I once attended a seminar featuring Robert Kiyosaki of the 'Rich Dad Poor Dad' books fame. They got a very smart 10-year-old boy to stand up on stage and repeat his mantra. They asked him, what is an asset?
“Assets puts money in your pocket “, the boy gleefully replied.
They then asked him what is the liability.
The boy said, “liabilities (e.g. cars, consumer goods) - takes money out of your pocket”.
He’s probably a millionaire by now!
This is rather simplified description of an asset and does not really explain assets fully.
Whilst it’s true that assets can put money in your pocket, like property or shares, not all assets give you regular income and the value can go down as well as up. For instance, gold and silver, or classic cars and watches are not going to give you an income unless you rent them out, but the value generally increases over time but can also decline for many years. You can also enjoy using them.
Assets are not always tangible or physical. They can also be things you create like blogs, podcasts, books, songs, websites, online stores, copyrights, inventions, email lists, Facebook pages and many others including of course businesses. My best investments and greatest assets have been the businesses I started from scratch with hardly any money.
One very sound reason for investing your money in assets, as opposed to leaving it in the bank, is to protect the value of your savings against inflation.
If you are earning half of one percent and your savings and inflation is running at 1%, The rate at which the buying power of your money is going down is double the amount you are earning on that money. Whilst a half percent doesn’t sound much, over the years it will eat into your savings like a moth ridden pair curtains. We all need some ready cash in the bank by the way.
Only about 15 years ago I could buy a flat in my area with a 15% deposit or around £20,000 - £25,000. Today, I would need £40-£50,000 to buy a similar flat with the same percentage deposit. This is because properties have gone up faster than inflation while savings in the bank have lost their buying power.
In other words, if I was sitting with £20-25,000 in the bank for 15 years the value or buying power of that money has diminished and would no longer be sufficient to put down on a flat, as first-time buyers saving for a deposit find to their cost.
Put another way, I have doubled or even tripled the value my money put into the property over a 15-year period. In addition, I also enjoyed income in the form of rentals. Had I left it in the bank I would have earned a little bit of interest, but the real value has gone down. Yes, it requires more effort on my part but the little bit of work itself was well worth it.
Assets can also include stocks and shares, which also provide dividend income and the prospects of future growth.
Today, we’re not even earning half a percent on our savings but less the .25% in some cases and inflation is running at nearer 3%.
You might say, okay everybody knows the value of properties go up and inflation reduces the value of your money. If that is the case, why do so many people leave their money in low interest bank accounts for years instead of investing in real assets?
Part of the reasons are lack of knowledge, poor education, complacency or just laziness – it takes a lot of effort, get up and go and tenacity to travel around looking at properties, doing your homework, applying for finance, dealing with tenants, builders, brokers and estate agents!
Not everyone wants to be a landlord or property developer. My own relatives don’t want the hassle and own one residential property at a time despite the fact that they could have used their equity to build up a sizeable portfolio.
When I worked in the bank, we had clients with substantial savings in an old, obsolete accounts earning extremely low interest rates. When we advised them to simply move the money into a different account, which required no effort on their part, they would refuse and preferred to just leave it where it was.
Investing in assets obviously takes some time and effort and requires knowledge and expertise. There are also risks.
For these reasons, millions of people hand over their cash to fund managers to invest into assets on their behalf – usually into shares and bonds on the stock market.
They do this through vehicles such as pension schemes, unit trusts, investment trusts or mutual funds as they are known in America. Fund managers collectively invest into assets typically property, bonds and shares and the holdings are divided into units.
This all sounds fine, but there are some drawbacks.
Firstly, charges, commissions and fees can have a major impact on investment returns and ultimately how much money you have when, or if, you can retire. Investment houses and fund managers charge fees including an annual management charge and ongoing administration fees. You may also have to pay commission or fees to an adviser for financial advice.
Whilst an annual management charge of say 1% may seem almost insignificant, over time it can add up to a substantial sum when applied to the total value of the fund.
An annual management charge of 1% of a £10,000 investment is £100 a year. However, in 20 years’ time the fund may have grown to £100,000 with growth and additional investments and 1% of that is £1000 per year.
There is also loss of growth on the money that would have been invested had the charges not been deducted.
There are other charges applied within a fund which you need to consider carefully in the information regulated companies have to provide. All in all, charges on managed investments over the longer term will affect the value of funds.
When you go to any major city and look at most of the tall office buildings they are usually owned by banks and insurance companies, the two institutions which largely control our money.
Obviously, nobody expects fund managers to work for nothing especially as they are actively managing your money. This brings me on the second drawback with entrusting your money to someone else. Performance.
Active management in my book means that by picking out the best stocks and shares the managers should beat the average growth of the market as tracked by the indexes, such as the Dow Jones, FT 100 Index or FT All Share index, right? Wrong! The vast majority of active fund managers do not even match, let alone beat, the average price rise of the various indexes. When you consider that the average index by definition includes the best and worst performing shares you would think that by selecting which shares to buy and sell the fund manager would easily outperform the average growth movement. Sadly, this is not the case.
