Low Valuation Assets to Build WealthAs you’ll see below, there are no “best” assets to build wealth because almost any quality asset can be used to build wealth. The wealth building potential depends on the purchase price, or the asset valuation when it is bought. When an asset is bought at low valuations, it almost always returns back to above normal valuations. This is called the mean. It’s an average. And that move from low to high valuations builds wealth. You may be wondering: If this is so easy, why isn’t everyone doing it? Keep reading because the first step in using low valued quality assets to build wealth requires a small mindset shift from traditional thinking about investing.
Mainstream Finance about Investment AssetsLong term buy and hold investing in stocks and bonds based on asset allocation without regard to price (valuation) is the traditional and most promoted investing method. It is the only use of money that discounts the cost of an asset. Imagine if you bought a car or a house without thinking about how much it cost. Yet this is what many stock and bond investors do after being taught it is the only way to invest. While buy and hold investing is easy to easy to implement by both individual investors, and more importantly by financial advisors it is not always the best strategy to build wealth, especially for investors near retirement. Long term compounding can work better for younger investors but not as well for investors after midlife since we don’t have decades to build wealth before retiring like the younger investors do.
The Math of Long Term Wealth Building with StocksAs you can see below, the is math is there to support that long term saving and investing in stocks will build wealth money over time. No one can argue with this compelling data. For example, if you save $1,400 a month for 20 years and earn 10% (before fees and taxes) your money will grow to $1,063,117. You can see this in the image below. Feel free to play with your own numbers on the calculator we installed here at RetireCertain.com. Read my post here with another retirement savings calculator example.
Buying and Holding Assets to Build Wealth ProblemsLet’s acknowledge that saving $1,400 a month for 20 years is problematic for most people, especially earlier in life since you earn less starting out and tend to have higher home and family expenses. But let’s say this saving, buy and hold strategy works. And it does work for many very disciplined individuals who have foresight, which is not always easy when you’re in your 30’s.
The 10% Total Annual Return ProblemYou probably noticed that I used a generous 10% annual return (shown as “interest”) in the calculator. This is because 10% is the total return for the S&P 500 stock index over long time frames before fees and taxes. (Please don’t plan on a 10 year return from stock investments because you read this here! Read more about this in my post How Will a Stock Market Crash Affect You? The problem with the 10% return projection is that it is made up of up years and down years with wild swings along the way.
TimeTwenty years is a long time, especially when you’re 50 and want to retire at 60. Here’s my related post Playing Catch Up Retirement Savings with 59 Uncommon Solutions.
How to Build Wealth with Quality Assets and Low ValuationsA different strategy from long term buy and hold investing is to buy assets that are valued at less than historical prices. When this is done, quality assets that are bought at low valuations return to valuations above the norm. This builds wealth for investors. This strategy requires no work beyond learning some basic fundamentals about valuations and staying mildly attuned to what is happening in the financial markets and economy. To illustrate how this works, I created the image below. This chart shows how a simple stock index based fund can be used to build wealth from buying when stocks are valued unusually low. The chart is showing the movement of SPY, an ETF that represents the S&P 500 index. In traditional buy and hold investing, SPY is a commonly recommended asset to build wealth.
Passive Buy and Hold Example with ETF Asset – SPYIn this example, Joe got a nice bonus of $100,000 in the fall of 2007. After putting aside some money to pay taxes, he put it straight into the stock market so it would build wealth over time. Joe’s investment in SPY is shown with the blue arrow in 2007. Joe takes pride in following a strict buy and hold investment strategy with the plan to save and build wealth over time, so he was excited to get ahead with this nice increase in his investment account. See the blue arrow showing when Joe bought SPY. There was a bear market that began in late 2007, unfortunately. Joe did, however, get back to break even about 6 years later in mid-2013. This is shown with the blue arrow. Thank goodness Joe was young and he had plenty of time to rebuild wealth on the subsequent bull market. This eventually allowed Joe to build wealth after finally getting back to break even. Unfortunately, SPY pays a low dividend yield since it is made up of more growth oriented yet established companies, so Joe got around a 2% yield while he owned SPY. Since inflation averaged around 2%, Joe broke even on that yield on a real return basis. He decided to rethink his investment strategy. Read my related post How to Know If Stocks Will Go Up with 10 signs to spot the change in stock market trends. Or watch this video.
Using SPY as a Wealth Building AssetBeverly spends an hour a month following longer term stock market trends by listening to a weekly podcast while she is walking. She noticed in the spring of 2009 that stocks looked undervalued relative to historical prices so she bought SPY. See the green arrows on the chart image above. Fortunately, in late 2007 she had a good profit from her stock portfolio, so she sold some stocks to lower investment risk. At the time, she was also concerned about the frivolous real estate lending and the inflated real estate prices. Beverly was able to build wealth with a simple low cost asset, SPY, since she had the capital to buy stocks when they were undervalued from her 2007 sale of stocks. Read my related post What Percentage of Cash Should Be in My Portfolio?
What Are the Best Assets to Build Wealth?So, the best assets to build wealth are quality assets that can be bought low valuations relative to history. Investors buy into stocks because they feel it is the “right” thing to do instead of using reliable past data and math to guide investing decisions. Often, a lump sum of money is received from a bonus or inheritance and it goes into the market all at once. Other times, investors decide it is time to finally start investing, and in goes their life savings, maybe at dangerously high valuations.
