This blog is going to look at the three different asset classes you can invest $1 being business, shares and property. We will also touch on why it’s important to re-invest profits and how timing is key.
Why every $1 counts:
Just after I finished university I started training with a friend of mine to run in the Melbourne Marathon. I wanted to do this to develop the skill of being disciplined so that I could use this in other areas of my life like money management and my career. I knew I couldn’t just wake up one morning and run 42.5kms I had to train and consistently show up.
Whilst I was training I listed to a, American business coach called Jim Roan. IM’S Philosophy was based around the idea that is not how much you earn that is important but what you do with each $1. For example, a percentage of your wage should be allocated to your basic living expenses, 10% should be allocated to saving, 10% assets and 10% to giving back to his community.
I use this same principle but structure it a little differently. When I get paid every week I have a fixed amount transferred into a separate account so I know that many is going towards certain asset classes. It means that no matter what is going in my life, I pay myself first.
The point is, it really doesn’t matter how much you earn. I bought my first 5 or 6 investment earning less than $80,000 per year which was our total household income at the time. I really do believe it’s what you do with your dollars.
When you break down the different areas of your life and have a very focussed goal it’s amazing how you can find more money, make more money or save money to get you where you really want to be. Regardless of where you are starting from it’s really important to obtain the philosophy of each dollar matters. When you use each dollar to its full potential you can develop each dollar into more dollars.
Whether you own your own business or you are employed your job is still a business in the regard that you are in control of it and your own destiny. You have the potential to earn more or earn less, to change your hours, to work harder or to work less.
When I worked for someone else I looked for small opportunities to make some extra money, for example taking on a extra job or set up a side business.
If you are looking to starting a business, there is certainly risk associated. Finding a niche and becoming a specialist is key, consistent cash flow in a industry where you can make more money than you have to fork out. I prefer businesses which have cash flow from day one, rather than those that cost a fortunate and put you in a hole for the first 3 years. I like low risk industries food, health and property where people will always need these services.
Business at the end of the day is a sales and marketing activity.
My old boss was a young guy doing really well in business. He managed a franchise where it was relatively low risk, low volatility and consistent cash flow. He made me realise it was possible to do a lot more with my life than I thought possible and that starting and running a successful business is something anyone can do.
I learnt from him regardless of the business you are in you true business is selling and marketing. Realistically a lot of us don’t like selling and that’s probably why a lot of us don’t run businesses. It is however the key to running any successful business. Every single day we are negotiating and selling when talk with our kids, when we meet our partners and talk to knew people. It is the essential skill set to really build value.
Here a few books I have read that have helped me understand how to build meaningful relationships with people, identify how you can help them. They look at sales from an add value perspective rather than the old school selling skills which are aggressive and outdated.
- Grant Cardone – Sell or Be Sold
- How to win friends and influence people
- Solution selling and Spin Selling
This is a topic that I am interested in but not heavily invested in at this point of my life.
The share market interests me because despite having massive fluctuations where it will drop by large percentages it has a long term record of consistent good performance.
I have read a great book called MONEY: Master The Game by Tony Robbins. Tony sat down with all the large Hedge Funds managers in the world and took snippets from each of them. The book is quite long and heavy but he did condense a lot of the information into a smaller book called Un-shakable.
I learnt from this book that every single year for the last 50 – 70 years the share markets around the world had lost 10% of their value. About once every three years the American share market had lost 30% of its value or more. Then, once every now and then, the marketplace gets wiped out, like the GFC, about once every 14 to 18 years. So understanding that things go up and they go down is all part of this game. He said that buying and holding longterm, it’s less about timing the market, and more about time in the market, because things work out in the longterm.
Another really, really meaningful thing that I learned from him is this concept of the index fund, which is basically just going in and saying, “I would like to buy a small percentage of each one of the top 500 companies in America in the SMP500.” What he found, that for the average person, even in the top brokering firms in America, and the big Australian companies and banks in America, the index fund over time out-competed 98% of the managed funds that people were sitting in.
So after they take out their fees, after you take out all of the idiots that don’t really know what they’re doing, the average managed fund return was very low, somewhere between 2% and 4% depending on time in the market.
Where if you just bought and held an index fund for the longer term, the average return was well over 7% and the fees were a lot lower. As someone that doesn’t like to take risk I found that really interesting.
Another thing I have picked up from Tony about shares is the importance of time in the market. He went on to say that if you had been in the market every single day for the last 30 years, your average return in the index fund would have been I think 7% or 9%. If you had missed the three best trading days over that 30-year period, your average return would have gone from, say, 7% to 3% or 4%. If you had missed the five or ten best trading days, your average return would have gone down to something like 1%.
Whilst I believe buying low is important, it’s not about timing the market and waiting for the next crash but rather just being in the market place and making the most of those good days.
Those good days are hard to predict. Even the best companies in the world can’t predict them. So don’t kid yourself and pretend that you can.
Property is my passion and my business. A good investment property needs to:
- Grow in value over time – Capital Growth
- Offer great cash flow
- Ideally provide an opportunity to upside – (manufacturre or adding value i.e. build, renovate etc.)
If you look at Australia’s property history in the last 46 years the average return from buying a house in Sydney, Melbourne or Brisbane was over 9.5% p.a. Interestingly Brisbane was the top performer in this time.
In the last 20 years the average return was over 8.5% p.a. and in the last 10 years Brisbane has come down to 4.9% with Sydney and Melbourne achieving 7.9% p.a. based on data from RP Data. These metro markets tend have performed better than any other market in Australia.
There is money to be made in the short term in property but a lot of this is speculation and mostly for people who really know what they are doing. With property investing you are .
I also target houses over units as houses tend to out perform units by about 1-3% p.a. When you have a limited amount of money to invest it is key to ensure you are investing in the right product.
Popular Blog: 4 Properties To Financial Independence
No matter how much money you’re making, if you don’t reinvest into other asset classes, you end up with nothing, because the value of cash is always declining, and particularly in a market where your cash return in the bank’s under 2% right now.
Reinvest your profits back into businesses, shares, property, other asset classes to continue to build your longterm position and wealth, because money that’s sleeping is dead money. Money likes to move, and likes to go on and make more money. So that’s a skill set that you can learn and develop.
There’s a great book on this by Phil Anderson called The Secret Life of Real Estate and Banking. There’s another book by Fred Harrison called The Power in the Land. They look at booms and busts related to the share market and property market for the last 250 years in Phil’s instance, and 350 years in Fred’s instance.
Both are really good books to help you understand the bigger picture that’s at play. Again, the future doesn’t always predict the past, and you can’t use those as silver bullets, but it is good to know that there’s good times to buy, there’s bad times to buy. As a sophisticated investor, you need to figure those things out.
To book a complimentary strategy session with the team at Pumped on Property click here. We would love to spend some time learning about where you are right now and where you’re looking to go in the future.