In the previous lesson, we explained why investing our savings is so important.
We analyze the problems of the public pension system, the loss of purchasing power that we suffer from inflation, and the importance of long-term investment to achieve our financial freedom.
Now that you know the importance of investing in the long term, in this lesson, I will explain where you can invest to obtain the best returns.
He thinks that saving and investing are useless if our investment strategy is not adequate.
This is one of the most important steps in the process, so pay attention and put your doubts in the comments if something is not entirely clear to you, I will be happy to answer you.
Where to invest?
This is the question most often asked by friends and family when it comes to money and investing.
It is a complex question, since there is no correct answer, and that will depend on the characteristics and needs of each person.
What we must do before investing is to know the different investment options, in order to choose the most appropriate one.
And that is what we are going to do from now on, we are going to know the most interesting investment options so that you have the key information that allows you to decide. Let’s go there!
The 4 most popular investment options
- Invest in gold
- Real estate investment
- Entrepreneurship
- Invest in the stock market
Invest in gold
One of the main advantages of gold is that it allows maintaining the purchasing power of those who buy it, for this reason, in the event of a crisis it is usually used as a safe haven value. It is important to know that its safe-haven value makes it a countercyclical asset.
And what does that mean?
A countercyclical value is one that behaves contrary to economic cycles, that is, when there is an economic recession and the stock markets fall, the price of gold rises by acting as a safe haven for many investors.
One of the main disadvantages of gold is that it maintains purchasing power, but the profitability is very low, very close to 0% per annum based on historical data.
This happens because it is not a productive good, contrary to what happens with the shares of companies, which do sell goods that add value to society.
Therefore, while it is true that it is not the best product to invest in the long term, it can be very useful to invest in gold in a timely manner when a crisis approaches.
Not only will it allow us to maintain purchasing power, but we will also obtain a good return during the crisis period, given that many investors will also buy gold and cause the price of this asset to rise.
Real estate investment
The most popular investment option in UK is undoubtedly real estate investment. Our parents and grandparents have invested in housing seeking to make their savings profitable in a safe and long-term way.
Next, we are going to analyze if investing in real estate is really a worthwhile option since there are advantages and disadvantages that we must take into account.
One of the main advantages of investing in real estate is that it requires little training. If you want to buy a home or commercial space in your territory, you will probably know if the price is high or low depending on the price per square meter in your city.
In addition, in real estate investment, banks offer low-interest rates to finance the purchase of a home through mortgages, which is not the case with other types of investments.
There are mainly two ways to make money in real estate:
1. Buy and sell
Look for opportunities in the housing market to buy low and sell higher. This way we can win the differential between the purchase price and the sale price.
2. Buy and rent
In this case, we will also look for opportunities in the real estate market, but this time with the aim of generating a monthly income through the collection of rent.
However, in real estate investment, there are also a number of drawbacks that must be taken into account before carrying out the investment.
Next, we are going to analyze the 4 main drawbacks of real estate investment:
1. Transaction costs
The transaction costs are those taxes such as VAT (10%), the Tax on Patrimonial Transmissions and Documented Legal Acts, the property registry, or the Real Estate Tax (IBI). These taxes will vary depending on the autonomous community in which the house is located.
2. Maintenance costs
Maintenance costs represent all those repairs that may arise and are the responsibility of the owner, such as traffic jams, boiler changes, humidity, paint, etc.
3. Risk of default and squatting
Two of the main disadvantages of renting a home are the risk of default by tenants and the risk of squatting.
These situations can be prolonged in time, due to the slowness of justice in these types of situations. For this reason, it is advisable to have non-payment insurance, in addition to selecting the most solvent tenant.
4. Low liquidity
If you need to sell your house to have liquidity, you should know that on average it takes more than a year to formalize the sale of a home.
This is a problem since you cannot access the money immediately. This problem does not occur in the case of having bought shares, where there is liquidity practically instantly.
Entrepreneurship
Starting a business can be an interesting alternative to investing in stocks. Entrepreneurship is currently in fashion, and both the State and the Universities are encouraging the youngest to innovate and create new companies.
