If you’re just starting your investing journey, or maybe you’ve been around the block a few times and you’re looking to change your game up a bit, taking the time to research the best investing strategies will certainly put you on the right financial path. In this article, I’ll be diving into the two most popular investment vehicles – real estate and the stock market. Which method of investing or specific strategies would be best for you would all depend on your short- and long-term financial goals, your preferences, and other various factors.
What is an Investment Strategy?
Financially speaking, an investment strategy is a plan an individual utilizes that is crafted to grow their funds through their chosen investment vehicle – stocks, real estate, and so on. Risk tolerance is taken into account to determine if a low-risk, long-term investment strategy should be used, or a high-risk strategy for rapid growth potential. The investor’s reason for wanting to grow their funds, the amount of wealth they wish to produce, and when it’s needed, will all come into play to sway their decision as to which investment ideas will work best for them.
What is the Purpose of Investing Strategies?
Each person will have their own purpose, goal, or reason for their customized investing strategy. The purpose is typically to raise funds either quickly or over a period of time for things such as a nest egg for when you retire, a college tuition fund, large future purchases, emergency funds to fall back on, or to simply become financially independent to leave the 9-5 lifestyle. Basically, an investment plan is put into place to grow the funds that an investor may need at a later date.
Real Estate vs Stocks – Which Investment Vehicle is Right for You?
Over the years, I’ve implemented both real estate and stocks into various investment plans. Because of this, for me personally, I know what produces the best results. However, everyone is different, and everyone has their own preferences. With that in mind, let’s review both investing vehicles so you can make an informed decision as to which would be best to base your investing plan on.
Investing in Stocks
You may already have a stock-based investment plan and understand the concept if you started a 401k or IRA retirement account. However, for those who don’t have a full understanding of how stocks work, here is a simple and brief explanation: A stock is a security that represents ownership in a piece (share) of a company. When an investor owns shares in a company, they will have financial gains and losses that correspond to how the company performs. Individuals can also invest in a bundle of stocks for diversification with what is known as exchange-traded funds (ETF), as well as a mutual fund. You can get a full overview of what a stock is and exactly how it works by heading over to the U.S. Securities and Exchange Commission.
Common Avenues for Stock-Based Investments
There are various strategies for investing in stocks, which gives you options for putting together a personalized plan that’s right for you and your financial situation. This section will focus on two different trading strategies – the first one being more of a hands-on approach where the investor is actively involved in the investing process with a traditional brokerage account, while the other is typically a retirement account that is managed by a financial advisor/custodian.
1. Standard Brokerage Account – Short & Long-Term Investments
Individuals who would like to be involved in the buying and selling of stocks, without a financial advisor, would create a standard brokerage account. They would do this through a financial investment company such as Webull, Fidelity, or Vanguard. Investors would simply set up an account, transfer money from their bank, and start buying and selling company stocks. This can be a long- or short-term investment plan due to the fact that they can pull their money out at any time without penalty. I have personally utilized Webull and recommend them. You can take a look at the Webull special’s page to see what they are offering new clients.
If personally investing in the stock market will be your main strategy, it’s best to ensure you possess the expertise to know which specific company stocks are safe to add to your investment portfolio. Or, which stocks are worth taking a risk on because it’s believed they will yield a higher return. There are currently many establishments that report daily on which company stocks are a good buy. Plus, there are forums with expert investors willing to share some insider tips. The Buffett Indicator is also something to look into for a few clues as to how the stock market is doing overall. You should read the following article by Yahoo Finance for a general overview of how the Buffett Indicator works, if you’re not familiar with it.
Another tip that you can benefit greatly from if you buy and sell stocks, is to regularly read the Wall Street Journal. It’s packed with useful company information that can influence your stock purchase decisions.
Standard Brokerage Investment Account Details:
- Withdrawal Limitations & Fees: The investor can withdraw as much money out of their account at any time without penalty.
- No Dollar Amount Limitations: You can transfer and invest as much money as you see fit during the calendar year.
- Taxes: Investors typically claim any capital gains as taxable income. At the same time, when money is lost, you may be able to earn a tax break.
