Last time we spoke about accumulating assets by putting money away each month. So what is an asset? An asset is an investment – something that will grow in value and from which you will eventually earn income. Because assets provide additional income, eventually the amount of income provided from assets will exceed your income from working if you continue to buy assets, and in particular if you use income from assets to buy other assets. The following are examples of assets:
1. Stocks and bonds
2. Real Estate
3. Fine art
Note that cars and other vehicles are not listed among the assets. While a car dealer will tell you that the new car is a great investment, the car will lose value the minute after it leaves the lot. It will then continue to depreciate and require insurance and maintenance, all of which will require money from you, not provide you with money. Even looking at classic cars, most do not appreciate at all from their original price, taking into account inflation. If insurance and maintenance are included, I doubt any car purchase would result in a net gain over a period of time.
Note also that while real estate is included, one’s personal residence is not necessarily an asset. The reason is that while many call their home their “biggest investment,” homes require constant maintenance, upgrades (kitchens and baths every ten years or so at $20,000 or more each), insurance, and taxes. It is true that the home will grow in value over the years, but the growth is in line with inflation, so that you will never really get more out of the home than you put into it (there are exceptions when homes are bought in the right areas at the right times). Money in real estate is made from rents and the wise choosing of location for appreciation, taking advantages of growth patterns and demand.
Of all of the types of assets, stocks and bonds are the easiest to purchase, own, and sell because there are ready markets available. Real Estate and Fine Art require direct sales between individuals, and each property/piece is unique, so they are far less liquid than stocks and bonds. Of all of the types of assets listed, fine art probably requires the most knowledge because while stocks and real estate in general tends to appreciate, such that buying most stocks or properties will, over time, result in an increase in value, the wrong piece of fine art may decrease in value and never reach its purchase price again.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.