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To answer the question What should I invest in? You first have to answer another question for yourself:
Why?
That’s the question. Why do you want to invest?
We’ve all heard of the teenager that made a million buying Bitcoin when no one heard of it.
Or have an uncle that got in early on Google.
Or your coworker that talks about all her Netflix stock. (If she’s so rich, why is she still working here?)
Do you have goals in your life that more money will fix?
Why do you want more money?
If you can figure out your Why you can figure out a strategy (your What.)
Reasons not to invest
If you’re looking to make money quick, you shouldn’t invest.
Are you saving up for a down payment for a first home? You shouldn’t invest.
Do you want to invest for the thrill of it?
Or because your friends are doing it?
Blogs you read say to do it?
Financial advisors say you should do it?
What I’m getting at is do you have an internal reason that you want to invest your money?
Investing vs Speculating
Many people think that all investing is speculating.
Gambling.
It’s only making the stock brokers rich.
And you have to be rich in order to invest anyway, or it isn’t worth it.
That’s not exactly true.
The internet is full of personal finance bloggers that became wealthy through saving and investing their money.
Mr. Money Mustache, the Mad Fientist, and JL Collins all worked normal jobs, saved a high percentage of what they earned and invested that money.
Ronald Read worked as a gas station attendant and janitor and through saving and regularly investing left around $8 million to his local library and hospital.
Reasons to invest
We’ve gone over why you shouldn’t invest in our path to discover the answer to “What should I invest in?”
You probably figured out I’m looking for your internal reason to invest.
I believe that everyone can invest.
I believe that you work hard for your money and your money should be working just as hard for you.
That’s why I started this site.
I invest because I want to generate wealth.
Not have to worry if I lost my job.
Not have to depend on my job for basic living expenses.
I want to get to a point where I don’t have to trade my time (the only thing I can’t get back) for money.
If I make enough money through investing, I get my time back.
That’s invaluable in my book.
Answer it for yourself- Why are you investing?
“Why-Investing” determines exit strategy
Warren Buffet’s favorite holding period for a stock is forever.
Why?
Because he is buying a business.
And if he can own it forever, it’s because it is making him money forever.
If you’re investing for your child’s future college tuition your goal is a lot closer than forever.
Depending on your goal you might need the money that you’ve invested.
If you’re living on your investments during retirement for example.
Risk tolerance
The University of Missouri has a good questionnaire to figure out your risk tolerance.
The best question to ask is “Will I be able to sleep at night?”
If you have all your money in something with a lot of risk and you can’t sleep at night because of it, it’s not worth it.
You already have enough stress in your life.
Don’t add more for no reason.
Priority number one is your health.
Then you can think about wealth.
Reason to invest + Risk tolerance determine overall strategy
You know Why you want to invest.
And how much risk you’re willing to take on.
Now we can figure out the answer to your question, “What should I invest in?”
The main categories are self run businesses, debt, stocks (someone else’s business,) and real estate.
Use your Why to see what makes sense for you
If you want to replace your job with passive income, why?
Because you hate your job?
Find a new one that suits you.
Hate your career path? Learn new skills and get into a new line of work.
Investing so you don’t have to worry about money and can pursue your dreams even if they don’t make any money? Now we’re talking.
Investing to Replace Income
If you’re investing to replace a steady income there are 3 main options:
- Debt
- Dividend Stocks
- Rental Properties
Debt
Start thinking like a pawn shop owner or a bank.
If you have extra money you can loan it to people and collect interest.
There are a lot of people out there that need a lump sum of cash in exchange for smaller payments.
Why do you think those payday loans make so much money?
If you go this route do it on the up and up though and try not to get your customers trapped in permanent debt.
If you’ve ever been in credit card debt you have an idea what this feels like.
Avoid this feeling to encourage repeat business.
In fact, you should probably prefer someone that can pay back their loan and then come to you again in the future.
Dividend Stocks
Earlier I mentioned Roland Read.
He’s the janitor that amassed an $8 million fortune through investing over his career.
He did it primarily through investing in dividend stocks.
When you buy shares in a company you are buying a small fraction of that business.
Some businesses take part of their profits and distribute that to their shareholders.
This payment is called a dividend.
The two main ways to focus on dividend investing is to either invest for maximum income or to focus on companies that have a track record of annually increasing their dividends.
Dividend Kings are companies that have annually increased dividend payments to shareholders for over 50 years in a row!
Getting a small raise every year for the next 50 years sounds nice, especially since you only need to buy once.
(Not the optimal strategy, but once you’re a shareholders you’re getting dividends for life.)
Rental Properties
Buying a property to rent it out sounds like a lot of work.
And it can be depending on your tenant.
But if you have a reliable tenant paying you rent each month it can be a great source of income.
The other great thing about real estate is leverage.
If you have $10,000 ready to invest you can buy $10,000 worth of stock, or loan out that $10,000.
If you put it in real estate though you can buy a home with much more.
You can pay as little as 4% down with an FHA loan.
So with that $10,000 you can buy a property worth about $285,000.
Or you could buy 4 properties worth about $71,000 each.
Then you’re collecting rent on 4 properties each month, just from your original $10,000.
If you factor in the cost of a management company into it you can even take yourself out of the day to day operations.
Let the management company directly handle the tenants.
You get your money deposited and check in with the management company to make sure everything stays running smoothly.
How Much should I invest?
Kelly Criterion
The video above is a good explanation of what the Kelly Criterion is.
You want to optimize your bet size because you’re here to make money.
But you don’t want to risk it all and go broke.
Pigs get fat and hogs get slaughtered.
See below for a calculator.
Enter Percentage loss if your investment goes wrong in A.
Enter Percentage gain if you’re right for B.
Use the probability your investment is correct for W.
Risk Profile
Don’t only use the Kelly Criterion to figure out how much you should invest.
Listen to your gut as well.
Remember the question you answered previously, right after the survey through the University of Missouri?
Will this let you sleep at night?
You can use the Kelly criterion to figure out the mathematically optimal amount to invest.
If you can sleep at night will keep you from investing more than you can handle.
Wrapping Up
To answer “What should I invest in?” you first have to take the mental journey and discover Why you want to invest.
From there you can figure out a strategy of what you should invest in.
What interests you? Real estate? Stocks? Loans?
Try one and learn from it.
You even learned how to use the Kelly Criterion and the amount of risk you can handle to figure out how much you should invest.
The most important step is taking action.
You can read this blog and other established personal finance blogs all you want.
The greatest teacher is experience.
You won’t really know how you’ll act in a recession until you’ve lived through one with money invested.
If you invest and do well, figure out what you did right and repeat it.
You invest and it tanks, figure out what went wrong and adjust.
Investing is a journey.
My goal is to help you with everything investment related through this blog.
You don’t have to sign up for my course because it’s all here for you to learn on your own.
But if you would like a little extra help through an organized course check out my course about dividend investing.
If you’re not ready to enroll in the course but still want extra insights on investing, enter your email address below and sign up for the newsletter.