2. Traditional Retirement Accounts – Long-Term Investments
This path is viewed as the most common investment strategy when it comes to dealing in stocks. Why? Because for many generations, we have been told to get a job, take part in the company retirement plan program, and keep this investment strategy in place until we are ready to retire. This type of retirement account is normally in the form of a 401(k), traditional IRA, and Roth IRA, and relies on the condition of the stock market. Retirement plans such as these are long-term investing strategies.
In contrast to a standard brokerage account where you run the show, a custodian manages traditional retirement accounts. They will decide which stocks you will buy and sell, and they maintain your investment portfolio for you. This ends up being ideal for those who want to passively trade because they have no knowledge of the subject, or don’t want to spend the time. However, with this comes a fee for account management, as well as other various fees.
Traditional Retirement Investment Account Details:
- Withdrawal Limitations & Fees: Retirement accounts typically have early withdrawal fees that come into play when investors withdraw their funds before the designated retirement age.
- Dollar Amount Limitations: This type of account comes with contribution limits. There is a cap placed on the amount of money you can transfer into your account each year.
- Taxes: Different retirement investment accounts handle taxes in various ways. Which type of account you choose – 401k, traditional IRA, Roth IRA, and so on, will determine if you have a tax-deferred or tax-free growth account. Take a look at this article from Fidelity that covers retirement accounts and taxes for more information.
Stock Investing Strategies
There are many stock investing strategies out there to choose from, and we will cover three of the most common – Value Investing, Growth Investing, and Dollar Cost Averaging. You might choose one over the other based on your risk tolerance, along with your goals and financial situation.
1. Value Investing
Value Investing involves buying undervalued company stocks that are selling for unusually low prices. However, Value Investing is not to be confused with buying stock in no-name companies at rock-bottom prices, which might be more of a penny stock.
Warren Buffet sums it up perfectly by saying that Value Investing is “finding an outstanding company at a sensible price.”.Shares bought through the Value Investing method have turned out to be the best investments for many who have taken the time to research a company’s true value. Once the company stock gains or regains its true worth within the stock market, big gains can be achieved. Furthermore, there is less risk while using this investing strategy simply because of the low price per share. You can dive into a brief history of this investing strategy on Wikipedia’s page on Value Investing.
2. Growth Investing
In contrast to Value Investing, where a stock is bought well below its true worth, growth investors will go after company stock that is typically trading at much higher prices. The price may even seem to be set higher than a company’s current intrinsic value, with a great potential to keep growing in value at a fast pace. Growth Investing involves seeking out companies that display signs of above-average rapid growth, as seen in the company profits.
Growth stocks can be smart investments even though they are a bit risky due to the high price per share. A perfect example of a growth stock would be Amazon (AMZN). This company keeps growing, and so does its stock price. In 2015, one Amazon share was going for $290. As of today, one share goes for $3,165. So, although $290 seems like a lot, it’s worth the investment. This is because just one share brings in a profit of $2,875. If 100 shares were bought at $290 in the past, today, that would be a total gain of $287,500. So you can see the great potential of Growth Investing in this one example alone. For more examples of growth stock-worthy companies, flip through the pages of this U.S. News article that lists the 10 top growth stocks.
3. Dollar Cost Averaging Investments
This investing strategy involves setting up automatic purchases of a specific stock, with the same amount of money each time. This money will buy as many shares as the allocated amount of money can buy. For instance, if the investor allocates $500 a month to buy one specific company stock, and in one month, the stock is $100 per share, the investor buys five shares. In the next month, for various reasons, the stock price falls to $50 per share, then the investor can buy ten shares, and this pattern follows for the following months. It allows for buying the stock at all levels of pricing, which lowers the average cost per share.
This strategy of setting up an automatic stock purchase eliminates the need to “time the market” when determining the best price to move forward with buying company shares. In addition to this, Dollar Cost Averaging investments keeps investors on track in regard to their savings since they regularly transfer money into their accounts. For a more detailed explanation, along with a helpful chart, take a look at this Forbes article on Dollar-Cost Averaging.
Advantages & Disadvantages of Investing in the Stock Market
All investing strategies have their good and bad points. With that said, smart investors know the importance of evaluating the PROs and CONs of the investing methods they are thinking about pursuing. Let’s go over a few points that can steer you in the right direction as to whether or not stock-based investing strategies are right for you and your financial goals.
