Clients often ask me what to invest in to make them richer. This blog talks about some of the things that people do because they think it will make them rich, but they won’t.
Bonds. While the suitability of an investment must be determined on a person to person basis, the bond market is generally a lousy investment at this point. With interest rates low, the cash that short to medium term bonds throw off as coupon interest isn’t as high as it needs to be in order to cover inflation, in many cases. Given the high demand over the last few years, most bonds are expensive to buy now, too. For all these reasons, you’re not going to get rich over the long term by investing in bonds, although they can be a great way to diversify and reduce risk in a portfolio.
Coupons. While frugal spending habits are a great way to maintain a disciplined budget, you’re not going to get rich because you pinched every penny. You grow rich by earning high income, saving a large portion of it, and investing it wisely. While reducing expenses is a critical part of the process, the more important part is step one (increasing wealth.) I’d rather see a client invest their time in a plan to increase their income or earnings than search for the latest bargain buys.
Unemployment insurance. Many people collect unemployment because it’s “free money” during hard times when they have no better way to earn income. It’s true that at certain points in the cycle there are simply no jobs available. Well, here’s the Catch 22; nobody ever gets rich by collecting unemployment. It handcuffs people, in a way, by making them complacent. Some people get depressed by having to sit around the house all day. It can be a demotivating force that derails them from their job searches. Have you ever heard someone say “I’ll just collect my unemployment until it runs out – I paid my taxes all those years – the government owes me!” This is an impoverishing statement because it distracts people from their real goal which should be to earn as much money as possible all the time. Accepting a set wage (because it’s given to you) is actually quite expensive because of the opportunity cost of higher earnings lost. In a bad economy, no job is unworthy of you. Even if you get a lower paying job than what unemployment would pay, at least you’re working. If you perform well, you never know how much more money you could earn. You never know what can happen when you show your stuff to the right person. You never know what you could learn from a new job, or a new coworker. Also, the risk of staying unemployed for a long time is high because employers view you as somehow tainted by the lengthy break. Having a cookie on your plate doesn’t mean you shouldn’t get up and go hunt when there’s bigger game in the forest, although you may have to work harder to find it. Nobody gets rich by collecting unemployment insurance.
Hedge funds. Hedge are restricted to accredited investors, meaning you have to qualify based on income or net worth. The purpose of many of these vehicles is to hedge, or shield a portfolio from part of the downside when the market declines. To accomplish this, they engage in sophisticated and risky techniques such as borrowing a stock and then selling it with the agreement to buy it back later, hopefully at a lower priced. Many hedge funds are highly leveraged, meaning they use margin, or credit, to amplify their returns. Another reason you’re taking higher than normal risk when you invest in a hedge fund is because it’s not a publicly traded vehicle. It’s not transparent like a stock or a mutual fund; you won’t always know what it holds. This opens you up to the risk of fraud and requires a thorough (and costly) due diligence examination to be performed before putting your money into them.
Here’s where investing in hedge funds goes wrong. Their appeal is exclusivity, not the merits of investing in them. People view it as a luxury product like a Prada bag, a status symbol. There are about ten thousand hedge funds, many born out of this demand for luxury status rather than the skill of the manager. Many hedge funds don’t outperform and they generally create little value for the investor after fees, transaction costs, and taxes. There are only a handful of hedge funds (out of the thousands) that are not a rip off. Investing in hedge funds is not going to make you richer for most people.
Disclaimers Get Rich Quick Club
This is neither an offer to sell nor the solicitation of an offer to purchase any interest in GIM or any other investments discussed. This publication is for informational purposes only; it is not intended to be a solicitation, offering, or recommendation by Grillo Investment Management, LLC of any product, security, transaction, or service. It should not in any way be interpreted as investment, financial, tax, or legal advice.
An investment in any security discussed herein may be speculative, and may involve a high degree of risk. An investor in securities could lose all or a substantial amount of his or her investment. Investors should conduct thorough analysis on their own before investing in any investment vehicle. The risks of investing in international markets include currency fluctuations and political instabilities.
This presentation and its contents are proprietary information of GIM and may not be reproduced or otherwise disseminated in whole or in part without GIM’s consent. All data herein was obtained from publicly available information and/or sources, internally developed data, and other sources believed to be reliable. Except as otherwise stated, GIM has not sought to independently verify information obtained from public or third party sources and makes no representations or warranties of any kind, express or implied, regarding the accuracy, completeness, or reliability of such information.
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The S&P 500 Index consists of 500 selected stocks, all of which are listed on the exchange, the NYSE or NASDAQ, and spans over 24 separate industry groups. It tracks the performance of the US large cap equity market. Indexes are unmanaged and investors are not able to invest directly into any index. Dividend rates are not guaranteed payments, nor can they guarantee a rate of return.