Alternative Assets for Building WealthThis simple low valuation principle can be applied to investing in stock, bond, real estate and commodity assets. Again, it is super important that the asset be high quality since the valuation can drop for a very good reason, only to never recover to higher valuations. But, as opposed to a single security, ETF and index based assets move based on long term cycles in the overall financial markets in relation to the economy and macro (big) events. Plus, risk is lower through the diversification that occurs from simply owning a fund vs. a single security.
Alternative Assets That Build WealthThis same principle of buying undervalued assets can be applied to individual real estate properties. Due to the pricing inefficiencies of individual properties vs publicly traded stocks and funds, properties can often be bought at low valuations. Examples of this are sellers needing cash right away, personal situations such as divorce, or estate properties. Single properties can also be bought at low valuations after a real estate market downturn. Real estate prices also go through long term valuation cycles. You may remember the huge number of For Sale signs in 2009 and 2010 when real estate prices were cheap relative to historical prices.
Real Estate ETF Asset to Build WealthTo illustrate how real estate prices and valuations move in cycles I made a chart of a Vanguard real estate ETF with the symbol VNQ. While there will be variations between areas and types of real estate assets, like commercial vs residential, VNQ can be used as a reliable indicator from a broad perspective for real estate prices. You can see where the long term buy and hold investor bought VNQ in 2007. She got back to break even in mid-2014. An investor focused on buying during low valuations instead of simply when he gets the money to invest bought VNQ in 2009. The value of VNQ roughly tripled in the 10 years between mid-2009 and early 2019. That is passive wealth building, no work required except for occassionally checking valuations. Read mt related post How to Build Wealth.
Income Generating Assets to Build WealthBuying assets with low valuations as a way to build wealth can be applied to income generating assets as an additional wealth building strategy. The income can be invested into more low valuation wealth building assets. This is what I call double wealth building. An example of an income generating asset used for both wealth building and income is AMLP, an MLP ETF. Below is a weekly chart of AMLP. It has been priced at low valuations since early 2015. This is due to the price of oil and also the restructuring of many oil MLPs (Master Limited Partnerships). AMLP yields almost 8% as of this writing but the yield has been yielding as high as around 10% within the past year. I have owned and sold covered calls on AMLP over the past year. I do not own it as of this writing because the last call I sold was exercised. Adding covered call income turns this one asset into a “triple wealth builder” with the dividend income, covered call income and good capital gains potential! I don’t know if AMLP will return to its 2015 valuations. It might. But while I am waiting to see, I would be happy to own an undervalued, diversified asset that yields 8 to 10% and allows me to sell covered calls for extra income. You can read more about selling covered calls here in my article. There are many other assets that pay income while you own them waiting for higher valuations. And many of these same assets allow investors to sell covered calls for extra income along the way. (Just note that selling “out of the money” covered calls works best to keep the capital gain and build wealth.)
The Cons of Buying Based on Low ValuationsWhile this all looks easy in hindsight, there are some challenges with buying assets to build wealth based on low valuations.
TimingIt’s impossible to get the timing exactly right and pick the exact highs and lows. My dad used to say that you could ease in and out of markets near the tops and bottoms. He was right again.
It Takes EffortBuying based on valuations takes a little more effort since investors must be aware of valuations before buying investments. But don’t investors want to understand the valuations of the assets they are buying anyway? I use the car or hose analogy again. You’d never buy either without carefully evaluating the price in comparison to what you’re getting and comparable assets.
Systematic Monthly Investing AveragesBy making regular investment purchases during various market valuations, investors will naturally buy at both low valuations and at high valuations so is trying to buy only at low valuations really necessary? Regular systematic investing works well over time for many investors, especially those with long time frames to invest and compound wealth. Everyone has to do what works best for them.
TaxesTaxes may need to be paid on capital gains. Almost all investors had rather pay the taxes and have the gains than not have the gains.
Creating Assets to Build WealthThe other type of asset that builds wealth is one that is created. This creation can be from some form of small business such as the assets below.
- Information based website
- Invented product
- IP (Intellectual Property)
- Local businesses
- Website Assets
Capital Needed to Create AssetsEach of these types of businesses will require different levels of capital. At the high end is a local business which can require hundreds of thousands if not over a million dollars in capital just to create. For this reason, a local business has much higher risk than a virtual or online business. At the low end, an information based business can easily be started for under $50. I have seen many such businesses increase in value to over a million dollars, so the low cost to entry doesn’t mean there is less potential to build wealth. The Joanna and Chip Gaines empire began with her blog, for example. There are countless other success stories where wealth was built from created assets with no startup capital from “normal” folks like us. An invented product, on the other hand, will require more capital to bring to market than just a website but is usually significantly less than a local business. Read my related post How to Choose an Online Business to Start.
Summary for Best Assets to Build WealthWhile building wealth from assets such as stocks and bonds can work well from compounding over decades, there are alternative strategies that may work better, especially in the second half of life. Investors planning to retire soon simply don’t have years to compound wealth. The best assets to build wealth are those that can be bought for low valuations or created with little cost. This strategy naturally lowers investment risk while having high upside potential for wealth building.
The information on this website is for education only and is not to be construed as personal financial advice.