Two Types of Investments
There is no shortage of things you can invest in. You can invest in real estate, stocks, businesses, movies, oil wells, commodities, and collectibles just to name a few. There are numerous investment vehicles, but when it comes to down to it there are really only two types of investments. There are INVESTMENTS, and there are TRADES.
Investments are long term and for cash flow. These investments are usually held for life. Sometimes the investor decides to sell (TRADE), because they want to move their capital into another cash flow producing asset. Many investors confuse long term trades for investments, but an easy way to tell the difference is by asking two questions: Does this investment produce residual cash flow? And, do I ever plan to sell it? If the answer to either of these questions is YES, then what you have is a TRADE.
TRADES are usually short term investments, but can be longer term, and the investor’s goal is to create capital gains, not cash flow. An investor who buys something as a trade may still receive cash flow during the holding period, but the primary goal is to sell the investment at a much greater value later.
Stock investors are often traders, and investors in rental property are usually investors. This doesn’t mean stocks cannot be investments or real estate cannot be a trade. Warren Buffett, who is known as one of the world’s greatest stock market investors, is thought to never sell his stocks. This is not true. Buffett actually has made a great deal of TRADES throughout his career, but many of his holdings are INVESTMENTS. When he buys INVESTMENTS, he says he doesn’t care whether the stock price goes up or down. That is because he is concerned with the cash flow (like a real estate investor who invests in rental property).
So which is better, INVESTMENTS or TRADES? It depends on the investor, their situation, and their goals. Both are great tools! If you have more disposable income, you may want to put more money into INVESTMENTS to solidify future passive income. If you are building up and want to move up the new worth ladder quickly you may want to use TRADES or a combination of both.
TRADES are great ways to increase your wealth rapidly, but INVESTMENTS will build your wealth over time. One great thing about INVESTMENTS is that since they are cash flow producing assets, they will pay you whether you work or not, while TRADES require you to go do repeat the process over and over. INVESTMENT income is more stable than TRADING income, and there are tax advantages to INVESTMENT income over TRADING income. It isn’t necessarily a matter of which is better, but which better suits your goals and needs.