The Power of Investing

Join me as we delve into the fundamentals and strategic nuances of investing. Whether you're a novice seeking clarity on investment basics or an experienced investor aiming to refine your strategy, this episode is tailored for you.

In this discussion, we'll cover:

• Understanding Investments: I'll define what investment truly means—allocating resources like time, energy, or money to achieve a desirable return on investment (ROI).
• Types of Investments: Explore various investment vehicles from traditional stocks and bonds to real estate and more exotic options like startup funding.
• Risk vs. Reward: I'll explain the inverse relationship between risk and potential returns, helping you navigate the complexities of different investment types.
• Investment Timeframes: Discuss the importance of considering your time commitment and energy alongside financial input.
• Strategic Diversification: Learn about diversifying your investment portfolio to manage risk effectively and increase potential gains.
• Compounding Interest: Understand the powerful effect of compounding interest and how small, consistent investments can grow significantly over time.

Let's break down investment strategies to enhance your financial literacy and empower you to make informed decisions that align with your financial goals. Whether you're planning for retirement or looking to expand your investment horizons, this episode will provide valuable insights into creating a robust investment portfolio.

Tune in to discover how to harness the power of investing to maximize your financial potential and secure your future. Let's demystify the world of investments together and set the stage for financial success.

Introduction to The Power of Investing (00:10)
Types of Investments (01:35)
Time Investment in Real Estate (04:57)
Gradual Entry into Riskier Investments (07:02)
The Power of Compounding Interest (09:39)
Diversification Strategy (11:58)
Liquidity and Investment Planning (14:00)
Summary & Conclusion (18:10) 

