What are the best investments for 2022?
And how to beat inflation and gain more money
Investment strategies compared
If you are reading this article, you are most likely interested in investing. In this article, we are going to break down the pros and cons of investing in stocks versus real estate versus crypto.
Just a few years ago whenever the word “investing” came up, most people would immediately start thinking about stocks and bonds. But now investing means Bitcoin and a bunch of other things that didn’t even exist 15 years ago. In fact, a lot of Millennials and Gen Z invest all their money in crypto and nothing else. Somehow, they seem to think that crypto is the only investment worth looking into.
On the other hand, older generations — Gen X and the Boomers, tend to stick to the more traditional asset classes of stocks and real estate. However, if you are investing only in crypto or only in stock and real estate — you’re missing out! Why? Because each of these three asset classes can provide a combination of growth and income. The best approach is always to first understand all of your options and then decide where to invest your money, especially given how the investing landscape is evolving as we go into 2022.
We will debrief you on the market dynamics and economic conditions you need to be aware of right now and finally, we’ll leave you with some tips on how to decide where to invest your money in 2022 and beyond.
All right let’s first talk about stocks.
When it comes to investing in stocks a lot of people fixate too much on trying to buy low and sell high but what’s often overlooked is that as a stock investor you can also make money from dividends. This leads us to the first pro of investing in stocks which is passive income.
Since stocks represent a share of ownership in a business whenever the company makes a profit anyone who holds the company stock is entitled to a pro-rata share of those profits. Meaning that if Tesla makes a profit of five billion dollars in 2021 selling electric cars, and you own a few shares of tesla you should get a tiny piece of that 5 billion profit. This pro-rata share of the profit is called a dividend and dividends are typically paid quarterly.
Now, if you don’t want to invest in individual stocks like Tesla, Apple, or Alphabet, you can also invest in index funds and ETFs, descriptions of which written by Investopedia you can find in the images below.
Usually, they hold hundreds and sometimes even thousands of different stocks. They’re an easy way to get started investing in stocks and as long as the underlying stock holdings within the fund are paying dividends the fund will also pay dividends. Some good ones to look into are FSKAX — which is an index fund and VTI — which is an ETF.
Both of these track the Total US stock market and have returned about 10% a year over the last 35 years.
For more information on stock index, funds mutual funds, and ETFs check out this article by Investopedia.
Dividends are paid into the same brokerage account where you’re holding the stocks. In fact, one huge advantage of stocks is seeing dividend deposits come in. You will never get tired of it and nothing can make a person happier than seeing their own money working for them.
Stocks are literally slices of ownership in operating businesses and they’ll continue to throw off passive income for you as long as you hold that stock. And this is whether the stock price goes up or down.
For example, throughout the month of September 2021, while the market was going down your stock holdings would still be paying you dividends. So if you’re willing to keep the faith through all the ups and downs you can generate big gains over a 10 to 20-year period while also collecting dividends all along the way. Not only this but dividend income from stocks typically gets taxed at much lower rates than other forms of income.
This leads us to the next pro of investing in stocks: favourable taxation.
Income from a paycheque gets taxed at your ordinary income tax rate which if you’re in a high tax market could mean up to 37%, and that’s not even counting all taxes.
On the other hand, dividend income gets taxed at either 0, 15, or 20 percent. For most people, it’ll be 15 %, unless you’re in one of the highest tax brackets. The catch is that for dividends to get this favourable tax treatment it has to be a qualified dividend versus an ordinary dividend. Luckily most stocks and index funds in the US pay qualified dividends. Not only are dividends taxed favourably, but so are capital gains. When you buy stocks you hold them for at least one year and then you sell them at a higher price. That’s what’s called a capital gain and capital gains count as taxable income. However, they’re taxed much lower than paycheque income. So, the moral of the story is not all income is created equal, yet society mainly pushes you to study hard so that you can get a job that pays you a paycheque income which is the highest tax form of income.
The fact, that no one ever taught us this in school is just crazy! This is why we are passionate about financial education.
