If you're a successful entrepreneur, you might think your successes to date are what guarantees your financial future.
But, by definition, to be an entrepreneur is to take risks. Most entrepreneurs have got a good handle of two forms of money. Day-to-day cash and their investment capital.
This puts them at risk. There needs to be a third option. Capital that’s demarcated from the rest and kept separate. So that means day-to-day cash, investment capital and your funds for the future. If anything goes wrong with the first two, your investments for the future are always safeguarded.
So what is the best investment for the future?
In my experience, conversations with entrepreneurs start with something like…“I talked to an adviser once and they wanted to invest in a pension. I didn’t like the sound of that.”
Entrepreneurs hate pensions. For two reasons: accessibility and control.
Despite the tax advantages, they resent having to wait until 55 to access their money. You can buy / sell and borrow against a property. So that resolves some of the accessibility issues.
The second is control. Entrepreneurs like to invest in assets they both understand and can influence. That makes property the most likely choice.
But, the very fact that a pension can’t be accessed by you or your creditors in the event of an insolvency makes it an excellent investment for the future.
That doesn’t solve the control issue. So, entrepreneurs turn to property instead.
Is property the best investment?
First of all, there is choice. You can choose between development opportunities and beautifully furnished homes ready to let, family houses or HMOs, and individual properties versus several units in a block of flats.
When it comes to financing the property, you could pay in cash, take out a repayment mortgage, use an interest-only mortgage or leverage existing properties to buy more.
This list isn’t even exhaustive!
You can choose how hands-on you are too, either managing every element yourself or outsourcing various aspects so you can take a back seat.
With celebrities, property development TV shows and a growing number of ‘finfluencers’ promoting property investment as a passive source of income and the secret to long-lasting wealth, it’s easy to see why so many people find this way of investing enticing.
What’s not to like?
It’s not as passive as people think
You might love the idea of your portfolio ticking away in the background while you focus on your business or spend your days at the beach, but it’s unlikely to be as passive as you think.
I’ve worked with an increasing number of clients who’ve turned to property investment as a means of protecting their wealth, but by the time they come to me, they’re often burnt out by it – or on the way there.
They went into property investing expecting a truly passive source of income but end up feeling disappointed with their returns or exhausted from juggling lease issues, tenancy problems, government legislation and so on.
Of course, if you don’t fancy being the next Sarah Beeny, you can outsource many aspects of the property investment process. You don’t have to knock down any walls, find the right tenants or respond to urgent leaks. Someone else can do that for you… but that comes at a cost and too much outsourcing can drastically affect your profits.
Enter… the stock market
The reason clients in this situation come to me is because they’re intrigued by the alternatives, but tentative about them. For many who are used to dealing with bricks and mortar the stock market is invisible, mysterious and therefore untrustworthy. They worry about how they’ll master it and feel as comfortable with it as a property portfolio.
If this sounds familiar, I want to let you in on a little secret. You don’t need to understand everything about the stock market to be successful investor. All you need to know is that they’re made up of companies – companies that might not be that different to those run by people like you.
The reason each of those 25,000 plus companies have been able to float on the stock market is because they’re run by brilliant entrepreneurs who’ve created successful products and services and now run very efficiently and profitably. It may not be your own company or property, but you’re investing in a system that supports success. And the more successful the company, with the right strategy, the more you’ll own.
There’s an element of risk, yes, but property can be risky too. Would you view property investment risky if you owned every property in the UK at the same time? Well, you can replicate exactly that by owning an index fund, for very little cost, that represents every tradable company globally.
And when we look at the stock market’s performance throughout history, it’s easy to see how long-term growth can be achieved. Invest smaller amounts than property requires, often and over the long term and your confidence will grow too. The stock market is a 200 year old wealth building machine.
With the help of a diversified portfolio of index funds, it’s historically been possible to get a 7% annual or higher - and that’s without having to track down the right property, calculate rental yield, or buy hazmat suits from Amazon in order to get rid of a particularly troublesome tenant.
All you need to do is buy the funds and wait for their value to grow. I’ll even do it for you, so you don’t have to think about it. Tell me which option is the passive one now?
Handing your money over to someone else can be hard, especially if you’re used to the control that comes with property.
But think of it this way: When you invest wisely in the stock market, you’re investing in thousands of companies run by brilliant entrepreneurial minds who care about their businesses just as much as you care about yours.
If you don’t want to go all-in, how about a compromise?
A new client I met recently doesn’t feel ready to shift his property mindset just yet, but he’s looking for a less stressful method of generating returns. He’s intrigued enough that he’s agreed to let me invest £1,000 a month into the stock market for the next 5 years, alongside his existing property portfolio.
My view: It's more likely that he’ll generate a higher return through ownership of global companies, with virtually no involvement required, and it will beat or match his property portfolio returns after tax, without the hundreds of hours he will spend managing the flats.
If I prove I'm right, he’s young enough to have time to ‘flip’ his approach and dial down the property holdings in favour of the stock market.
Let’s see who ‘wins’…