Jun 17, 2022
Assets – Appreciating vs. Harvesting
- BRT S03 EP26 (125) 6-17-2022 – Wealth for Life
Things We Learned This Week
Co-Host: Denver Nowicz, President - Wealth For Life
Denver is an advisor with nearly 20 years experience working with clients in investments and insurance, designing retirement plans with a combo of both. He takes us through different strategies for clients to get the best allocations for their money over the long term. It is the Combo Strategy of both Offense and Defense, the synergy of the mix, not ‘All or Nothing’.
Assets: Appreciating vs. Harvesting
There are many different Assets you can invest in. Common asset classes are Stocks, Bonds, Gold & Real Estate. There are Alternative assets like Crypto, Art, Private Equity, etc.
The classic idea is you buy an asset as an investment with the idea it will appreciate over time so it is worth more when you sell it. Buy low, sell high.
It also may act as a hedge vs inflation. Instead of having your money sit in cash, and lose money to inflation, you purchase an asset that goes up in value more than inflation.
What is rarely discussed is the concept of Appreciating Assets vs. Harvesting Assets. What's the difference?
Appreciating Assets are the assets mentioned above, where the plan is to buy low, wait for the appreciation, then sell high. You do not capture the gains until you sell. You gain value on paper, but if you wait too long to sell, you could miss the appreciation. Likewise if they lose value but you do not sell, then only a paper loss.
Stocks are a classic example. 'If I just sold last month, I would have made 25%, instead of 15%.' You have to time it right.
Other examples are Gold, Art, most Crypto, certain types of Real Estate (Land for example with nothing build on it yet).
These assets are only valuable when they appreciate, and if you sell at the right time.
Harvesting Assets are assets that get interest, or give off profits, or cash flow.
You are able to capture some of the gains from the asset.
*** Asset value can go up or down
in the holding period
In fact many of the above Harvesting examples can all be both Appreciating and Harvesting Assets:
Rental Real Estate, Bonds, Dividend Stocks, REITs, Cash Flowing Business, Index life Insurance, etc.
Note: Options are not an asset, they are a contract that with a decaying value over its term, and can go down quickly; time decay lessens the option contract the longer you hold it, until it expires at the expiration date worthless. This is why Options are often referred to as trading (short term) vs investing (long term).
When investing in Assets, it is recommended you buy Harvesting Assets to get the best of all worlds. In case the value of the Asset goes down, at least you receive some cash while holding the Asset.
Cash – classic asset that loses value over time, can’t buy the same amount today for a dollar that you could 10 or 15 years ago
Fed Policy – print money, devalues currency, creates inflation
Inflation – eats away at value of cash, assets like stocks, gold, real estate can all act as a hedge vs inflation
Create assets – digital assets, build an online business
Past – people had pensions, savings, & social security to rely on, today have to create your own retirement plan
Buy & Hold – appreciating asset, when to sell, avoid whipsaw of market (up & down movement)
Harvesting – cash flow, take profits off table and re-deploy money
Asset pricing and timing
Hard Assets - Real Estate
Cash Flowing (CF) Business with recurring revenue is an excellent harvesting asset that gives you multiple options to grow wealth long term
With good assets, can use leverage to grow wealth and acquire more assets.
Assets – appreciate, options, harvest / cash flow
Leverage – scale wealth using other people’s money, finance your retirement and go bigger and quicker
Tax Protection – defense strategy, put money in long term tax free position
Index Strategies with IUL
Top 10% strategies – if you earn more than $140K, than top 10% earner and most financial advice does not apply anymore
Wealth gets more wealth – save and invest more money using leverage can grow massively thru compound interest
“One Thing” Retirement Plan – 401K, and stocks (+ W2 income), hope it goes up and no volatility (market risk). 90% of people are on this plan – Need to get away from this plan and diversify your retirement plan
Retirement Rule or 4% Withdrawal Rule – is outdated, and often will fund one’s lifestyle in retirement
More efficient use of money
Assets can act as an inflation hedge, as they increase in value when Inflation rises.
Income Streams – Good use of Harvesting type assets leads to multiple income streams
Loan Collateral – borrow against assets, or use as collateral to get a loan or another asset
Credit Line – borrow from assets (ie – bank credit line, real estate credit line)
Refinance – cash out refinance of real estate leads to tax free money returned
Net Worth – personal financial statement, fill out yearly and list asset values
Markets are inefficient, and often irrational. Humans are emotional and tend to panic when they see scary headline on CNBC. People sell on fear of a recession, disregarding the fact that many of these big companies will not go out of business.
Trading in the Markets have changed with all the super computers and algorithms involved in daily stock trading. Computers can create huge sell offs in the market, because of the programs and indicators they operate off of - artificial intelligence.
Financial Advice should be more holistic. Too much advice is based on buying stocks, vs growing your overall net worth. To grow wealth, one must have cash flowing assets. You want to put yourself in a solid financial position owning different assets (like real estate, stocks, etc.) so you can handle economic downturns.
The stock market value is all on paper until you sell, so it is inefficient on capturing gains. The wealthy may only have 20 - 30% of their money in the stocks. It is hard to be consistent and disciplined in your investing. You need ways to generate cash, and lock in gains.
It is important to understand Market Cycles, and how they work, plus how long they will last. Howard Marks writes often on this topic, in his memos or the book he wrote on the topic (here is a summary). If you can recognize these cycles, it helps in investment planning.
Tiger 21 Club - Follow this super investor group for ideas, and how they diversify their investments. Allocation usually has 25% in real estate, 25% in stocks, 25% in private equity, 10% in cash, and the rest is Bonds or other investments.
More Info on WFL and Tax Free Matching: HERE
Wealth For Life Topic: https://brt-show.libsyn.com/category/Wealth+For+Life
Link to Taxes Show on 10/31/2021 w/ Denver: Here
Link to Offense / Defense Show on 6/6/2021 w/ Denver: Here
Link to Shows, Denver was a Guest: Here
Investing Topic: https://brt-show.libsyn.com/category/investing
More - BRT Best of: https://brt-show.libsyn.com/category/Best+Of
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