Transcript

0:10

Welcome to the end game podcast, season two, where I bet you didn't know what you didn't know. I'm Dr Ryan Wakim, successful entrepreneur and your end game coach. Sit back, relax, and tune into today's episode, the power of investing. So today's topic is the power of investing, and we want to break this down into some of the basics. And then maybe a little bit further into what does all of it mean? So first and foremost, defining investment. So investment would be anything that you would dump either time or energy or money into with the hopes of achieving what would be considered a return on investment or an ROI. That would be more than you put into it. Simple math. If you put 100 into an investment and you got after a year, you got 110 back, that would be a 10 percent return on investment. You know, in terms of what you invested in, and I said at the top of this investment can mean financially, you put 100 in you, you know, the investment did X performance, 10 percent performance, you got 110 out after 12 months. So there's the financial impact of that. And then, as I said, when you think about investments or being an investor, you also should be thinking about what is your. Time commitment or your energy commitment toward that investment. And we'll break that down a bit more as part of today's talking points. So as you think about investment, investment can be a number of things. There's the, the more typical asset investment like mutual funds or. Bonds, or, you know, the traditional stock market or ETFs, there's investment in real estate projects. And that can get as kind of simple as putting money into a, a second home or a, an Airbnb rental all the way through to, you know, many multi units. There's strategies around taxes with real estate investments, both on how you depreciate that investment and how you could sell that investment and turn it into a larger investment through what's called a 1031 exchange. And then there's investments that are, you know, tend to be on the riskier side, which are investing in a startup as an angel investor, or as a friends and family into a new business or into, An existing business looking to expand and might need more capital where you would be investing and getting actual equity in that business you know, some percentage of ownership. And then again, over time, that could turn into some sort of multiple on your investment or some sort of percentage return on investment. And as I said, that, you know, that there's kind of different chunks or different buckets really do break down into, you know, parlays very well into the different risks of investment. So if you think about something that is. Very minimal risk that would be like a CD or some sort of bond or some sort of mutual fund where they're backed by the FDIC. There's if it were to or really there's almost zero chance that you lose money. In fact, most of those instances, there's no chance you would lose money and there's a guarantee return on investment. Those returns, when you think about our allies, there's this inverse relationship oftentimes between that, which is of risk. And that is in that, which is the reward, meaning your reward on something like a CD is traditionally relatively small, where you might get a CD that will pay you out. Single digit percentages, a couple of percent, 3%, 4 percent to keep your money in the bank without being able to touch it for X amount of time. So your chance, you will not lose money on that investment. However, your upside is very small. So your risk is almost nothing and your reward is not almost nothing, but, but small. The flip side of that is, you know, investing again in a startup company where you might invest, you know, 10, 000 and over the course of maybe 5 years, that 10, 000 could turn into a million. Thank you. You know, you could have truly multiples on multiples on multiples, or the 10, 000 could turn into 50, 000. That would be what's called a five times cash on cash return. Meaning you put 10, 000 in, you got 50, 000 back, you made five times multiple, not 5%. You made five times the amount of money over X amount of years or timeline. So, as I said, there's generally an inverse relationship between that of what is risky and that is, and that of what you can get as a reward or oftentimes we'll see as a reward. Real estate investments tend to be a little more risky, or they often, or they definitely are riskier than some sort of mutual fund or bond or CD. But they are definitely can appreciate or create a higher return on investment than a few percentage points over the course of a year, for instance, and then there's, there's this idea of again, your time into the investment. So, especially if you're going to invest in, let's say, real estate, and you're going to be the one to be the general contractor on a real estate flip. Where you're going to be the general manager on renting out this real estate investment and the units in the investment. So not only do you need to be thinking about what is your monetary return on investment? So is that 10 percent is that a five times cash on cash or five times multiple, but also what is your time worth and how much time are you putting into that going into the riskier investments like startups? Oftentimes you might do a little bit of both. You might put in money as kind of a co investor. So you're saying, Hey, I believe in what you're doing. Therefore, I'm going to invest in this idea. And you might get an exchange for that. Either that money turns into equity, meaning I'm going to give you 10, 000. And for that, I get 10 percent of your business. Or there's something called a convertible note. Meaning you might say, I'm going to give you 10, 000. You're going to pay me back the 10, 000 interest free, but in exchange for that, you're going to give me 5 percent of your business. So it's more of a loan that converts into ownership or even more traditional convertible notice. I'll give you 10, 000. There's an interest rate on that. And if you don't pay it off or choose to at some point exercise conversion into equity, Then that 10, 000 plus the interest would equal this percent of your, of your business. And then finally, there's just truly investment that is purely sweat equity, meaning you are giving your expertise, you're giving your energy, you're giving your time, which has a value. You've talked a lot about the, the time value dynamics on this podcast, but where you're giving your time. Experience energy in exchange for a percent equity where you don't actually put any money in. So rather than here's 10, 000 and pay back 5, 000 and convert the other 5, 000 into 5%, it's here's 0. You will get this amount of my time, energy and expertise. And for that, you owe me 5%. So again, investment strategies can be really basic, like putting your money into a mutual fund or a CD. Or it