PROs of Investment Plans That Involve Stocks
The stock market has been around since the year 1817. Sure, it goes through its good and bad seasons, but it has proven to stand the test of time. So, it goes without saying that there are many good qualities that surround the stock market. Here are just a few:
1. Easy for Beginners to Start an Investing Strategy with Stocks
For those who choose to have an investing strategy that involves the stock market, but have no experience, you’ll be happy to know that it’s very easy to get started. Millions of people have large investment portfolios that have been in place for many years, all while they have no experience or knowledge of investing in stocks. These are the individuals who have 401k or IRA retirement plans that are managed by a financial custodian. All it really takes is signing a few forms to set the retirement account up through their employer. The rest is taken care of for them moving forward. This doesn’t apply to those who want to start investing on their own through a standard brokerage account.
2. Potential for Great Investment Gains
The main purpose of investing in stocks is to grow your money. Stocks have a chance to rise in value over time, especially with low-risk, long-term investment strategies. If done properly, this enables the investor to achieve big financial gains.
3. Simple to Diversify and Protect Your Investment Portfolio with a Broad Range of Industry Stocks
Having a diverse investment portfolio is best to protect your funds when a particular company stock or industry suddenly decreases in value. For instance, if an investor has a love for cars and decides to have mainly automotive stocks, and that industry tanks, like it has in the past, they may have lost all their money. On the other hand, if the investor would have had a more well-rounded portfolio and bought stocks in the automotive, healthcare, tech, and science sectors, then they would have been more grounded. This is very easy to accomplish when investing in stocks, especially through ETFs and mutual funds.
CONS of Investment Plans That Involve Stocks
Although investing in stocks has some good incentives, wise investors should also weigh in on the disadvantages. The information below details the most common CONs investors may experience when utilizing investment plans that involve stocks.
Before we actually dive into the CONS, I thought it would be appropriate to start this section with one of our videos that captures a few disadvantages of the stock market. Take a moment to watch it so you can get a better idea of what’s currently happening on Wall Street:
1. The Stock Market is Extremely Volatile Making it a High-Risk Investment Choice
Although there is great potential for big investment gains, the stock market is known to be highly volatile. Your funds are at the mercy of the many factors that can easily cause the stock market to crash. When this happens, whether you’re actively investing yourself, or your funds are in a 401k or IRA, your savings could be wiped out overnight. The recent pandemic caused some retirement accounts to plummet as much as 50 to 75 percent. What if someone was set to retire the same year this happened? They may have to continue to work due to a lack of funds. Things like economics, war, and politics can all sway the stock market. Basically, elements that are out of the investor’s control. For some, it’s just not worth having an investing strategy where they feel their nest egg is not safe.
2. Time-Consuming for Those with Individual Investment Brokerage Accounts
For those who have a busy lifestyle – work, family, and so on, know that this form of investing strategy can be very time-consuming. This is only the case with individual brokerage accounts where the investor is managing their own account. It does not apply to those with retirement accounts that are handled by a custodian. When you manage your own investment portfolio, to be successful, time must be spent researching each company that is of interest. It’s important to also carefully watch the stocks that are currently in your portfolio. This ensures that an eye is kept on the stock prices and how the company is doing to judge if specific stocks should be sold to avoid losing money. Additionally, it’s helpful to learn how to read financial reports and have experience monitoring the stock market in general.
3. Entire Life’s Savings is Controlled by Someone That Doesn’t Know You
Many people try to stay clear of investment strategies that involve retirement accounts that are controlled by an account rep that they have never even met. This is the case most of the time with traditional retirement accounts. How can you be 100 percent sure your financial advisor/custodian has your best interests at hand? Not to say they won’t try and do a good job with your investing account. But, in reality, your entire life’s savings is in the hands of a stranger who is managing multiple accounts all day long.
4. Starting a Stock Centered Investment Strategy Late in Life Won’t Yield the Money Needed
What if you’re older and never thought to have an investing strategy? It’s really never too late to start your investing plan, but you would need to ensure you choose the right path. If you’re starting late, investing in the stock market might not be your best bet. Why? Because starting when you’re, let’s say, 55 years old, won’t provide enough time for your stock investments to mature to the point where you can retire and live off the funds.
Are Stock Market Investing Strategies Right for You?
After reading through all that pertains to investing in the stock market, do you feel that stock-related investing strategies are best for you and your financial goals? If you’re not sure, keep reading so you can also evaluate real estate investment strategies and what they have to offer you.
