Before we get back to specific thinking errors, let’s start with some basics: First, should we own equity or debt? In other words, should we be investors or lenders? It depends on if you want to build real wealth. I will assume you do.
The only way to grow wealth in real dollars is to own equity. All or almost all the equity in the world resides in only two general asset classes:
- Stocks
- Real Estate
Each of these are worth (very loosely) about 30 Trillion dollars each. What other equity is there in addition to these two? Hint: almost none. Ownership in either of these is considered equity. Simply put, you have real ownership of something.
There is one other main way to use your dollars. That would be called debt.
Debt is formed any time we rent our money out to someone else. This would include all types of bonds. The bond market is larger than the Stock market. It is huge! When you buy a bond, you are loaning your money to the government or a corporation for a set interest rate. You have no chance of your principal increasing when you buy a bond.
So, owning fixed income doesn’t put you in debt, it puts the loaner in debt. This would also include all bank deposits, notes, CD’s, etc. Dollars allocated in these accounts will never pay you more than simple interest. That may be fine for an older wealthy person. They may make plenty in interest without the fluctuations of the market if they have enough principal.
But if you are trying to build wealth you will only tread water in bonds and banks. Inflation has run about 3% over the long haul. Tying up your money in bonds may make a bit, but you have to pay tax on the interest. You are just breaking even. So…the first law of investing must be:
Be an owner not a loaner!