 21, the ultra-wealthy consistently allocate more than 50% of their assets to private equity and commercial real estate.
$100 Of Passive Income Is Worth More Than $100 Of Labor Income.
Would you rather have $100 made in your sleep or $100 from toiling at a job? That’s why $1 of passive income is not the same as $1 of labor income. When you factor in the blood, sweat, and tears that go into earning $100 of labor income, the value of this type of income is diminished.
That’s why savvy investors pursue religiously passive income and not just from one source but multiple streams. Not only can multiple income streams be compounded to accelerate wealth, but diverse income streams insulate against downturns.
Avoid Bad Debt.
Bad debt carries two types of costs:
- Actual costs from interest expense.
- The opportunity cost of losing out on investing in income-producing assets when potential investment capital is going towards debt servicing.
Is there good debt?
Yes, debt that is used to leverage investments in income-producing and appreciating assets. Elite investors use leverage to multiply investment opportunities and expand passive income streams.
Your Best Investment Is You.
If you want to break away from the middle-class pack, invest in yourself and soak up the knowledge and surround yourself with successful investors to learn what it takes to achieve financial independence. An investment in yourself is the most important investment you can make right now.
For the ultra-wealthy, none of these rules are new to them for investing for freedom, but for everyone else looking to break from the pack and do more than get by, these new rules should put you on the right track to achieving your financial goals.