The Best Investments For Financial Freedom
I am often asked about what the best investments are for people who are looking to achieve Financial Independence. I think people assume that my answer will be to go looking for risky tech start-ups or Bitcoin like fads to invest in, but they couldn’t be more wrong.
I believe that the best investments to help you on your way to Financial Freedom are perhaps some of the oldest investments in the book. Namely the stock market and property investing.
Although these investments might sound a little bit ‘boring’ to some, they have stood the test of time because they work and they almost always work, unlike the latest ‘fad’ investment (cryptocurrency, traded endowment policies, risky tech start-ups etc) which almost always don’t work.
I would much rather invest in what has always worked rather than what is working now!
Stockmarket Investing
Many people are put off by stock market investing. It can be hard to understand and complicated, but it doesn’t need to be this way.
If you are set on achieving Financial Independence, then you only need a single type of investment to get you there. That is a globally diverse share portfolio. Even that sounds a little complicated and risky, but it really isn’t.
You see, the global stock market is made up of thousands of the worlds best companies, filled with the world’s smartest and most innovative people.
Although the global stock market does go through periods when it falls in value. These periods are temporary and short lived – usually lasting less than 1 ½ years in total.
The global stock market always recovers from these periods of loss and when it does, it tends to go on to grow even higher than it was before.
The mistake many people make when investing in the stock market for the first time is that think that they have what it takes to ‘beat’ the market.
They try and pick the stock that is going to be the next big thing, rather than settle for the (rather impressive) average returns that the market produces.
This strategy is almost certainly doomed to failure.
For starters, if you are investing for the first time, what makes you think that you will do better than the scores of experts, analysts, traders and professionals who are paid some serious money to invest professionally, and even most of them underperform the market on average.
Selecting individual shares means that you are very likely to underperform the market overall in the long term and you are also increasing your risk quite substantially.
If you only buy 5 shares and one of those companies goes bust, you have potentially lost 20% of your investment.
If you invest in one of the new breed of global stock market trackers (more on what that means in a moment) then you are investing in 0000’s of companies, meaning if one goes bust, it’s no big deal.
So what exactly am I talking about when I say ‘global stock market trackers’?
Well, put simply, a ‘global stock market tracker’ is a single investment fund, that you can buy from a single investment provider which in turn tracks the performance of pretty much the whole global stock market.
You don’t need to know much more at this point if you are just getting started.
The main point to bear in mind is that the global stock market is likely to deliver returns that are far in excess of cash. This is super important for your financial freedom because higher returns not only mean more money for you this year, but more money to earn you money next year.
The 8th Wonder Of The World
This is the miracle of compound interest, something that has been described as the 8th wonder of the world.
Let’s say you have $100 to invest and you can choose between investing in a cash savings account paying 2% and an investment portfolio earning 7% per year on average.
At the end of year one you would have $102 in the cash account and $107 in the investment. A difference of $5 – no big deal you might think and, in isolation, you would be right.
But, it is what happens in the years that follow that is like magic, because that $5 extra you earned in year 1, can now earn 7% in year 2 and so on.
After 10 years, the savings account earning 2% would be worth roughly $122, where as the investment would be worth nearly $201 – a whole $79 more!
This is the magic of compounding – interest earning interest – and the reason why the stock market is one of, if not the best wealth building tools we have available.
And the best news is that you can now access pretty much the whole global stock market with a single fund from a single provider. That gives you the ability to invest in thousands of the worlds best companies with very little effort and stress and no fear of ‘getting it wrong’.
If you invest in the global stock market, you will receive the average returns from the global stock market.
Now getting ‘average’ returns doesn’t sound very good until you realise that the global stock market returned an average of well over 10% per annum over the past 20 years, and that includes the tough times during the financial crisis.
It has been reported that millennials have lost faith in the stock market since the financial crisis and if that is true, I think it is a real shame because to miss out on the stock market is to miss out on quite possibly the oldest and most reliable wealth building tool of all.
If you would like to learn more about making your first investment – head on over to the following post.
Related Article: How To Make Your First Investment
The only other type of investment that I would consider for my own financial freedom (or that of my students) is property investing.
Property Investing
If the stock market has anything that can compete with it for returns, reliability or longevity, then it would be property investing.
Property investing has a special allure to it because it involves investing in something tangible.
We all love things that we can look at, touch and feel (and decorate) and so property investing has rightly taken its place alongside the stock market as a very popular and reliable wealth building tool.
Unlike stock market investing, it is very difficult to make assumptions or generalisations about property investing.
The returns (or losses) you make will depend on the type of property you choose to invest in, the area it is in and all sorts of other variables that are too many to mention here.
As such, it is more difficult to give advice when it comes to property investing as each property is so different. Even 2 houses right next to each other can have very different features and characteristics.
When I look at my clients in the financial planning business, almost all of them have built up their wealth using the stock market, property or a combination of both.
These two things are by a massive margin the main source of passive income for most of my wealthy clients and for good reason – they work.
Now investing in property can mean different things to different people, but most will picture ‘buy to let’ property. Basically this means buying a house or a flat and then renting it to someone else.
You benefit from the rental income that is produced and also any uplift in value in the property over time.
Property has made a lot of people very wealthy. In the UK especially, we seems to have an infatuation with property and seem to believe that it will go up in value indefinitely.
Now over time property in the UK (and indeed in many other countries) has enjoyed impressive growth. However, as with all major markets, the property market can and does often go through downturns.
In the financial crisis of 2007-2009, UK property prices fell by around 30%. Although property has generally gone up in value over time (and impressively so), it is not immune from falls in value as some people would have you believe.
A lot of people ask me which is better – the stock market or property investments. My answer is usually ‘it depends’.
Property is a very different animal than the stock market, however it can be a very powerful wealth building tool.
Looking at the returns of the whole stock market and property market over time, the stock market generally delivers a slightly higher return on average, but this does not tell the whole story.
When making property investments, you have far more influence over the process.
Which property will you buy? Will you do any work to it? What area is it is? Is the location likely to experience a boom? All of these things and much more will determine your success in the property investment game.
If you would like to know more about property investing, I recommend you check out this excellent article from Property Geek to give you a guide to all of the options.
So there you have it. The two perfect investments to get you on the path to financial freedom.
Are they new and exciting? No.
Are they the ‘next big thing’? No.
Are they going to make you rich overnight? No.
Do they work? Yes.
Are they reliable? Yes.
Do they make people wealthy over the long term? Yes
Enough said!
If you would like to learn more about how to get on the path to financial freedom, sign up for my free email course below.