Investing in Real Estate
It’s now time to evaluate real estate investing to see how it stands up to your view of the “best investing strategies.” There are a good number of ways to invest in the real estate industry, but to keep things more focused, I’ll just be covering, in detail, the real estate strategy that can generate the most wealth, which is buy-and-hold rental real estate. However, before starting, I’ll briefly touch on a few other real estate investing strategies first, so you can get a feel for what’s out there.
A Brief Overview of Various Real Estate Strategies
One form of investing in real estate that’s popular is flipping properties, which is a short-term investment strategy. Another short-term plan that’s utilized by many individuals is called real estate wholesaling. This is where a wholesaler scouts out off-market/low-cost properties for other real estate investors. The wholesaler then makes a profit off the sale for doing all the work in locating the rental property.
There is also what’s called the BRRRR Strategy for real estate investing. You can read our article to learn how it all works. It’s really a brilliant investing strategy. The BRRRR Method can be combined with the investing strategy that will be our main focus in this section – Buy & Hold Rental Real Estate.
Buy & Hold Rental Real Estate – Long-Term Investment Strategy
A buy-and-hold real estate strategy involves buying low-cost, off-market properties, where the value is increased through renovations and repairs. A property manager is often put in place to take care of everything moving forward, and a tenant rents out the property. Once the tenant is in place, the investor receives a rent check every month like clockwork. They hold on to this property with the intention of keeping it for years to come. Typically, more properties are purchased. The real estate investor then has several properties in their portfolio, with multiple streams of income rolling in.
Advantages & Disadvantages of Investing in Rental Real Estate
It’s best to weigh in on the good and bad sides of any investing plan you are interested in. With that said, let’s take a look at what buy-and-hold real estate has to offer you and what its downfalls may be:
PROs of Rental Real Estate Investment Plans
The PROs of an investing strategy are what everyone looks to when contemplating if a plan is right for them. Buy-and-hold real estate investments have some of the best advantages that can result in building great wealth. Let’s go over what the most notable benefits are:
1. Buy & Hold Properties Provide Passive Income & Steady Cash Flow
Rental real estate is a reliable way to create steady cash flow. Once a tenant signs the lease, your property will start to cash flow that very first month. If the rent amount is, let’s say, $1,200 per month, then you will receive that same amount every single month. It’s a reliable way to bulk up your retirement fund, or to just become financially independent. In addition to this, since a property manager can take care of everything, this money is considered passive income. This means that you do little to no work, and the money continues to flow in.
2. Your Investment Does Not Fall when the Stock Market Crashes
As you read earlier, the stock market is volatile and experiences steep highs and lows. It can crash when Wall Street doesn’t like the political atmosphere and then rise again weeks later. It’s considered very unstable – providing an uncertain holding place for your funds. Most retirement accounts are connected to the stock market and take significant financial hits during rough patches. On the other hand, all the many things that impact the stock market won’t affect your real estate property. Your buy-and-hold investment will continue to operate as usual, bringing in the same amount of monthly cash flow.
In fact, you can set up a retirement account where its growth depends on your real estate investment instead of the stock market. Most people don’t even know that this is possible. It all starts with buying property through a self-directed IRA.
You can also watch this video that touches on self-directed IRAs and why Wall Street doesn’t want you to know about them:
3. Real Estate Investments Allow for Incredible Tax Advantages
Having an investing strategy that involves real estate can provide you with some great tax benefits, to the point where an investor might end up owing zero. Let’s take a look at two tax advantages that pertain to real estate investing:
- Depreciation: Investors can depreciate the cost of the rental property, which is something that can’t be done by traditional homeowners. It only pertains to investment properties, or personal homes that use a portion of the property for business. Depreciation is basically a yearly income tax deduction to cover the deterioration over the lifetime of the property. To give you a better understanding, this is similar to how business owners depreciate computer equipment over time.
- Expense Deductions: Investors can take a tax deduction for the money spent on property repairs. This also applies to maintenance, management fees, property taxes, mortgage interest, advertising, and more.
Having a personal accountant who understands the tax laws as they apply to real estate is important. I use Tom Wheelwright of WealthAbility. He comes highly recommended.
