Types of Assets
Learn about the four general types of assets: business, real estate, commodities, and paper assets. It is important to learn about the pros and cons of each, find out which will work best for you, and which ones you need to learn more about. If you want to become financially free, always learn before you leap. The determinant factor to financial freedom is in your education. Another asset, at least in my eyes, that most people overlook is their environment/relationships.
Asset Type 1: Business
For the purpose of this blog, there are two general types of businesses: small businesses and big businesses. Small businesses are those where the owner has to play an active part in the day-by-day operations of the business. Big businesses are those where the owners create systems that can be managed by others. To have financial freedom, you need to create big businesses. Examples of people who have created big businesses are Bill Gates, Steve Jobs, Richard Branson, Jeff Bezos, and Marcus Lemonis. Marcus has a great show called The Profit, where he applies and explains the three components that drive the success of big businesses: people, product, and process.
Asset Type 2: Real Estate
Real estate is property comprised of land and the buildings on it, as well as the natural resources of the land. Real estate can be grouped into three broad categories based on its use: residential, commercial and industrial. Examples of residential real estate include undeveloped land, houses, condominiums and town houses; examples of commercial real estate are office buildings, warehouses and retail store buildings; and examples of industrial real estate include factories, mines and farms.
Investment real estate is real estate that generates passive income or is otherwise intended for investment purposes rather than as a primary residence. It is common for investors to own multiple pieces of real estate, one of which serves as a primary residence, while the others are used to generate rental income and profits through price appreciation. The tax implications and debt management for investment real estate are often different than those for residential real estate. Examples of people who have been successful in real estate are Donald Trump and Robert Kiyosaki.
Asset Type 3: Commodities
Commodity drives almost everything around us and can be looked at as primary wealth. Gold in the ground, oil in the ground, fish in the sea, the oranges on the trees; these are all commodities.
Asset Type 4: Paper Assets
Paper assets are pieces of paper that define ownership of an asset. Classic examples of paper assets are stocks, currencies, bonds, money market accounts, and similar types of investments. For paper assets to have a tangible value, there must be a working financial system (for example, a business) in order to back them up and exchange them. In the cases where a financial system (the business) collapses, paper assets commonly sharply decline along with it.
Getting started in paper assets is very easy. Anyone today can go online and buy or sell a share of stock. Deciding what and when to buy and sell is where it gets tricky. For those reasons, I’ll spend a good amount of time talking about paper assets (scroll down to the bonus asset if paper asset doesn’t interest you).
In paper assets, you will hear the word derivatives quite often. Think of a share of stock as a derivative of the company that issues it. A stock option, such as a put or a call, is a derivative of a stock.
One adviser’s two rules for investing in stocks are:
- If you don’t understand how the company makes money, then don’t invest in that company.
- If it looks too good to be true, then it probably is.
Pros of Paper Assets
Very liquid – Paper assets are quick to get into, and quick to get out of.
Easy entry – It does not take a lot of time or effort to begin investing in stocks, bonds, etc. (However, you still have to do your homework.)
Cash flow – Stocks that pay dividends can provide long-term cash flow. There are other paper vehicles that will deliver cash flow if you learn the strategy.
Tax advantages – The gains, or profits, for paper assets held longer than a year are taxed at the lower long-term capital-gains rates. Dividends are taxed at the lower long-term capital-gains rates as well.
Home-based business – Include your children in what you are investing in. They can learn along with you!
Cons of Paper Assets
No control – You have no control over how the company makes money, spends money, or manages its debts and liabilities. (Unless, of course, it’s your company that is offering shares to the public.)
Volatility – Stock prices can rise and fall dramatically, especially in uncertain economic times.
No leverage – For the average investor, they must pay 100% to own the asset. They cannot borrow money to purchase a mutual fund or shares of stock.
High fees and commissions – High fees and commissions are charged on the majority of trades, whether you are buying or selling.
Bonus Asset Type: Environment / relationships
There are two variables that lead to different outcomes and results in life, positive ones and negative ones. The first one is your character, together with your personality traits, behavioral patterns, level of awareness, quality of decision-making, and so on. The second one is your environment. To a big extent, you are a product of your environment. Different types of environments bring different parts of your character to life. So an important part of becoming financially free is also dealing with your environment.
Where you currently are = Your starting point + Your character + Your environment
It has been seen over and over again. A weak character in a strong environment, with lots of support and positive role models, starts to flourish. On the other hand, the strongest and brightest character in a bad environment doesn’t flourish as expected.
The environment around you is leading you to a certain kind of outcomes, because it influences your decisions and which part of your character gets emphasized. So it makes sense to deal with the environment you operate in as part of continuous improvement and growth. You have the power to change it to a certain extent. Much like you are a product of your environment, so is the environment a product of you.
Your environment can bring out the best or the worst in you.
When I talk about the environment you operate in, I especially have the following elements in mind:
Your key relationships – spouse, family, friends, boss, coworkers, mentor
PESTLE factors – political, economic, social, technological, legal, environmental factors
General market trends – financial markets, job markets etc.
Your company culture and your work space
Your family culture and your home
Other elements (religion, infrastructure, infostructure)
These are all the things that extensively influence your spirit, your behavior, your potential, what you can achieve in life, how happy you are and the general quality of life. You might not realize how much you internalize some of the culture around you.
You become who you spend the most time with.
“Environments inspire you, or they drain you. Pick them wisely.”