The solution is clear: you need to make your assets generate income that covers the annual inflation.
Master this skill, and you will become the master of your life and a prosperous individual. Fail to learn it, and you’ll remain as poor as the majority of people on this planet.
We live in a world of competitive competition, just like millions of years ago. There are those who are more adaptable and successful, and there are those who are less so. The difference now is that this is measured not in muscles and endurance but in the ability to think and create profit. The majority of people around you don’t know, don’t have the skills, and don’t want to compete, just like it was millions of years ago. A minority strives, desires, and competes. That’s how the world works.
Those who try have a chance to surpass those who do nothing. Investing is essentially competing with the people around you, because you are doing something to outperform them. You manage your resources, lend them (investing is essentially lending to other companies and governments) in order to gain even more resources (money, assets, income, etc.).
Okay, I agree. How to do it technically?
Let’s say you’ve already mastered setting aside a portion of your earnings every month (typically recommended to save no less than 10% of your salary). Now, we’re in the position of figuring out WHERE TO PUT THESE FUNDS, aiming to generate new money. Here are the primary options:
- Bank Savings: You entrust your money to a bank, and it provides you with modest interest. For U.S. dollars, this is around 2% annually. This is similar to depositing money in a savings account.Advantages: Convenient, simple, and straightforward. It doesn’t require in-depth study. It’s secure due to government insurance up to a certain amount. There’s guaranteed profitability. Small amounts can be invested.
Drawbacks: The returns are very low, often close to or slightly above the annual inflation rate. It’s not suitable for creating new wealth, mainly for preserving existing funds. In times of crisis, the central bank might limit withdrawals (the likelihood is low, but it has occurred before).
Conclusion: This approach can function as a temporary “safe harbor” to accumulate a desired sum before investing in more lucrative opportunities.
- Peer-to-Peer Lending (P2P): Privately, you lend your money to individuals at an interest rate. Returns can be high and might even reach 1% per day.Advantages: Very high returns. Those consistently engaged can double their money in a year (200% annualized).
Drawbacks: Often unregulated and might not comply with tax regulations. Adequate collateral or security must be considered. There’s a risk of non-repayment or legal repercussions.
Conclusion: This method is highly profitable but extremely risky. As a one-time endeavor under favorable conditions (with trustworthy borrowers and sufficient collateral), it can be utilized. Consistent usage isn’t recommended.
- Stock Market: You purchase securities (stocks, bonds, ETFs) of companies or governments. Returns vary from 2% to 20% and even higher.Advantages: Legitimate and regulated. Easily accessible (you can buy stocks with as little as $1,000). High liquidity (securities can be sold quickly). Wide range of options (from conservative/safe to high-return/risky).
Drawbacks: The securities market is influenced by the economy’s state. During crises, stocks and ETFs lose value. Crises (market crashes) usually happen around every 10 years. Knowledge is required to select the right securities.
Conclusion: The securities market (stocks, bonds) is a key wealth-building tool. Economic growth drives up the value of stocks and bonds, resulting in profits for investors.
- Investment-Linked Insurance: You entrust your funds to an Investment-Linked Insurance (ILI) company. They manage your money, and you receive returns either in the case of an insurance event (injury, illness, etc.) or at the end of the contract term (5-10-15-20 years, etc.). The company invests your money, aiming to increase it. The majority is invested in safe instruments (bonds, bank deposits), with a smaller portion in riskier/high-yield instruments (stocks, ICOs, etc.).Pros: Easy entry. No need for personal research (professionals handle your money). If an insurance event occurs, you receive funds for medical treatment (up to 200-300% of the invested amount). Your money doesn’t stay idle; it’s invested. Tax deductions are available (for contracts of 5 years or more, the government reimburses 13%). Favorable tax rates (taxed only on income exceeding the central bank’s refinancing rate).
Cons: No 1.4 million insurance coverage as with banks. There’s a penalty for early withdrawal (e.g., taking out funds within the first year might result in a 50% penalty). Net profit from risky investments is often split (the company might claim up to 50% of the profit).
Conclusion: This investment suits those who are very passive or those who are willing to risk their health. While it involves management, the returns are questionable, and if they do materialize, the company will take a substantial share.
Managed Investments: You give your money to a management company that invests it in lucrative instruments (stocks, bonds, precious metals, indices, etc.) to grow your funds.