4. When the Economy Falters Your Rental Property Will Stand Strong
Typically, when the economy is taking a dive, the stock market is drastically in line with it. If the economy and businesses throughout are doing poorly, then most likely, so is the stock market. This means that stock investments can decline in value. But when the economy crashes, your buy-and-hold real estate investment stays safe. Why? Because no matter what’s going on, everyone still needs a place to live.
5. No Experience is needed When Starting Your Real Estate Investing Strategy
For individuals who have no experience in real estate, beginning your investing journey is super simple. This is an attractive benefit for those who are new to this industry. It’s true, there are many moving parts to a real estate investment deal that can be deemed complicated. However, that doesn’t matter because you can just work with a full-service real estate company such as SDIRA Wealth. They can take care of every single detail for you. This includes finding a profitable off-market property, and placing a property manager, and also finding a reliable tenant for you.
This is a big advantage since you can get set up quickly and then reap the benefits of your investment immediately. You don’t have to wait years to achieve big financial gains, your rental income starts on day one. When a real estate company takes care of everything for you, it’s called a turnkey investment.
CONS of Rental Real Estate Investment Plans
Although buy-and-hold rental real estate has some fantastic benefits to offer investors, it’s best to be informed on what some may feel are the downsides. For that reason, I’m providing these two points that provide a few details on the possible CONs of this investment vehicle.
1. Inexperienced Investors Can Make Costly Mistakes
When new investors buy their first rental property, and they choose not to work with a full-service real estate company, there is much room for error. This includes buying at a price that is too high, which causes the ROI to lower. Additionally, a common mistake that beginners make is investing too much into rehabbing. Instead of only repairing and renovating what is necessary, they may focus too much on making the rental look top-notch instead of just rent-ready. When it comes to looking for profitable properties, you can utilize a tool that I’ve used for years. It’s reliable software by DealCheck that analyzes the profitability of rental real estate. I recommend it if you’re not using a full-service investment company.
Since someone who is new to the real estate industry may not have a network of contractors yet, they may end up working with one that does low-quality work at high prices. Working with the wrong contractors can also delay the completion of the project. When this happens, it causes rental income to start flowing in at a much later date. You can avoid this when you have a full-service real estate company overseeing the project for you.
Watch our interview with Don, a real estate investor who let SDIRA Wealth get him set up with a cash flowing rental property. It will give you a real insider’s view on investing in real estate.
2. Some Investors May Not Want to Deal with Tenants
Owning a rental property comes with the responsibility of ensuring your tenants are taken care of. When a heater breaks at 2 am during winter, it has to be taken care of immediately. Or, when your tenant moves out, you would need to find another one quickly to avoid losing monthly income.
So, for those investors who don’t want to deal with examples such as these, and also don’t want to have a property manager, this type of investment might not work out so well. But, having a property manager, who is typically only paid 10% of the monthly rent, will eliminate this CON. Experienced property managers take care of everything moving forward after your tenant signs the lease. This includes collecting rent, taking care of tenant issues, and the like. Furthermore, having an efficient property manager can also raise your ROI.
Real Estate Based Articles by Morris Invest
If you’d like to research real estate investing, we have some great articles on the topic. Plus, it’s an excellent idea to research as much as possible before making a decision as to which investment vehicle and strategy is right for you.
If finding the money to invest in real estate is a concern, review our page that details Fund & Grow. You will learn how you can obtain unsecured business cards to fund your next deal.
Choose Investing Strategies with the End Goal in Mind
Most likely, your end goal is to make money to be financially independent, whether it’s for your retirement years, or in the near future. With that in mind, when deciding which investment strategy is best for you, try to focus on which path will meet your specific financial goals. This means taking into account the risk involved, the projected ROI, investing growth rate, and so on. Real estate and company stocks are the most popular forms of investments – does one fall in place with being able to meet your financial expectations? We hope that this article has placed you on one path or the other so you can start investing for your future.
If you feel that investing in real estate can bring you greater returns, as well as the passive income that you have been hoping for, feel free to schedule a call with our friends at SDIRA Wealth. They can get you set up with a cash flowing new construction rental property, a property manager, and a tenant, so you’ll have a rent check in your hands the very first month. It’s what SDIRA Wealth does on a daily basis for all their clients.
For those interested in real estate, grab a cup of coffee and watch this great video. It goes into detail on figuring out if real estate investing is right for you and how to get started:
