Forget the Hype, Cash is King.
In 2017, we are exposed to many life hacks on becoming rich & wealthy — what’s worst is this: the most popular word that is being connected to the idea of becoming rich is “investing.” It has created a false sense of security in the idea that every individual should take their money and invest it into the stock market, which will allow them to have a ton of wealth accumulated by the time they need to draw upon these funds.
So why do I care about this? Because we are living in 2017 and there are many other ways that individuals can “invest” their money — especially when you only have $10, $100 or $1,000 to start.
The Myth: Investing in the Stock Market will Make Me Rich.
Sorry but no. If participating in the stock market alone will make you rich, then you may as well propose that by participating in the local soccer team, you will become the next David Beckham. Let us keep in mind that even in a “Bull Market,” there are people who have lost money trading stocks & bonds and mutual funds often lose money in bull markets. In Vancouver’s red hot real estate market, I know tons of people who have lost money on the investment homes that was going to provide them with capital appreciation and rental income. But why is this happening?
Because people buy into the hype of the next big thing without thoroughly understanding how these investment vehicles actually work! We have been so brainwashed with the idea of investing, that any seemingly decent image of an investment opportunity causes us to believe that it will be the breakthrough that launches your net worth to infinity & beyond!
Here is what I want to propose to people who are struggling to create some substantial level of wealth — stop investing in silly little mutual funds and sit on this money in cash, at least for the time being. Let me explain.
1. Save yourself the fees: Most accounts that involve indirect investing (mutual funds, market-linked deposits, etc.) will charge you a fee regardless of whether or not you earn money on these investments.
2. In the 20th Century, Knowledge is Power: Understand that the stock market works in percentages. A 7% increase in your $1,000 is $70 — although it is $70 that you would not have had otherwise, you would be better off deploying these funds in more practical ways noted later in this post.
3. Do It Yourself: If you’re really keen on trading stocks then go right ahead. The internet has created access to guides and resources that could turn you into an investment professional in a matter of hours, just by reading up on “how to invest.” Discount Brokerages and Self Directed Accounts have also made it extremely cost effective for you to by-pass the financial advisers and invest in the market for yourself. “I don’t know how” is no longer a valid excuse.
So now you’re sitting on cash — what should you do?
1. Create Your First Pot of Gold: A strong foundation is always a good idea when you are in the early stages of building an empire. Continue to set money aside consistently to create your first lump of money — don’t count on your Canadian Equity Fund to do the heavy lifting here. Through the money in a high interest savings account and take responsibility for the growth of this pool of money.
2. Learn to Arbitrage — that is, to recognize that the internet has now created many different market places that are similar to the different stock exchanges in the world. The only difference is that, marketplaces on the internet are not as efficient as the stock markets and therefore, you will often find opportunities to exploit and profit from mispricing between these markets.
For example; buy a kids toy on eBay for $10 and sell it on Amazon for $35 — this would be a $25 profit which translates to a 250% profit on the item. Remember we said that stock markets work in percentages? Well, real life works in dollars — that is where the money is at for people with very little to “invest.”
So what is the final recommendation? It’s simple. Set aside enough cash to sustain your lifestyle for 3 months — Yes, this is call an emergency fund and it will do wonders for your financial security. Emergency money should be set aside to earn a little or no interest, this is your foundation that you will build your empire upon.
With extra funds, if you’re looking to really invest and grow your financial position, start buying cheap things online or locally (Craigslist’s, Facebook groups, Garage sales,, Goodwill, etc.) and resell these things online for a profit — more likely than not, you will earn far more of a return on your investment than you would if you had bought the next best Canadian Equity Fund. Remember, do your research first — the internet is an open platform for you to triple check through all the available resources.