I am going to be a bit out there from how people most likely expect me to define an investment.
I think that a true investment needs to have these qualifications:
You need to be paid to own it.
Rewards build slowly over long periods of time.
You must be able to optimize it.
That’s really about everything I feel the need to throw in there.
I just want to point out how things that a lot of people think of as investments don’t fit the qualifications.
Firstly, anything that you buy that you buy insurance on is most likely not an investment.
Cars, houses, artwork, collectibles, precious metals and gems, any of that stuff. If you buy those things that’s great. People need cars and houses and stuff to get along day to day, but they aren’t investments. You can potentially make money off of those things, but buying them with a hope of future profit is something else closer to gambling that many people refer to as speculation.
If you call any of those things investments, you are only misleading yourself.
Another category of things people usually think of as investments that are more correctly called speculation is any kind of stock that is not paying a dividend.
People are going to hate me for this.
It’s true. If you buy a stock for 500 because you want to turn around and sell it for 1000 at a later date and it isn’t paying you dividends in the mean time, then it fits speculation more than it fits investment. That’s just how it is.
Mind you, I am not saying that speculation is not OK or that people should not speculate. I am just saying that they should not speculate and call what they are doing investing.
The people who are most often disappointed are the people who are speculating and who believe they are investing.
I feel like I need to repeat this another way.
The way you are most likely not to be disappointed is by buying things that strictly fit my 3 rules above.
Anything you buy for speculation purposes (and some things you buy for investment purposes) has the potential to work like a lottery ticket. It can pay off wildly more than you paid to buy it. Probably at less of a multiplier than a lottery ticket is, but it’s there. Actually going gambling at a casino is another way to potentially double your money from one minute to the next.
The thing about speculation is that it is very much inherently more risky than investing as I have defined it above.
What are some things that are much more close to investing as I have defined it above?
- A plain old ordinary savings account. If you just put money in a savings account it will earn interest and it won’t go backwards in value. The rate of return is horrible, but it does qualify. Please nobody do this, though, because the rate of return isn’t high enough to make it worthy to allocate investment dollars here. It *does* qualify, though, more than anything else I said already. You can optimize by picking a savings account with a higher interest rate to put your money in.
- Dividend paying stocks. You get paid consistently by owning this, usually four times a year. The value of these tend to be stable over time too, especially compared to stocks that don’t pay dividends. Warren Buffett, the best investor in history, has made tons of money this way.
- Bonds. These have payoffs that pretty much guarantee you will get out more than you paid in unless you buy a bond from a company or country that subsequently goes under. The payoffs may not be that great, similar to savings accounts, but it does qualify. Indeed, one of the best ways to decrease portfolio risk is by owning a lot of bonds.
- Permanent life insurance. I am not legally allowed to call this an investment. However, I think I am allowed to say that there are aspects of it that are investment-like. As long as you keep paying over long periods of time, you contractually will get out more money than you paid in. It is possible to treat life insurance like it’s an investment and it can be very good for that purpose, but the law should be obeyed and this should not be specifically called an investment. This can be optimized by structuring policies in different ways.
- Start a business. Maybe this works or maybe it doesn’t, but successful business ownership definitely constitutes an investment. This is not really very different than a dividend paying stock, in essence. This is most likely to work like you expect an investment to work if you start small and part time.
It’s possible to make money a lot of different ways. Both investing and speculation qualify. Working at a business is another way people commonly do it. Within each category there are different things with differing qualities, some better than others.
If you really want to invest and you want the maximum likelihood of being happy with your investments, you should probably stick with items that fit those original three qualifications.
If you do your research and put your money into things on that bottom list there, you are most likely to be happy with how things turn out.
* Disclaimer For Legal Reasons * Insurance is primarily for decreasing risk, not for investment purposes. You should buy it if you have a risk that needs to be reduced. If you don’t have a risk that needs to be reduced, you should strongly consider buying something else. If you buy it to reduce risk and it so happens that you make investment-like gains, that’s great too.