can get really complicated, like a convertible note into a startup business as a, as a friends and family or angel investor. And so there's, there's a wide variety of things you can do. I think probably most important of all of it is that you first, you know, dip your toe in, I would never recommend you that your first kind of step into investing is to go give a hundred thousand dollars to a startup, right? You should understand the concepts and the returns and what does it mean? You know, what does it mean to be a. A managing partner in a, in a business or a limited partner in a, a REIT or some sort of real estate investment. So there's a lot of terminology. There's a lot of kind of ways in which you can sit in an investment and you should really work your way into the riskier stuff over time and a lot. And along those lines, what's really important in investing in any investment, whether you're just investing in stocks, even with investing in stocks, you generally don't invest. You know, you don't kind of put all your chips on one, all your eggs in one basket or all your chips on black, you would invest in a portfolio of stocks, right? So if you're, if you're simply trying to kind of dip your toe into investing beyond something guaranteed, like a CD, if you're going to do stocks. A stock investment, you would want to do that in a way that is spread out. In other words, you'd want to do that where you're diversifying your portfolio and diversification of portfolio can be true within an investment or can be true and will be true among all of your investments. So in the stocks, you don't want to just put all your money into a stock. And even if you're going to do that, you want to buy that stock slowly over time so that you're getting in at different levels. You're not putting all your chips on one stock. This stock, this date, this price, et cetera. So you want to diversify your investment, even within the same buckets of investing. You want to diversify your investment. And then as you understand investing, and as you get more capability to invest and you have some wins, then you might start dipping your toe into the riskier items like real estate and then getting into the riskiest stuff, like startups, angel investing. Et cetera. So you should kind of work your way into the different investment types and start off with the simple stuff. Use your earnings, your winnings, or you know, take X amount of money, invest it in some stocks, generate some returns. Then take your, you know, the margin which you made on that, and start using that to diversify into other investments. And so that's another really important way that you might wanna consider how you. Grow in your investment strategy over time. Finally, I think it's really important to point out this idea of compounding interest, and we've talked about this in another podcast before. And that is this there's a very kind of, well, there's a factual math, mathematically accurate depiction of something called compounding interest. And I'll give you an example of that. And this is always kind of mind blowing initially, but if you were to invest 200 a month into kind of a traditional stock market, even like an IRA, something with a. 5 or 6 percent annual interest rate. If you were to invest 200 a month into a 6 percent interest rate or 6 percent return on investment annualized interest rate asset, and you were to do that monthly for the quarter from when you're 25. You will have invested a little under 100, 000, 96, 000 to be exact, 200 a month for 40 years from 25 to 65. However, your account at that time at 6 percent annualized interest compounding will actually be closer to 400, 000. So you will have put in 96, 000 or 100, 000. You will be able to get out after 40 years, a four times cash on cash return. Right. So if you just put 200 a month at 6 percent interest over the course of 40 years, your 100, 000 becomes 400, 000. And that is a classic example of compounding interest. And if you were to break it down simpler than that, think about the 100 example earlier, if you put 100 in. And you're going to have a 10 percent return on investment after a year, you would have 110 in your account at the end of that year. Well, if you were to leave that money in there and keep letting it accrue 10 percent interest year on year, by on year two, it would actually be 10 percent on 110, not on 100. So, you know, that would be 11. So now you have 221 in your account and so on and so on and so on. That's not including any more money into it. That's simply just what's in there today. As you add to it, you're just exponentially raising that long term investment value. So this idea of. Small gains over a long period of time in any kind of market or any kind of investment can end up becoming very large gains on the back end. So that is the principle of compounding interest. It is incredibly powerful. It's something you, you know, the earlier the better, right? So if you begin investing at the age of 20, as compared to the age of 40, your ability to kind of compound by the time you get to retirement is notable, right? Because we only all live a certain amount of time. And usually you want to be able to tap into retirement when you are supposed to be retiring, which is that social security age, 65 to 70, depending on where you are in that lifespan today. And so, you know, time in the market is, is more important than time on the market. Right? So understanding the stocks and getting in the nitty gritty. It's good, especially if you're going to be a day trader, but. Ultimately, if you just put a little bit of money in every single month, that little bit becomes a lot of it over time. And again, you end up with a four times cash on cash investment as compared to a 4 percent return on investment. So again, thinking about diversification of your portfolio. So that can be true, as I said, within the same class of investment, the same asset investment classes. So stocks and bonds and ETFs versus real estate versus, again, the riskier items like angel investing and friends and family and startups and in business investing, right, or actually getting equity in. Some sort of organization. Other thing you want to be thinking about when you're thinking about investment is not just the money you have to put into the investment, but what money do you need to get out of the investment? So some people will put money in again, going back to the compounding interest. That should be, you know, kind of your piggy bank money, right? So 200 a month over the course of 40 years, that needs to be that's an automatic, right? That is not you don't need that 200 to live on. That is something that you're. You're putting away as part of your own personal budget, which by the way before you ever start investing, you should develop your own personal budget, money in versus money out. What