11. What Should You Invest In?

Question 1

What does Wally Jay emphasize about teaching and learning?

Answer 1

Not everyone learns the same way. Instructors must individualize their instruction.

Question 2

What is the core ethos of wealth building mentioned in the text?

Answer 2

Continually buy a diverse set of income-producing assets.

Question 3

What are the two most commonly known asset classes for investors?

Answer 3

Stocks and bonds.

Question 4

According to Jeremy Seigel, what is the average real return on U.S. equities over the last 204 years?

Answer 4

6.8 percent per year.

Question 5

Which country had the lowest annualized real returns in a study of equity returns from 1900–2006?

Answer 5

Belgium with 2.7% annualized real returns.

Question 6

What is a significant risk associated with investing in stocks?

Answer 6

Expecting a 50%+ price decline a couple of times a century.

Question 7

How can investors buy stocks?

Answer 7

By purchasing individual stocks or through index funds or ETFs.

Question 8

What is the average compounded annual return for stocks?

Answer 8

8%–10%.

Question 9

What are bonds essentially classified as?

Answer 9

Loans made from investors to borrowers.

Question 10

What is the term for the time period over which a bond is paid back?

Answer 10

Term, tenor, or maturity.

Question 11

What is the yield of a bond?

Answer 11

Annual coupon payments divided by the price of the bond.

Question 12

What types of bonds are commonly discussed by investors?

Answer 12

U.S. Treasury bonds, foreign government bonds, corporate bonds, and municipal bonds.

Question 13

Why are U.S. Treasury bonds considered the safest?

Answer 13

The U.S. government can print money to pay back bondholders.

Question 14

What is a primary benefit of owning bonds during market downturns?

Answer 14

Bonds tend to rise when stocks fall.

Question 15

What is the average compounded annual return for bonds?

Answer 15

2%–4%.

Question 16

What is a significant advantage of investment property?

Answer 16

It can provide income if rented out while also appreciating in value.

Question 17

What is leverage in the context of buying investment property?

Answer 17

Borrowing money to amplify exposure to price changes of the property.

Question 18

Fill in the blank: The average return on U.S. stocks is _______.

Answer 18

8%–10%.

Question 19

True or False: Bonds generally provide higher returns than stocks.

Answer 19

False.

Question 20

What should investors consider when evaluating asset classes?

Answer 20

Pros and cons of investing in each asset class.

Question 21

What is a common strategy when investing in stocks?

Answer 21

Focusing on different stock characteristics like size, valuation, or momentum.

Question 22

What does the phrase ‘flight to safety’ refer to?

Answer 22

Investors selling riskier assets to buy bonds during market sell-offs.

Question 23

What is leverage in real estate investment?

Answer 23

Leverage is borrowing money to buy investment property, magnifying returns due to exposure to price changes.

Question 24

How does leverage affect returns when property values increase?

Answer 24

If a property increases in value, leverage can significantly multiply the original investment returns.

Question 25

What happens to equity when property values fall?

Answer 25

If property values decline, leverage can lead to a total loss of equity.

Question 26

What is the average compounded annual return for investment properties?

Answer 26

12%–15% depending on local rental conditions.

Question 27

List some pros of owning investment property.

Answer 27

* Higher returns than traditional asset classes * Potential for significant capital appreciation

Question 28

What are some cons of owning investment property?

Answer 28

* Requires management of tenants * Difficult to diversify

Question 29

What is a Real Estate Investment Trust (REIT)?

Answer 29

A business that owns and manages real estate properties, distributing income to shareholders.

Question 30

What is the minimum taxable income that REITs must pay out as dividends?

Answer 30

REITs must pay out at least 90% of their taxable income as dividends.

Question 31

Name the types of REITs.

Answer 31

* Residential REITs * Commercial REITs * Publicly traded REITs * Private REITs * Publicly non-traded REITs

Question 32

What is the average compounded annual return for REITs?

Answer 32

10%–12%.

Question 33

What is a major advantage of farmland as an investment?

Answer 33

Farmland has a low correlation with stock and bond returns.

Question 34

What is the expected return from investing in farmland?

Answer 34

High single digits, with returns coming from farm yields and land appreciation.

