Yes, I like It BETTER Than Real Estate
I’ll give you four choices…
Business, real estate, paper assets, or commodities.
Take a moment and ask yourself which of these four main asset classes you’re most interested in. There is no right or wrong answer.
My first choice has always been commodities. I’ve always loved gold and silver. I began collecting silver coins when I was nine years old. I went to school in New York to be a ship’s officer. My specialty was oil, and I became an officer on oil tankers.
Interest is important in investing. You need to study investments hard to understand the ins and outs. You need to understand how markets for each behave. You’re not going to make the time to follow and study it if you don’t love it.
Love makes it easier for me to study gold, silver, and oil. As you know, market prices are always going up and down. I don’t mind price fluctuations because I love my assets. I want to own more. So when prices go down, I buy more.
Here’s how each asset class stacks up for me…
My second choice is real estate. I love real estate because it is easy to use debt to acquire properties. It’s a bonus that the tax laws are favorable for real estate investing.
I love real estate, especially old buildings. And it’s that love that makes it easy for me to be a student of real estate and real estate finance. I am always a student, as I encourage you to be because I can never say I know it all. Again, market prices go up and down. When they go down, I buy more. I rarely sell because I love my real estate assets and the cash flow they deliver.
My third choice related to asset classes was to be an entrepreneur, someone who started a business. I have started many businesses, but most of them never survived those first critical years. Of all the asset classes, business is the toughest. That may be why the richest people in the world are entrepreneurs. It can be a long road — and a tough one — but when they win, they win big.
My fourth choice is paper assets. I have attended many classes on stocks and options. I’m not good at it. I don’t love reading annual reports or watching stock prices going up and down.
As an entrepreneur, I’ve formed three companies and taken them public, via an IPO, an Initial Public Offering, just for the experience. I wanted to look behind the curtains at how companies are created and then sold to the public. It’s a dirty game and I didn’t enjoy it but you might.
The Right Kind of Diversification
When I hear someone say they have a diversified portfolio, I often ask them what they mean by that word. More often than not, they will say something like, “I have some growth funds, bond funds, international funds, sector funds, mid-cap funds,” and so on.
My next question is, “Are they all in mutual funds?” Again, in most cases, the response is, “Yes, most of my investments are diversified in different mutual funds.” While their mutual funds may be diversified, the reality is that their investment instrument of choice, in this case, mutual funds, is not diversified.
Most people who believe they have a diversified portfolio are not diversified because they are primarily in only one asset class: paper assets. To have a truly diversified portfolio, you should be diversified across all asset classes.
An often-overlooked asset missing from diversified portfolios is commodities. Commodities are raw materials used to produce consumer goods. Supply and demand drive commodity prices. When the supply is plentiful, prices are relatively low. When a commodity becomes scarce, prices rise.
Pros and Cons of Commodities
As the headline of this article hinted, investing in commodities may be a great option — but it’s not necessarily the right option for everyone. Let’s explore some of the pros and cons…
- Easy entry: For example, buying gold and silver coins is very easy to do. If you can buy a loaf of bread, then you can buy gold and silver. (If you don’t believe me, you will after visiting this website.)
Buying other commodities has the same level of ease as paper assets.
- Increase in demand for raw material as economies grow: For example, with the growth of China and India, there is a greater demand for oil, gas, food, copper, and aluminum.
- A hedge against inflation and a falling currency: When currencies fall in value, commodities usually rise. And when investors lose confidence in currencies, they may run to commodities, especially gold.
- Tax advantages: Different commodities have varying degrees of tax advantages. Almost all are taxed at a lower rate than ordinary earned income or income from salaries and wages.
- Home-based business: A child can easily buy a couple of silver coins and follow daily charts and graphs to check the current price. Involve your children as much as possible as you invest. What a great way for them to get started!
- No cash flow: Most, not all, commodities do not cash flow. They are a capital-gains investment.
- No leverage: The average investor can’t borrow money to invest in commodities.
- Dependent on the economy: As an economy slows, there is a decreased demand for raw materials.
- Volatile: Commodities can be volatile with extreme ups and downs.
Gold, Silver, Oil & Gas
Gold is primarily seen as a tangible store of wealth and as a good hedge against inflation. As confidence in the dollar and other fiat currencies wanes, the demand for real money, such as gold, will rise. Silver is a lesser-known hedge against inflation. Silver’s advantage is that it is a consumable metal that is used in a wide range of electronics and computer products. As more and more silver is consumed and the supply decreases, its price will probably increase significantly.
Oil and gas prices affect our lives in many ways — from the cost of gas for our cars and the cost of heating our homes to the cost of any product we buy which needs to be transported by truck, rail, or plane.
There are four main categories of oil and gas properties to invest in:
- Producing wells that currently produce oil and gas. These provide the smallest percentage return because there is little risk involved.
- Proved developed wells that are not yet operating. These wells have higher returns because, even though the oil and gas are proven to be there and the wells are developed, production has not yet begun.
- Proven undeveloped reserves that have not developed wells yet, even though oil and gas reserves are proven to exist. These investments yield a more profitable return because of the time and higher expense to get the oil and gas out of the ground.
- Exploratory wells where nothing is proven and nothing is developed yet. This is the highest-risk investment because nothing is proven yet. Experts just think there may be reserves in these locations, but they need to drill first to find it. Since this is the highest risk, it also has the potential to provide the highest return.
Of course, there are many commodities that you can invest in. They include:
- Agriculture (such as soybeans, wheat, milk, and cotton).
- Livestock (such as cattle and hogs).
- Energy (such as oil, natural gas, and ethanol).
- Precious metals (such as gold, silver, platinum, and palladium).
- Industrial metals (such as copper, lead, zinc, and tin)
Commodities, along with the other asset classes, are a science unto themselves. If you’re interested in commodities, as with any asset class, start studying.
Buying gold bullion coins or bars is a great place to start! You can also start collecting silver coins, which is not only a great financial investment but can be a lot of fun.
Play it smart,
Editor, Rich Dad Poor Dad Daily