Pros: Everything is managed for you (no need to delve into details). Legal and regulated (government oversees company operations). Low-cost entry options are available (e.g., through mutual funds).
Cons: The management company charges substantial fees (2-3-4%) for “managing” your money annually (even if there’s no profit, fees are deducted). If actual profit is generated, you’ll pay an additional 15-20% or more. Some funds have calendar limits on selling shares (meaning you can’t access your funds anytime).
Conclusion: This approach is suitable for the very passive during market growth (e.g., in the 2000s, mutual funds provided 20-40% annual returns). Generally, the company benefits regardless of returns, while you might not (fees + profit share).
Real Estate: You purchase residential or commercial property and rent it out.
Pros: Real estate is relatively resilient against inflation (a Moscow apartment near a metro station won’t depreciate by 90% in 10 years like currency or stocks). This investment is conservative and survives crises.
Cons: Expensive entry (real estate comes with a high cost). Low yield rates (return on investment in residential real estate = 20-30 years, commercial real estate = 7-15 years). Requires ongoing management (tenant turnover, repairs, depreciation).
Conclusion: Real estate investment demands skill. However, it’s secure and resilient against inflation. With sufficient funds, allocating some to real estate makes sense.
Precious Metals: You purchase bank-grade ingots of precious metals (Gold or Silver) to protect funds against inflation. These ingots are easily sold.
Pros: Ideal for preserving value during crises (when the currency drops, precious metals rise). High liquidity (bank-grade ingots are easily traded in banks).
Cons: In some countries, you need to pay VAT (e.g., 20% in Russia) when buying ingots. Storage is a concern (bank vaults, safes, etc.). In peaceful times, precious metals might depreciate.
Conclusion: This option is great during crises or economic instability. During normal times, it’s suitable for the passive, especially in countries with no VAT on precious metals.
Cryptocurrencies: You purchase decentralized electronic currencies like Bitcoin. This is a novel asset class with high risks and returns. Five years ago, Wikipedia deleted an article on Bitcoin, considering it a financial pyramid. Now, Wikipedia accepts Bitcoin payments.
Pros: Astronomical returns not seen in other assets (100-1000% annualized returns are possible). Governments and taxes struggle to track these funds (a matter of time).
Cons: Very high risks (most cryptocurrencies that existed 3-4 years ago are dead, leading to lost investments). Extremely high volatility (Bitcoin’s value was $20,000 at the end of 2017, dropping to $4,000 a year later). Technical knowledge is needed (how to buy, store, protect, etc.). Weak regulation and laws lead to fraud and deception.
Conclusion: Cryptocurrencies aren’t suitable as a primary investment due to their high risks. However, their high returns shouldn’t be ignored. Allocating a portion of income (5-10%) to this asset makes sense. A significant part could go into Bitcoin.
It’s crucial to remember that every investment decision should be meticulously considered based on your financial goals, risk tolerance, investment horizon, and market conditions. It’s highly recommended to consult a financial advisor before making any investment choices.
What is the best thing about this?
This depends on your financial capabilities and risk tolerance. Some prefer higher risks, while others prefer lower risks. Depending on this, you should choose different investment tools.
Remember, the biggest mistake made by novice investors is the lack of diversification!!! Never invest all your money in a single asset. The more instruments you use, the better. The more projects within one instrument you utilize, the better.
Prefer a calm investment approach? Great, buy bonds (government bonds, corporate bonds), and precious metal ingots (gold, silver, etc.). Keep some money in the bank and allocate a portion to investment-linked insurance.
Prefer higher returns? No problem. Invest in stocks of government and private companies, market indices (ETFs), cryptocurrencies, and more.
The core idea is to have a variety of tools and companies. Some in bonds, some in stocks, some in precious metals, some in cryptocurrencies, and so on. When something goes down, something else goes up. For instance, if the stock market starts to plummet, gold tends to rise.
There’s no single best solution. There are numerous solutions for various situations and risks. Overall, I recommend paying attention to investing in the STOCK MARKET (SECURITIES) because there are options for every taste and budget (from low-risk bonds to high-risk stocks). This market is regulated by the government and offers opportunities to benefit from favorable taxation.
The second important direction is REAL ESTATE, PRECIOUS METALS, and CRYPTOCURRENCIES. Both of these directions depend on YOU, not intermediaries (mutual funds, investment-linked insurance, management companies, etc.).