Research published by Standard and Poors in 2017 on US funds reported that roughly 1 in 20 fund managers beat index funds. Over a 15-year period 92.2% of large-cap funds lagged behind the S&P 500 index in America.
When a few fund managers do manage to beat the index, they are hailed as superstars. Legendary investors like Warren Buffett and Charlie Monger have outperformed the index over decades, but they do not run a fund. Their investment vehicle is a listed company called Berkshire Hathaway, which invests in other companies. The share is trading at around $300,000 a share at the moment! You can buy a smaller fraction of a share though.
If you want to invest your money into a managed fund, such as a unit trust, some advisors – I am NOT your financial adviser by the way - say that you could look at an index tracking funds, which track the main indexes and has lower charges due to being largely run by automated systems. There are a number of different types of funds and tracker funds and you should take independent financial advice.
The stock market has made money over the longer term, but it is still notoriously difficult to pick the right share, as even the expert fund managers have found to their customer’s cost. If you are planning to invest directly into shares you should take time to learn how the market works by reading books or taking courses. Then try investing in a dummy account before risking your hard earned cash.
Whilst I have invested in shares over the years, my favourite investment has always been property for three main reasons.
One, I can see and touch property – it’s tangible unlike a managed fund or a share certificate which is basically piece of paper.
Two, it is under my control not a fund manager or the management team of a company in which I am investing. I can rent it out, flip it, divide it into rooms or flats (subject to licensing and planning in some areas) or even live in it if I had to. It is more ill-liquid than shares but usually less volatile.
Three, and more importantly, unlike shares or bonds, I can use leverage or borrowed money to buy this asset class.
Depending on the markets and bank lending conditions, I can buy a £100,000 property for £25,000 along with a £75,000 mortgage. I will of course have to pay the loan back and pay interest, but I am enjoying growth and rental income on a £100,000 property (the rent usually pays the mortgage and leaves me with an income after all costs), not a £25,000 property. Do you see the difference?
If I’d invested my after-tax money into shares I would have a holding of £25,000 and received dividends and growth based on £25,000.
In my experience, most property I have bought has more than doubled over a 10-year period. If I sold the above property for £200,000, I would be sitting on a gross gain or profit, before costs, charges and tax, of £100,000.
Does this mean I’ve doubled my money and made a 100% gain? Actually no, because I only put £25,000 into the deal (with a loan of £75,000), which means I have actually quadrupled my investment of £25,000 or made 400% return on my capital employed in the deal.
In the above example, I am ignoring taxes, legal fees and stamp duty which are costs, but also rental income which are gains.
But there’s another, often overlooked, bonus. When I repay the loan after 10,15 or 25 years, the value of the debt has diminished as inflation is now working in my favour. Governments benefit from periods of high inflation to their advantage when they borrow money through bond issues.
Try walking into your bank tomorrow and ask them to lend you money to buy shares in BT or Apple using the shares as security. Just for fun, when they try and sell you one of their own investment funds ask them to lend you the money. They will usually be surprised by the question and inform you that it is not possible to borrow money to buy these assets. When you delve a little deeper you will discover that they view shares, unit trusts and even their own funds as too risky for them to lend their money on but NOT too risky for you to put your life savings into.
Shares are used as security in ‘leveraged buyouts’ of large listed companies, but seldom for small investors.
In summary, you’re nearly always better off investing in assets over the longer term. However, the price of assets can fluctuate and you could lose your money if you buy the wrong asset at the wrong time or need to sell fast. It is always in your interest to seek independent financial advice, but even better to become educated so that you can be your own financial adviser.
Property has consistently made me money over the years and continues to do so to this day. Buying property and dealing with tenants requires effort and at times a lot of patience, however, the returns more than justify the work. You can easily do this in your spare time. As long as you know what you’re doing and buy locally or in a market you understand, you can run a small portfolio of properties while still holding down a full-time job. You can also use management companies to collect rents and deal with the tenants like the many landlords who never visit their properties.
Before you rush out and buy a property, I would suggest that you learn about property investment from someone who has done it successfully – not your relatives or someone who has a couple of buy-to-lets. Unlike when I started, today there are many courses available which can teach you the basics of getting started in property.
Over the years, I have attended dozens of property courses, but the ones I found most useful and practical are the courses run by Progressive Property. I have also got to know one of the founders, Rob Moore, who owns and controls over 600 properties with his partners. I think you can safely say that they know a thing or two about property!
With Brian Tracy
Progressive offers a free taster course which takes you through the basics of many different strategies from single lets and HMO’s to options and deal packaging. You’ll not only learn from these courses, but they are a great place to network and meet interesting and like-minded people. I attended their beginner course and was sitting next to a man who I later found out owned 140 houses!
Author and speaker Brian Tracy said that only 10% of people ever study after leaving school or university. I find that the most successful people I know are continually learning, attending courses and seminars and updating their knowledge. They stay on top of their game, which is why they remain successful and get richer.
If you’re interested in finding out more about property courses, click on the link below or drop me an email/messenger.
