Let’s Address the Elephant in the Room
I have answered thousands of questions on numerous investment options at work and my favorite questions are always 1). how liquid is it? 2). Is it SEC regulated and 3). What are you really trying to accomplish? After some usual back and forth I always steer individuals to investment income vehicles that are publicly traded.
I’ll walk through my favorites in later posts but want to first lay some ground work as to why I always end up here.
Liquidity
Never under estimate liquidity as a key concern YOU should have if you invest. I have seen all of the Facebook and planted ads you have seen on big time returns…. read between the lines on a lot of these items and you have NO or limited liquidity for a period of time.
My question to you – even if the investment seeems like a good idea – if there is an investment with a similar profile that is liquid daily, why wouldn’t you pick the more liquid investment? I’ll walk through a few examples.
SEC Regulation
Let’s face it, the government isn’t always up to date on how new things should be regulated and they don’t have the resources to regulate ALL investments under the sun. As you can expect, smaller investment vehicles, new vehicles, and larger ones that are not publicly traded are not regulated by he SEC.
SEC regulations help enforce disclosure rules (most recent example – Elon Musk on Tesla… we’ll see what happens here) but they also help with comparability of investments to each other.
My favorite measure is the SEC yield which is an estimate of the after-expenses yield an investor would receive in a year. Or said another way the SEC yield focuses on actual income likely to be earned from interest or dividend income. The best part? Everyone has to use the same calculation which helps with comparability across investments vs voodoo or fuzzy math that may be applied to how some returns are calculated.
What are You Trying to Accomplish with an Investment?
Most people – even me – struggle with this question often when it comes to investments and I encourage you to pause at least for a minute before you plunge into an investment to consider what you are doing. Questions to ask:
- Do I want to make money via capital appreciation or off of monthly income?
- How much risk am I willing to take? If my investment goes down 10%, will I freak out?
- What’s my investment time horizon?
- Do I need to be able to liquidate this investment easily?
- Is it important to you to be more in the weeds on your investment (be part of a focused investment strategy)
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Show me the Money
- I’ll break down my favorite investments in a follow up post but here is a example:
- Flashy investment in real estate ad on Facebook: details no near term liquidity, returns in the 6 to 10% range, $10K minimum investment
- Alternative 1: Vanguard Real Estate ETF (VNQ) – 3.7% yield, minimum investment ~$80 a share. Highly diversified real estate fund with $32B invested.
- Alternative 2: Super Dividend Fund (SDIV) – 8.1% yield, minimum investment ~$20 a share. $1B diversified fund of real estate investment development companies as well as high dividend stocks.
- Alternative 3: Nice summary of other REITs Top Real Estate ETFs
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In Conclusion
- My point is there are a lot of alternatives for investment in publicly traded diversified, liquid, and low barrier to entry investments. Yes some of these may have slightly lower return than what you may be evaluating but is the excess return you are getting worth the trade off in liquidity? Might be worth a pause.
