In the next two decades, barring major advances in life extending technology, the wealthiest generation (aka Baby Boomers) will pass down close to $30 Trillion worth of assets to their children and grandchildren. That money has to go somewhere. To me, it’s not a question of what asset should investors buy because it’s only a race between stocks or real estate. There’s no third place asset in this race. Bonds, Savings/CD’s, and Gold will all fall well short of these two, which is why you do both — buy real estate and stocks.
If you’re happy with 7-8% a year, then you should buy an index fund like VOO, SPY, or FUSVX whenever you have additional cash to invest. Putting your money into a fund like this over regularly scheduled intervals will likely outpace 90% of investors during your lifetime. If you want to do your own homework, The Little Blue Book by Joel Greenblatt is a great starting point. Or, if you can handle more complex reading, Ben Graham’s Intelligent Investor or Warren Buffett’s collection of shareholder letters are fantastic. Each of these money managers produced market beating results for decades. My goal has always been to model and refine the best strategies to produce similar or better results.
That said, picking the right stocks is hard. It’s right up there with being a successful entrepreneur because it requires consistency and patience. Very few are going to be as good as Buffett or Icahn, which is why buying an index fund is becoming even more popular, along with services like WealthFront or Acorns. Obviously, my opinion is that buying stocks create the best opportunity to build wealth with the least amount of risk, but after 15 years in the financial markets, managing money and publishing research, the biggest hurdle that’s still prevalent today are the fees.
Regardless of what asset type you’re purchasing, here are three questions that can lead to better investment decisions.
#1 What is the future estimated value of the asset?
This involves looking at historical data to analyze financial metrics, growth rates, and price multiples estimating value based on past performance, current comps, and future potential. As with most assets, the more unique the more valuable and use a different set of core tenets to estimate value to price for each opportunity. Value estimates are determined in a variety of ways depending on asset class, but with most investments it comes down to the amount of cash that can be produced over the remaining life of the asset, then judge that figure against the price paid today.
#2 Can the asset’s value grow faster than the S&P 500?
With dividends the Standard and Poor’s index of 500 large publicly traded companies has produced an average of 10% a year for nearly five decades. An investment is one that beats inflation first, the market second. It’s rather easy for investors to buy an index fund and simply plug money in anytime he or she would like. Doing this will outperform inflation as well as the majority of their peers and professionals alike.
#3 What is the time frame for your investment?
For short-term trades like options, arbitrage, business/real estate flips, it’s important to know the time horizon. A 5% gain every 45 days turns into a 47% pre-tax return. For long-term investments, there might be months or years of flat to negative growth before seeing a massive return. What matters is that your money out brings back at least 1.15x money in every year, judged over a 3 to 5 year period. Even though the broad market may have periods of higher than average gains, normalized returns tend to be right under double digits for the stock market. And, as economies mature, count on lower returns.