Figuring Out The Key to Attaining Wealth:
How The 3S Behave Differently?
In our experience, most successful investors go through these same stages before they become successful. Some, like us, slowly evolve from one stage to another. Others are luckier, and quickly find their investing niche, bypassing the intermediate stages of growth. And others forever bounce back and forth between stages, hoping to find the “golden ticket” to success.
Savers
Savers are those people who spend the majority of their life slowly growing their “nest egg” in order to ensure a comfortable retirement. Savers explicitly choose not to focus their time on investing or investment strategy. Savers seek low-risk growth of their capital, and in return, are willing to accept a relatively low rate of return.
While there is certainly nothing wrong with striving for consistent returns, what the Saver is doing is really no different than putting their money in a Certificate of Deposit.
Speculators
Unlike Savers, Speculators choose to take control of their investments, and not rely solely on “time” to get to the point of financial independence. Speculators are happy to forgo the relatively low returns of a diversified portfolio in order to try to achieve the much higher returns of targeted investments.
While the Speculator recognizes the potential gains from smart investing, he doesn’t always invest smart. He is very much a gambler, and while sometimes those gambles pay off, often times they don’t.
Specialists
Like the Speculator, the Specialist realizes that there is a more powerful investing strategy than just diversifying across a range of asset classes. But, unlike the Speculator, the Specialist understands that the key to successful investing isn’t luck, “hot tips”, or “being in the right place at the right time”; it’s education and experience.
In fact, having a plan supported with the right professionals are the key difference between the Specialist and either the Saver or the Speculator. The supported plan is the blueprint to achieve investment success, and with it, the Specialist can achieve huge returns with relatively low risk.
So, Which Investing Types Are Correct?
Each of the three investing types clearly has its advantages and disadvantages…
The advantage to being a Saver is that you are free to spend your time and energy on things other than investing, but in return you will wait a long time before you have the opportunity at financial freedom. Speculators have the opportunity to “hit it big” if they end up at the right place at the right time, but when they don’t hit it big, they often don’t even see as high of returns as the Saver.
And while being a Specialist Investor requires the most time and effort, the rewards are the most profound – both in terms of control over income and the opportunity for financial success.
The 3 Types of Income (Part II)
We have spent a good bit of time talking about the different types of investors and the advantages and disadvantages to various investing styles. But, the one thing that remains consistent across all investors is the fact that they want to make money, and they want to be able to use the money they make to generate more. As you might guess, what you invest in is just as important as your investing style. And while there are literally thousands of potential investments you could or may pursue over the course of your investing journey, many types of investments have similar characteristics, In fact, when you get right down to it, there are three broad types of income you can generate:
Earned Income
Earned income is any income that is generated by working. Your salary or money made from hourly employment (regardless of whether that salary or hourly income came from working for someone else or from your own “consulting”) is considered earned income.
While earned income is the most common mechanism for making money, its obvious downside is that once you stop working, you stop making money. Additionally, because the amount of money that is made through earned income is directly proportional to the time and effort you spend working, it’s difficult for someone to make more earned income without either learning a new (or more valuable) skill or working longer hours. Additionally, earned income is taxed at a higher rate than any other type of income.
One huge benefit of earned income over the other income types is that you generally don’t need any startup capital in order to make earned income, which explains why most people rely on earned income from the start of their working life. In fact, earned income is a great way to start your investing career, as it allows you to save up cash that will help you generate the other two types of income…
Portfolio Income
Portfolio income is any income generated by selling an investment at a higher price than you paid for it. Some people refer to portfolio income as “capital gains,”
There are a number of downsides to portfolio income; for example:
- It often takes a good bit of knowledge and experience to learn how to make money trading paper assets. Unless you have inside knowledge of the companies you’re trading, you must learn to read financial statements or how to analyze market trends if you hope to beat the market
- You often have little control over your investments, other than your ability to buy or sell. For example, buying stock in a company still affords you no day-to-day control over the operation of the company, and therefore little day-to-day control over your investment
- Generating portfolio income generally requires you to have money to invest upfront. Even large gains are inconsequential when the investing amounts are very small
Portfolio income certainly has some advantages over earned income. Once you have the knowledge and experience to generate portfolio income on a consistent basis
Passive Income
Passive income is money you get from assets you have purchased or created. For example, if you were to buy a house and rent it out for more money than it costs you to pay your mortgage and other expenses, the profit you make would be considered passive income.
There are some major benefits to passive income over the other two types of income:
- Passive income is generally recurring income; once the investment is made, and assuming it is a good investment, the income will continue to come in month-after-month or year-after-year, with little additional work by you. This means that you can essentially “retire” and still continue to grow your net worth
- Passive income investments often allow for the most favorable tax treatment. Corporations can use profits to invest in other passive investments.
- Because it is generally possible to closely estimate the return (or at least the risk) you can expect from passive investments, these investments can often be funded using borrowed money. For example, real estate can often be acquired with a small down payment (25% or less in some cases) with the majority of the money borrowed.
As you might suspect from the above overview, many people consider passive income the holy grail of investing, and the key to long-term wealth.
Achieving Early Retirement Success
(Part III)
Why it is important to achieve earlier? While it may varies from different individuals, it could be having a stronger sense of security as ones cant predict what will happen for his/her employment at older age. It should be clear that in terms of investor style, being a Specialist is the best way to optimize for consistently large returns, which will ultimately lead to financial independence in the shortest period of time. Of course, as mentioned above, becoming a Specialist investor takes time and study, but anyone willing to invest the time and effort can become a wildly successful investor. In order to shorten the learning curve and lack of time, you may work with the right professionals and leverage on their expertise, experiences and time to achieve your retirement KPI.
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