Question: I have a good friend here at school who is lucky enough to have some money in the bank. Or, actually, it’s not in the bank–because my friend is intent on investing it in ways that will make him rich someday.
That’s a good idea, I think, but my friend isn’t so great with the execution. He buys some really, really weird stuff. He has collectible coins and valuable gems (well, he says they’re valuable, anyway). He has a stake in some company that is run by a friend of a friend, or something like that (I’ve never heard of the company). He has some things that he describes as being like stocks, but for crops and vegetables and stuff. I think he owns some property, too, but it has a mortgage on it, so he’s actually paying money on that, not making money. As far as I know, he doesn’t own stocks or bonds.
So I’m asking the experts: my friend is nuts, right? This can’t be a good way to invest, can it?
Answer: As both you and your friend seem to understand, investing is the best way to grow wealth. Because of inflation, a given amount of cash becomes less valuable over time. Inflation averages 3.22%. You can cut into that figure by putting money in a bank account that earns interest, of course, and that’s a safe way to minimize inflation losses without risking the money in question. To beat inflation, though, you need to invest. Through the power of compounding interest–a term that refers to the fact that gains through interest add to the “principal,” or amount invested, meaning that future interest is calculated on a progressively larger sum–investments can grow more rapidly over time. Money invested now will grow more and more valuable over time!
Are your friend’s interesting investments wise choices? Well, he has a mix in there. For instance, collectible coins are not necessarily the soundest investment. With that said, direct investment in the valuable metals these coins are often made of is both reasonable and popular, investors and analysts like American Bullion’s Peter Schiff say.
The stake in his friend’s company could be good or bad depending on the company itself and the role your friend holds in the organization. Is he expected to contribute (more) money or labor? How profitable is the company? It’s hard to say whether or not this investment is wise based on the information in your question.
When you say “like stocks, but for crops,” you’re most likely talking about the commodities market, where investors can take positions on everything from agricultural futures to precious metals. While not as widely known as stocks, these are perfectly respectable things to invest in–though, just as with stocks, investors can find plenty of ways to take ill-advised risks within this regulated market.
Finally, there’s his property. You’re right to note that a mortgage is an ongoing expense, but mortgage experts say that may not be a problem. Properties can be seen as investments, and a rising US real estate market (median home prices are now 2% higher than they were before the 2008 crash–a big comeback) means that your friend very well could end up with a property that increases significantly in value.
Altogether, it seems your friend has a mix of unusual and very normal investments. But there is one final thing to note here, and that’s that you are likely right that his portfolio would be a bit safer with some stocks and bonds. It’s okay to aim for aggressive growth, but a nice safety net of diversified holdings in a big market like the US stock market can’t hurt.
“Price is what you pay. Value is what you get.” — Warren Buffett