Question 35

What are the pros of investing in farmland?

Answer 35

* Low correlation with financial assets * Good inflation hedge * Lower downside potential

Question 36

What are the cons of investing in farmland?

Answer 36

* Less liquidity * Higher fees for crowdsourced solutions * Requires accredited investor status for some investments

Question 37

What is the average compounded annual return for small business investing?

Answer 37

20%–25%, but expect many failures.

Question 38

What are the pros of owning a small business?

Answer 38

* Potential for extremely outsized returns * More involvement can lead to more opportunities

Question 39

What are the cons of owning a small business?

Answer 39

* Huge time commitment * High failure rate

Question 40

What are royalties?

Answer 40

Payments made for the ongoing use of a particular asset, usually a copyrighted work.

Question 41

What advantage do royalties have as an investment?

Answer 41

They generate steady income that is uncorrelated with financial markets.

Question 42

What is the Lindy Effect?

Answer 42

The longer something has been around, the more likely it is to continue to be popular in the future.

Question 43

What is a risk associated with investing in royalties?

Answer 43

Cultural changes can affect the value of royalties over time.

Question 44

What is the average annual royalty income from Jay-Z and Alicia Keys' 'Empire State of Mind'?

Answer 44

$32,733.

Question 45

What are some factors that can affect the value of royalties?

Answer 45

* Changes in musical tastes * Age of the work (Dollar Age)

Question 46

What does the Lindy Effect explain?

Answer 46

It explains why older cultural works, like Mozart's music, may have more lasting appeal than newer works, such as Metallica's.

Question 47

What is a downside to investing in royalties?

Answer 47

Potentially high fees charged to sellers, which can be a sizeable chunk of the final sale price.

Question 48

How can typical investors purchase royalties?

Answer 48

Through online platforms that match buyers and sellers.

Question 49

What is the average compounded annual return for royalties?

Answer 49

5%–20%.

Question 50

What are the pros of investing in royalties?

Answer 50

* Uncorrelated to traditional financial assets * Generally steady income.

Question 51

What are the cons of investing in royalties?

Answer 51

* High seller fees * Tastes can change unexpectedly and impact income.

Question 52

What is one of the best income-producing assets you can invest in?

Answer 52

Your own products.

Question 53

What types of products can you create for investment?

Answer 53

* Books * Information guides * Online courses.

Question 54

What is a key challenge of creating your own products?

Answer 54

It requires lots of work upfront with no guarantee of a payout.

Question 55

What is the average compounded annual return for your own products?

Answer 55

Highly variable with a fat-tailed distribution.

Question 56

What are the pros of investing in your own products?

Answer 56

* Full ownership * Personal satisfaction * Can create a valuable brand.

Question 57

What are the cons of investing in your own products?

Answer 57

* Very labor intensive * No guarantee of payoff.

Question 58

Why are gold, crypto, art, etc., not included in the list of income-producing assets?

Answer 58

They do not produce reliable income streams.

Question 59

What anchors the valuations of income-producing assets?

Answer 59

Cash flows.

Question 60

What percentage of investments does the author allocate to income-producing assets?

Answer 60

90%.

Question 61

What is the annual compounded return for stocks?

Answer 61

8%–10%.

Question 62

What are the pros of investing in stocks?

Answer 62

* High historic returns * Easy to own and trade * Low maintenance.

Question 63

What is the annual compounded return for bonds?

Answer 63

2%–4%.

Question 64

What are the pros of investing in bonds?

Answer 64

* Low volatility * Good for rebalancing * Safety of principal.

Question 65

What is the annual compounded return for investment property?

Answer 65

12%–15%.

Question 66

What are the cons of investing in investment property?

Answer 66

* Managing the property can be a headache * Hard to diversify.

Question 67

What is the annual compounded return for REITs?

Answer 67

10%–12%.

Question 68

What is the annual compounded return for farmland?

Answer 68

7%–9%.

Question 69

What is the annual compounded return for small businesses?

Answer 69

20%–25%.

Question 70

What are the cons of investing in small businesses?

Answer 70

* High volatility * Low returns after inflation.

Question 71

What should be considered when choosing an asset allocation?

Answer 71

The optimal asset allocation is the one that works best for you and your situation.