However, within entrepreneurship, there are advantages and disadvantages that we must take into account before taking the first step. We analyze them below:
The main advantages of entrepreneurship are the following:
1. Specialization
One of the main advantages of entrepreneurship is that if you are a specialist in a certain sector, you can use that knowledge to grow the business.
2. Control
In addition, if you are an entrepreneur, you will be able to choose the most appropriate growth strategy and model for your company. The success of your company will depend on your skills.
3. Profitability in a short time
If you get the business to prosper, you can achieve great returns in a very short time through salary, dividends, or by the sale of the company.
However, there are also some disadvantages when starting a business:
1. Initial investment
The initial investment in capital and time can be very high depending on the type of company. For this reason, it is important to validate the business idea before making the investment.
2. Risk
It is important to know that 9 out of 10 new companies fail in the first few years. This happens because reaching the economic viability of a company is something extremely complex that is not available to everyone.
Invest in the stock market
Investing in the stock market is one of the most lucrative long-term investment options. For me, it is the safest and most profitable way to grow your wealth in the long term. Next, we will analyze the main advantages and disadvantages of this type of investment.
Among the main advantages of investing in the stock market in the long term, we find the following:
1. Profitability
The stock market is the most profitable investment option in the long term,
If we periodically invest our savings during a good part of our lives, we will generate a very important equity thanks to compound interest.
However, it is essential to invest in stocks with growth potential, so that the profitability we achieve is the highest possible.
2. Liquidity
Liquidity represents the ease of converting our investment into money. Shares are usually a very liquid type of investment, since if I have a portfolio worth €100,000 and I urgently need €25,000, I can sell a portion of my shares and have that money instantly available.
The same does not happen with real estate. If you have an apartment valued at € 100,000 and you need €25,000, you will have to sell the entire apartment, since it is indivisible. In addition, it will take on average ONE YEAR to be able to make the sale of the property effective.
3. Diversification
Diversification allows us to limit the risk and volatility of our investments. This concept is popularly known as ”not putting all your eggs in the same basket”.
Thanks to investing in the stock market, we can diversify our portfolio into dozens of stocks from different sectors, countries and sizes. In this way, we limit the geographic and sector risks of our equity portfolio.
4. Maintenance costs
The maintenance costs of investing in the stock market are very low. Between the purchase and sale commissions and the maintenance commissions, the total cost can represent a few tens of euros.
For very large accounts the costs may be higher, but at the same investment level, the maintenance costs of the real estate investment are MUCH higher than the costs of investing in the stock market. And in addition, investing in the stock market is usually much more profitable.
Among the main disadvantages of investing in the stock market, we find the following:
1. Volatility
Volatility represents the noise the market makes in the short term. Less experienced investors perceive volatility as a negative since it increases the uncertainty of their investments.
On the other hand, expert investors see volatility as an opportunity to buy certain shares at low prices, in the face of news or rumors that make the price of some assets fall very abruptly, but that they recover their price just as quickly within a few days.
2. Herd effect
The herd effect is a problem that affects most people who do not have enough knowledge to invest in the stock market, and that ends up being translated into making poor investment decisions.
This type of behavior tends to show itself more clearly in extreme market situations, that is when the stock market is experiencing large rises or large falls.
When it appears on TV and in the newspapers that the stock market is at all-time highs, a sense of euphoria invades that drives the herd to buy stocks at very high valuations. These decisions are motivated by greed.
When the market corrects from highs and experiences notable drops of 10, 20 or 30%, fear invades the herd, as they are assuming significant losses.
In these situations, TV and newspapers usually occupy their front pages with a very pessimistic forecast about the markets, and it is then that the herd sells with significant losses.
The funniest thing about it is that when the herd sells at a huge loss, it really is the best time to buy.
3. Time
Time acts as an advantage and a disadvantage in investing in the stock market, since the more time passes, the more we can get rich with our investments.
However, the bag is a career background compared to other investment options faster and entrepreneurship.
Now you know where you can invest and you know the advantages and disadvantages of the main investment options. I’m sure that now you have a little clearer where to focus to invest your money.
And you know, if you have any questions or concerns, we can do so in the comments.
Probably wanna read:
- Importance of stock market analysis
- 5 reasons to invest in education
- Importance of investing in stocks
- The keys to managing the risk of your investment
