Wealth has to grow one way or another, so keeping your money in the bank seems like the most impractical thing to do. You need to look for investment opportunities that generate passive income so you can put all your hard-earned savings to good use.
There are three major options to consider that will grow your wealth. You only need to choose one that produces the highest possible yields for the lowest possible risks. However, it depends since not all options are suited for you, especially when you take your risk profile into account. Choosing the best one involves a risk v.s reward equation.
At any rate, you will have to choose from three major options, namely bonds, stocks, and real estate.
Bonds
Aside from taxes, governments also generate revenue through the sale of bonds. Through these financial instruments, private citizens are able to loan money to the government, which pays the amount in full (plus interest in the form of a coupon) upon maturity. There are also bonds issued by corporations that mature within a year.
Either way, bonds entail lesser risks since there is an assurance that bondholders will be able to get back their money in full. This is definitely the reason why many consider bonds as a more secure investment. This is obviously the case with government bonds, which produce lesser yields even for the long-term. However, market forces such as the inflation rate and the supply of tradable government bonds can affect your earnings.
Corporate bonds are still subject to risks, such as a bank default. This makes it unlikely to recover the full amount of the money you invested, depending on the assets that have been liquidated or repossessed. Nonetheless, bonds are definitely well-suited for investors who want to take things slow and simple. But if you’re opting to generate higher yields, you might want to consider a different investment option.
Stocks
Whereas bonds are another form of loan you give out to an organization, stocks are basically shares of a company distributed among its investors or stockholders for that matter. When it has to raise funds in order to expand its operations, provide better services, or simply make improvements, the company has to sell portions of itself to eager investors.
When you buy stocks from a company, you are entitled to a portion of the equity. This means that you are able to earn from the income that the company generates, depending on the number of shares you possess.
Such a setup allows you to grow your money faster, compared to bonds which take time to mature for very minimal gains. With stocks, your investments gain in value and generate high returns in the form of quarterly dividends. Then again, the value of your investments will depend entirely on the performance of the market.
It’s possible to profit from favorable market conditions, but the prospect of losing all your shares is also very likely in periods of lackluster market performance where massive sell-offs can be too much for a first-time investor.
You can always diversify your stock portfolio or find a company or brand that’s too big to fail, but nothing can prepare you for a stock market bloodbath when the market crashes.
The biggest difference in stocks is volatility. The risk profile is suited for someone who wants to play the volatility game. In this sense, people who have enough time to monitor the market can benefit well if they understand the ins and outs. So, what else is there to consider for growing your wealth?
Real estate
Bonds and stocks and other forms of investment have their caveats. It’s difficult to build passive income knowing that the higher the yields you are aiming for, the higher and more brutal the risks. But there’s a middle ground to this. Real estate investing, in this case, is preferable as it balances out the returns with the risks. That being said, real estate is the middle ground.
Commercial rental assets such as apartment complexes can appreciate rather quickly through value-adding components. Simple renovation projects on a 100-unit property, for instance, can greatly reduce vacancies and assures a healthy income stream.
Granted you bought a multifamily property in an emerging market with high employment and income growth and with the right operator, the value of the property will increase over time, hence allowing for equity growth on top of strong cash flow projections. Another advantage is the fact that real estate responds actively to inflation. Prices appreciate when everything else in the goods and services markets cost more. This would explain the high returns that real estate investors enjoy as what we can glean from this figure below showing the historical return of Bonds, Stocks, and Real Estate:
Courtesy of CCIM Institute
40 Years of Historical Returns of Stocks, Bonds
Although the real estate sector has its own fair share of risks influenced by high-interest rates and the health of the local economy. Nonetheless, compared to bonds and stocks, real estate offers a more peaceful way to grow your investments. It’s well-suited for high net-worth individuals who do not have time to monitor the volatility of the stock markets while making more money than bonds. If you consider these factors with passive real estate investments such as multifamily properties, busy high net-worth individuals end up with a winning investment.
So, find your middle ground in multifamily real estate investing today! Learn about how you can invest passively through multifamily syndication.
