I want to share with you 7 reasons why I personally like financial investments when building wealth.
(1) Quicker to Sell:
There are 60 major stock exchanges in the world with a total value of over $69 trillion. Within the United States alone the New York Stock Exchange has a total market capitalization of over $18 trillion being traded by millions of people around the world. The depth and breadth of the stock market allows for investments to be more easily traded because you have a greater reach of people and a greater number of financial exchanges. Although there are no guarantees, with this much reach, you are more likely to be able to unload your investments within a reasonable amount of time.
(2) Partial sale
In addition to being able to quickly sell financial investments than other tangible assets, financial investments provide the added flexibility of a partial sale. The reallocation of your investment portfolio on a regular basis (at least yearly) is essential to making sure you are staying within your risk tolerance at the end of the year.
If let’s say at the end of the year you decide to sell $10,000 of your stocks and transfer that money into safer fixed income investments like bonds. One can do this with financial investments, but this can become very difficult for many tangible assets.
(3) Cheaper to Sell:
Whether you are a novice investor and prefer to use a full service investment firm or a seasoned investor and opt for an online discount brokerage, the cost to invest/trade make sense. Full service investment firms charge 1%-2% in annual fees based on the value of your investments. Online discount brokers (which do not offer financial advice) charge a lot less with trading fees ranging from $5-$30/transaction. For some, these fees may seem steep, but for long term investors who are strategic (buy and hold), do their homework and are willing to take on risk, I think it is a great return on your investment.
(4) Allows for diversification:
The average salary across all jobs in Canada is $49,000/year and about $52,000 in the United States. Of course these amounts do not include taxes and other deductions so on an annual basis, most people have a limited amount of income to live off of.
With that being said, we are always playing a tug of war in our minds on the best way to stretch our money so it goes further. If you are like me, and are striving for financial independence (the ability to not rely on a working income to earn money) then you understand that diversification is everything.
The three biggest assets that most North Americans strive to acquire is a home, vehicle and long term financial savings. However, with limited resources (income), many must either forgo or significantly reduce the regular acquisition of 1 of these 3 major assets. For many, this results in significantly under funding their long-term/retirement savings.
However, this leaves one in a predicament and very vulnerable to market risk. Although owning a home is a great asset and can provide for some great returns, all investors should strive to remain diversified at all times. This includes within and between industries. If a disproportionately large amount of wealth is tied in your home/vehicles, then you will find yourself financially ‘imbalanced’.
Although understanding how the stock market works can be overwhelming, the rewards include more diversity in your net worth portfolio with less money needed to do it.
(5) Multiple Income Streams
Depending on the type of financial investment, one can enjoy up to 3 different income streams in the duration of and at the time they sell their financial investments. Financial investments can provide at least one of the following income streams:
- Interest income: Low risk investments like GIC’s, bonds (in the form of coupon payments) and even savings accounts pay a small interest for parking your money for a few months/years.
- Capital gains: similar to the equity a home receives when the value that other people will pay to acquire it goes up, so do financial investments. Capital gains is the ‘equity’ one receives when they cash out on an investment that went up in value from the time they bought it.
- Dividend income: when companies make a profit, they can reinvest it back into the business in the form of retained earnings. They can also pay out a portion of their profits to their shareholders in the form of ‘dividends’. The amount paid out depends on the type of shareholder and the number of shares they own of the company. This is probably the best income stream when investing because you continue to own the investment as it pays you money and the taxes are favorable.
Financial investments provide for multiple income stream options, which is always a nice thing when trying to reach financial independence.
(6) Lower barrier of entry
Unlike other investments like owning a home, which have many young Canadians priced out of in hot markets like Vancouver and Toronto, financial investments can be for everyone. You can start small and grow your investments with time, knowledge and discipline. This allows financial investments to have a low barrier of entry, with only the desire for one to learn about investing the biggest barrier.
(7) Affected by macro environment & micro environment
Financial investments are both affected by macro & micro environments. A macro environment is the condition that exist in the economy as a whole, rather than in a particular sector or region. In general, the macro environment will include trends in gross domestic product (GDP), inflation, employment, spending, and monetary and fiscal policy. In contrast a micro environment focuses on supply and demand and other forces that determine the price levels seen in the economy.
Because of this mix of macro and micro environmental influence, financial investments are less susceptible to being affected by one and not the other. This can be good or bad depending on how you look at it, but at a minimum, it allows for better forecasting when investing.
Contrast this to the housing market. The housing market is largely a micro environment (with influence from government regulations & interest rates) based on supply and demand. For those of you following the housing markets in Canada, you will know what I mean. There are hot markets like Vancouver and Toronto where single family detached homes sell for over $1 million starting price and bidding wars are expected. Then you have real estate markets like Windsor, Ontario where one can purchase a 4 bedroom, 2 bathroom detached house for about $170,000. Even within a specific region, the price of homes can vary drastically.