Investing

Building Wealth: Two Types of Income

If you want to build wealth, you must understand the two ways to produce income which I call Type 1 and Type 2.

Type 1 Income: “Work = Get Paid Money” & “Don’t Work = Don’t Get Paid Money”

  • A job where you exchange your time, talent, and energy for a paycheck.
  • Sometimes referred to as “aggressive streams of income”

Type 2 Income: “Get paid whether or not you are working.”

  • Your money produces more money without requiring you to work for it
  • Sometimes called “passive streams of income”

The wealthy are well aware of Type 2 Income. It’s why they have become wealthy.

Type 1 Income requires your physical presence and effort. It is how must of us learn to produce income from a very young age. We perform a task and receive compensation for it. In school we’re told time and again, “Study hard so you can get a great job.”

Each of us, however, is limited on the income we can produce using Type 1. Even if you are a doctor or highly compensated sales person, you are still limited by the hours of the day.

This is why it is important to move money generated from Type 1 Income activities into Type 2 Income producers.

You may already be doing this at some level without realizing it! For example, if you are contributing to your retirement savings plan, you have captured the power of Type 2 Income. The investments within your RSP (401k, 403b, 457, TSP, IRA) are working for you – producing growth and income – without requiring any additional work from you.

Recommended Resource

Joseph Sangl’s book: Oxen: The Key To An Abundant Harvest  Written for the person who is keenly interested in building up their Type 2 Income, this book will help you identify potential “Oxen” – investments – that will grow your net worth and position you for a fully funded life at retirement – perhaps at a much younger age than you think!

The Stock Market Is CRAZY – What Do I Do?

The stock market has been experiencing crazy swings since the start of 2016. In fact, the Dow Jones Industrial Average is down more than 10% since the start of the year.

This can cause a lot of alarm for investors. Particularly those who are very close to retirement or who have already retired.

What should a person do in this situation? Sell it all? Buy a bunch of gold and silver? Do nothing at all?

I determine my approach by asking several questions:

  1. When do I really need the money I’ve invested?  This is a great question each investor should ask. Since I have no need for my invested money at this time (it’s for my children’s college and retirement), I’m able to wait out a downturn.
  2. Do I have the ability to “time” the market?  Not really. I can anticipate some changes, but I have no control of global macro economics. With the market being flooded by oil and other commodities, various hostilities between strong nations, credit markets being squeezed, and natural economic cycles, there are definitely pressures on commercial growth.  But I can’t time the market. I suspect you are also challenged to do so.

Then I remind myself of various statements of wisdom that have informed my investing during my life. Here are a few:

  • “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain
  • “Emotional people buy high and sell low. Smart investors buy low and sell high.” – Unknown
  • “You never truly lose until you sell.” – Unknown

So what have I done during this challenging time? The same thing I did in 2008 – continue the course. I continued to invest in stocks (they were on sale!) and other assets (like businesses and real estate) to diversify my portfolio.

This approach has worked well for me for 20 years.

What is your approach?

How to Locate Incredible Mutual Funds

Locating a Mutual Fund can be overwhelming if you don’t know where to look. In this post, I’m showing you the three-part approach I use.

Once I have determined the category of mutual funds that meets my criteria, it is time for me to review actual mutual funds. Here’s the three-part approach:

  1. Mutual Fund Screens – I really like CNN’s Mutual Fund Screener and Morningstar’s Mutual Fund Screener.  For example, I used the CNN screener to select Small Growth Diversified Funds that have delivered an average of 10% annual return OR LARGER for the past 10 years.  It delivered 36 mutual funds that met that criteria!  This really helps me narrow down the search!
  2. Review Retirement Plan Mutual Funds – If your employer has a retirement plan such as a 401(k), 403(b), Simple IRA, or TSP then be sure to review the options available.  My employer has a Simple IRA with American Fund investment options.  Usually an employer helps absorb some of the fees or the fees are reduced by the plan administrator.  This can really help preserve financial gains!
  3. Seek Professional Guidance – I meet with a financial advisor about once a year.  This professional advice helps me look at my investments with more clarity.

Once I have found funds to look at, I look at the following characteristics of each fund:

  • Age of the Mutual Fund  I like mutual funds that are older than me!
  • Investment Growth  I look at the 1, 5, 10, and Lifetime track records.
  • $ Needed To Start  This is really important for beginning investors.
  • The Fund’s Objective  This helps me understand the direction of the fund.

I use the CNN Money Snapshot feature to analyze funds. I also like to compare mutual funds to each other using the “Advanced Charts” feature on CNN money.

So that’s just a glimpse into how I choose mutual funds. Many times I end up with a dead end, and I go back to the starting point again to get more mutual funds to compare!

 

Different Types of Mutual Funds

There are literally THOUSANDS of mutual funds available in the marketplace today.  Each mutual fund is usually assigned to a particular family of mutual funds.

Here are some common categories of mutual funds…

  • International Stock Fund
  • Aggressive Growth Stock Fund
  • Growth Stock Fund
  • Growth & Income Stock Fund
  • Equity-Income Fund
  • Balanced Fund
  • Bond Fund
  • Value Fund
  • Industry-Specific Funds (like Healthcare Fund or Pharmaceutical Fund)
  • Index Funds (S&P 500, Russell 2000, etc.)

If you purchase ownership in an International Stock Mutual Fund, you can bet that it is primarily investing in international companies.  If it is an Aggressive Growth Stock Mutual Fund, you would expect to see the mutual fund purchasing shares of companies that are growing like crazy.

Each family of funds has a general “feel” to it.  The International and Aggressive Growth Stock Mutual Funds tend to have wild swings in performance.  One year it could grow 40% and the next it could lose 25%.  It feels like you are on a great roller coaster ride at Six Flags!

Growth & Income, Equity-Income, and Balanced Funds are more stable and predictable.

Index Funds track specific market indexes like the S&P 500 and the Russell 2000.

Interested in learning more about investing? Check out my book on investing: “Oxen: The Key to An Abundant Harvest” HERE.

Establish Investment Goals

Goals! I love GOALS!! My goals spur me to save and invest. Today, I’m sharing about how my personal investment goals guide my mutual fund choices.  First you should know a couple of things about me.

  1. I view my investments as money that I will not touch for at least five years.
  2. I prefer mutual funds over individual company stocks.  I do own several individual company stocks, but I will not allow an individual company stock to exceed 10% of my overall portfolio. (See my current investment portfolio HERE)

My investment goals are GROWTH, GROWTH, and more GROWTH.  I do not need my investments to produce income for me as I am in my early 40s.  I want my money to GROW.  This means that I invest in mutual funds that are purchasing stock of companies that are experiencing major growth (like Google).

Now, if I were retired, I would want my investments to produce income so I would be searching for mutual funds that invest in companies that are paying dividends to its shareholders (like Wal-Mart, Microsoft).

If I were approaching retirement, I would be moving the money that I would need in the next five years to much more stable and secure investments.

What are your investment goals?