Whenever you talk about investments with your friends, one subject inevitably comes up.
Americans are obsessed with stocks. CNBC and Fox Business play in bars and doctor’s offices, and not just because of the attractive anchors. Warren Buffett, the greatest stock market guru the world has ever known, is practically a god. 40,000 people go to Omaha each year to hear him talk about stocks. Imagine how many would go if it was actually someplace interesting.
The obsession with stocks is a long and complicated one, but it really boils down to one big thing. Americans love stocks because they want to get rich without actually working for it. Screw the white picket fence stuff; the actual American dream is to get rich using nothing but a little spare capital and outstanding stock picks.
I don’t want to discount this dream, because it works. It’s not quite as easy as I described, but it’s still very possible for an average person to build up a good sized nest egg doing nothing but saving aggressively and dollar cost averaging into a good diverse portfolio of stocks. The only other part of the equation is time. It takes decades to build a decent sized investment portfolio.
But stocks aren’t all sunshine, lollipops, and rainbows. They’re volatile as hell, constantly spiking and crashing because of all sorts of factors. Sometimes certain stocks go bankrupt. And you have absolutely no control, meaning there’s really not much you can do if management decides to (figuratively, at least) light a big bag of $100 bills on fire.
Which is why I don’t have 100% of my net worth in the stock market. There are better opportunities out there. Here are four other types of investments you need to at least consider.
I can’t believe student loans continue to get a bad rap.
Let’s look at it generally. The average student in the United States that takes out student loans ends up about $35,000 in debt. We also know that the average college graduate makes about $65,000 per year while the average person who quit their education after high school makes about $41,000.
College is a terrific investment. Imagine paying $35,000 in exchange for increasing your earning power by $24,000 per year. What a fantastic deal.
If you already have a college degree, there are still options. You could take a graduate program like an MBA. Or you could take something more specialized relating to your career. A lawyer working for a bank would probably benefit from some financial courses, for example.
Yeah, I know. Your house probably went down in value in 2008. But that was almost a whole decade ago.
The attractive part of owning real estate is the leverage. Say you buy a $200,000 house that generates a return of $20,000 before expenses. If your down payment was $50,000, that $20,000 in cash flow represents a 40% return on your equity–even if most of it ends up going towards mortgage payments and taxes. Eventually one of those costs will go away.
When you own stocks, you’re owning a small part of a big business. Private equity means you own a big part of a small business. Often, because most people aren’t interested in these types of businesses, they’ll trade hands for 3-5 times earnings.
Fast food franchises are one example. You can always find staff, they’re easy to understand, and you can even take a hands off approach if you have a good operator. Getting financing isn’t terribly hard either.
A fast food franchise worth $250,000 might be too much for you. Okay, start smaller. There are dozens of small businesses you can start with serious money making potential.
Lending money to your cousin to buy booze and smokes probably isn’t a good idea. But lending money to regular people for good reasons is–provided you spread the risk around.
The internet has made that last part easy. Peer-to-peer lending sites like Prosper and Lending Club allow you to make very small loans to a bunch of different borrowers. Depending on the risk, you’re looking at a total return after write-offs of somewhere between 8% and 10%, which, unlike stocks, is relatively consistent. It turns out the internet is good for something besides porn. How about that?