do you need to survive? What do you need to live your lifestyle? All of those things are things you need to get really concrete on as part of your planning. But once you've developed your own personal budget and kind of figured out what you can do from an investing perspective, the compounding interest piece is the easy stuff. That is the, Piggybank rainy day fund that is, you put it in, you expect to never get it back out. You're not going to touch it. That goes back to something else with regard to, you know, another concept I should say of investing, which is not just diversification within different asset classes. But there's this other idea of liquidity or how liquid is that investment. So there's both the risk reward profile of an investment, but there's also the liquidity versus illiquidity of an investment, meaning can you liquidate that investment quickly if you were for some reason to need money in an emergency. So again, as you think about. Something like stocks, stocks are one of the most preferred investment avenue or tool only because it can be relatively rewarding. Meaning if you play the stock market or you have a good wealth manager, you can develop, you know, annualized returns of 10 percent or more a year. So you're getting into the kind of higher reward area of returns and it's highly liquid, meaning if tomorrow you need to turn your 10, 000 of stocks into cash, you could sell it off. Again, some things that are really risk averse, like a CD, you cannot take that money out. If you put that, if you're committing your money to a CD for 12 months at a 5 percent return, you cannot liquidate. If six months in, you need the money tough. The same is true actually with, you know, investing in a business. If you have invested 10, 000 into a business as a startup and you suddenly need your 10, 000 back. You just, you know, it's not easy to liquidate shares in a business. So the other thing you need to be thinking about is your own personal budget and not just diversification of money. You have, you can spend outside of what you're budgeted for. As you think about the different asset classes and different risk profiles, you also need to be thinking about the different liquidity profiles of these investments. Again, buying a rental property is not likely to be something you're just going to be able to flip tomorrow. If you need the cash. Going back to if you need the cash or part of your budgeting would be how much do you need to, you know, when do you need to be paid back? So I'd say the final kind of asset class dynamic you need to be thinking about is not just risk reward, not just liquidity, but also timeline on liquidity. Again, if you're okay with putting money into something for 10 years, or, you know, Or putting money into an IRA or some sort of retirement account that you'll never be able to get that you, in many instances, can never touch without paying either huge penalties or huge tax rates or something that would just really make it disadvantageous to do you not only need to be thinking risk benefit risk reward. As well as liquidity, the timeline to liquidity again, if you put 100, 000 into something and you know, you need that money back in 12 months, you should not be putting that into something that you have no chance of getting the money back in 12 months on taking that one step further. If you put money into something and you start, you need to return on it right away, meaning you need to start getting a dividend or you need to start getting paid passive income. You bought a rental property and you need the tenants to start paying you. That needs to be budgeted for, and you need to be, that needs to be part of your investment strategy and part of your portfolio strategy. As you think about diversification, meaning if you can invest a dollar and get 50 cents back every day, immediately, everyone would do that. Everyone would invest a dollar and leave tomorrow with a dollar 50 and just kind of keep doing that. That's not how this works. And so as you think about what money do you have on your personal budget to put into an investment, and when do you need to start being paid back, whether that's. Again, distributions or dividends on that investment. Hey, I'm a 10 percent owner of a business that business is generating 100, 000 of profit a month. Therefore, I will get a check for 10, 000 a month that all needs to be thought about. And again, when you get into the riskier investment portfolios or riskier investment assets, those things tend to be a bit gray, meaning there's often projections on what a business will do in terms of returns and projections on what your distributions or dividends will look like. But then projections versus reality can be very different. So again, as you think about your investment strategy, a couple of key takeaways here, number one, the principle of compounding interest is incredibly important and you should make sure that you're taking advantage of that as a part of your investment strategy. Number two, when you think about investing, there's investing in for the long term again, retirement versus investing for the short term, you know, by the way, this come with different tax bracket implications. So if you think about a capital gains taxes, even short term versus long term capital gains, there's a whole other tax conversation around this stuff, but just purely from the investment perspective, you need to be thinking about risk and reward. Again, some of the lower risk assets tend to have lower rewards. There's something nice about having that certainty and protection too. And then you want to consider how you diversify your portfolio. You want to be thinking about what's the liquidity again how, how quickly or easily is it for you, the money out of this investment and finally, what's your timeline, right? Again, are you long term short term? Do you need a passive income? Are you looking to, do you need the money back in a certain amount of time? If so, are you investing in the right asset to be able to do that? So what's your kind of risk tolerance? Not only as it relates to risk reward, but also. Okay. Cool. The amount of time you may have to go without ever seeing that money back, key takeaways, risk tolerance, portfolio, diversement, long versus short term. You got to be thinking about liquidity. You got to be thinking about compounding interest. And finally, you need to start with yourself and make sure you have a nice personal budget in place so you can even begin to realize what it is you can do with regard to investing from the onset. Thank you for listening. Please like, subscribe, share the episode. Once again, I'm Dr. Ryan Wacom, successful entrepreneur and your end game coach. I'm going to teach you how to exist today so you can expand tomorrow, create the ultimate end game of your wildest desires. Talk to you soon.