Investing For Dummies - Eric Tyson

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      However, I don’t think you should expect that you can “beat the markets,” and you certainly are not likely to beat the best professional money managers at their own full-time game. This book shows you time-proven, non-gimmicky methods to make your money grow in the stock market as well as in other financial markets. I explain more about stocks and mutual funds in Part 2.

      Owning real estate

      People of varying economic means build wealth by investing in real estate. Owning and managing real estate is like running a small business. You need to satisfy customers (tenants), manage your costs, keep an eye on the competition, and so on. Some methods of real estate investing require more time than others, but many are proven ways to build wealth.

      John, who works for a city government, and his wife, Linda, a computer analyst, have built several million dollars in investment real estate equity (the difference between the property’s market value and debts owed) over the decades. “Our parents owned rental property, and we could see what it could do for you by providing income and building wealth,” says John. Investing in real estate also appealed to John and Linda because they didn’t know anything about the stock market, so they wanted to stay away from it. The idea of leverage — making money with borrowed money — on real estate also appealed to them.

      John readily admits that rental real estate has its hassles. “We haven’t enjoyed getting some calls in the middle of the night, but now we have a property manager who can help with this when we’re not available. It’s also sometimes a pain finding new tenants,” he says.

      Overall, John and Linda figure that they’ve been well rewarded for the time they spent and the money they invested. The income from John and Linda’s rental properties also allows them to live in a nicer home.

      

Ultimately, to make your money grow much faster than inflation and taxes, you must take some risk. Any investment that has real growth potential also has shrinkage potential! You may not want to take the risk or may not have the stomach for it. In that case, don’t despair: I discuss lower-risk investments in this book as well. You can find out about risks and returns in Chapter 2.

      Running a small business

      I know people who have hit investing home runs by owning or buying businesses. Unlike the part-time nature of investing in the stock market, most people work full time at running their businesses, increasing their chances of doing something big financially with them.

      WHO WANTS TO INVEST LIKE A MILLIONAIRE?

      Having a million dollars isn’t nearly as rare as it used to be. In fact, according to the Spectrem Group, a firm that conducts research on wealth, more than 11 million U.S. households now have at least $1 million in wealth (excluding the value of their primary home). More than 1.5 million households have $5 million or more in wealth.

      Interestingly, households with wealth of at least $1 million rarely let financial advisors direct their investments. Only one of ten such households allows advisors to call the shots and make the moves, whereas 30 percent don’t use any advisors at all. The remaining 60 percent consult an advisor on an as-needed basis and then make their own moves.

      As in past surveys, recent wealth surveys show that affluent investors achieved and built on their wealth with ownership investments, such as their own small businesses, real estate, and stocks.

If you try to invest in individual stocks, by contrast, you’re likely to work at it part time, competing against professionals who invest practically around the clock. Even if you devote almost all your time to managing your stock portfolio, you’re still a passive bystander in businesses run by others. When you invest in your own small business, you’re the boss, for better or worse.

      For example, a decade ago, Calvin set out to develop a corporate publishing firm. Because he took the risk of starting his business and has been successful in slowly building it, today, in his 50s, he enjoys a net worth of more than $10 million and can retire if he wants. Even more important to many business owners — and the reason that financially successful entrepreneurs such as Calvin don’t call it quits after they’ve amassed a lot of cash — are the nonfinancial rewards of investing, including the challenge and fulfillment of operating a successful business.

      Similarly, Sandra has worked on her own as an interior designer for more than two decades. She previously worked in fashion as a model, and then she worked as a retail store manager. Her first taste of interior design was redesigning rooms at a condominium project. “I knew when I did that first building and turned it into something wonderful and profitable that I loved doing this kind of work,” says Sandra. Today, Sandra’s firm specializes in the restoration of landmark hotels, and her work has been written up in numerous magazines. “The money is not of primary importance to me,” she says. “My work is driven by a passion … but obviously it has to be profitable.” Sandra has also experienced the fun and enjoyment of designing hotels in many parts of the United States and overseas.

      Most small-business owners (myself included) know that the entrepreneurial life isn’t a smooth walk through the rose garden — it has its share of thorns. Emotionally and financially, entrepreneurship is sometimes a roller coaster. In addition to receiving financial rewards, however, small-business owners can enjoy seeing the impact of their work and knowing that it makes a difference. Combined, Calvin’s and Sandra’s firms created dozens of new jobs.

      

Not everyone needs to be sparked by the desire to start her own company to profit from small business. You can share in the economic rewards of the entrepreneurial world through buying an existing business or investing in someone else’s budding enterprise. I talk more about evaluating and buying a business in Part 4.

      Besides ownership investments (which I discuss in the earlier section “Building Wealth with Ownership Investments”), the other major types of investments include those in which you lend your money. Suppose that, like most people, you keep some money in a bank, either locally or online — most likely in a checking account but perhaps also in a savings account or certificate of deposit (CD). No matter what type of bank account you place your money in, you’re lending your money to the bank.

      

How long and under what conditions you lend money to your bank depends on the specific bank and the account that you use. With a CD, you commit to lend your money to the bank for a specific length of time — perhaps six months or even one or more years. In return, the bank probably pays you a higher rate of interest than if you put your money in a bank account offering you immediate access to the money. (You may demand termination of the CD early; however, you’ll usually be penalized.)

      As I discuss in more detail in Chapter 7, you can also invest your money in bonds,

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