Investors looking to build up their wealth have five major options available to them today, one of which is now widely considered a Ponzi scheme in financial circles despite undoubtedly making some wealthy on the way up.
We are talking about stocks, bonds, real estate, precious metals and cryptocurrencies.
Interestingly, in a recent Gallup poll, 34 per cent of Americans considered real estate as the best wealth-creating vehicle; tellingly, in the home of Wall Street, stocks only scored 26 per cent.
Gold and bonds scored 17 and 16 per cent respectively; Bitcoin was not included in the survey, though anecdotal evidence suggests it is still very popular with the younger demographic.
My last column considered why the world’s most successful investor, Warren Buffett, considers Bitcoin and the cryptocurrencies to be ‘rat poison’.
I won’t dwell on this Ponzi scheme phenomenon again, except to point out that this bubble burst last December and since then has been an epic destroyer of capital. It works on the ‘greater fool’ theory of investors. Thus it now has to attract another even larger number of fools to buy it than last December for its price to spike again. How likely is that?
But if Bitcoin shows investors anything, it is that being an early investor in the next major speculation can be highly profitable so long as your luck lasts.
Despite a massive crash Bitcoin is still up more than 300 per cent in the past 12 months, by comparison to around 5 per cent for gold, minus 2 per cent for bonds, nothing much on stocks and about 6 per cent for US residential real estate.
US property looks a safe, if not exciting performer. If you add on around 4 per cent in rental yield then that’s a total gain of 10 per cent, which is very comfortable with US inflation running at around two per cent.
Of course real estate does have its bad times too. Remember the great recession a decade ago? House price falls then were big enough to leave those with large mortgages in negative equity, with homes worth less than the debt entailed on them.
However, for many people it is precisely the ability to borrow against a house purchase that makes it such a great investment.
Usually with shares you only invest what you have earned. Indeed it is not generally advised to do otherwise. But with a house you can gear-up your investment so that, if all goes well, you are immediately earning a return on a much higher initial investment amount.
It’s not rocket science. You invest more when you buy real estate, so the return is also higher (and the losses if house prices drop).
Also in many countries residential property markets are well established. You have an infrastructure of estate agents, lawyers and bankers to help and guide you.
But maintaining an independent mind is always advisable as you pay fees for all this assistance, and keeping those fees down is a key to maximising the return.
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