Obviously, stocks are a great place to put your money for all the reasons that we mentioned. However, these days with stock prices at all-time highs dividend yields are very low.
The dividend yield is the dividend amount divided by the share price.
For example, Apple paid dividends of $0.87 per share in 2021 and the stock price is currently trading at around $170 which equals a dividend yield of $0.51. If the stock was cheaper the dividend yield would be higher. As long as stock prices remain at all-time highs, dividend yields will remain low. This is why these days people are looking for other ways to generate yield such as with cryptocurrency.
We will be getting into how you can generate yields with crypto a little bit later in this article.
Of course, with concerns about rising inflation and higher interest rates stocks might be due to corruption, and when that happens stocks will start offering more attractive dividend yields.
Something to keep in mind is that although inflation affects stocks negatively in the short run, in the long run, stocks are really good at outpacing inflation by well over six percent per year. That’s because companies can pass on the cost of inflation to their customers by raising their prices. Thus, maintaining profit margins so if you’re worried about inflation you’ll definitely want to have some money in stocks.
Next up — investment in real estate
The first pro of investing in real estate is obviously the passive rental income. People are always going to need a place to live and as long as you own real estate which people desire to rent, you’ll always be able to collect rental income. The catch is that you often need a lot of money upfront to invest in real estate. Buying any property is probably going to require hundreds of thousands of dollars which leads me to the next pro of investing in real estate — the ability to use leverage.
Leverage means borrowing money to buy assets and this is major because when you buy assets with borrowed money instead of your own money you not only get to buy things that you couldn’t afford otherwise but you also get a higher return on your capital.
Here’s how this works: let’s say you buy a property for $500 000 and then you collect $30 000 a year in rental income. The cash-on-cash return is 6%.
Using leverage, the picture is different. You buy a property for the same price, except instead of paying for all of it with your own money you only put up $100 000 and you borrow the remaining $400 000. You still collect the same $30 000 a year in net rental income but because you only have $100 000 of your own capital tied up in the investment rather than $500 000 your cash-on-cash return is 30% instead of 6%.
This is probably the number one reason why real estate is and always will be an attractive investment. The ability to use leverage is a huge advantage and real estate is the only investment where banks are lining up to lend you money to buy it. You won’t see Bank of America trying to get you to take out a loan to buy stocks or to buy bitcoin. They’ll be very happy to talk to you about taking out a mortgage to buy real estate. That’s because real estate is a hard asset and it’s in its own category. It’s different from stocks and cryptocurrency and it’s just nowhere near as volatile either. The one major con about investing in real estate is that it is quite labour-intensive. Buying real estate is not as simple as buying stocks or crypto which you can just do in a few clicks on your smartphone. You’ll have to meet with real estate agents and brokers and once you buy a property you have to deal with property managers, tenants, and contractors.
If you do not wish to expose yourself to all this, but still get involved with real estate, you can try REITs — real estate investment trusts. REITs are essentially stocks of companies that own huge real estate portfolios. Holding REITs is like having a second degree of exposure to real estate. Since if the real estate held by the company goes up the company’s stock should also go up. REITs also pay out rental income in the form of dividends. Those dividends are headache-free. NLY and SRG are examples of REITs that allow you to invest in property without having to directly purchase any on your own. NOI (Net Operating Income) looks pretty flat over time but it pays a dividend yield of 10.4 % which means that if you buy $10 000 worth of NLY you’ll get $1040 per year in passive income.
Whether you invest in real estate directly or via a REIT you still have to do your research.
Housing costs have been rising which is actually a big reason why the CPI or Consumer Price Index has also been rising contributing to inflation. Shelter is actually the biggest component of the CPI. The main driver behind rising housing costs is because interest rates have been so low. Low rates encourage people who wouldn’t do so otherwise to go out, borrow money and buy homes. When the pool of buyers gets bigger but the supply of housing stays the same, that’s when prices go up. With interest rates already at zero rates can only go up.
The third asset class is Cryptocurrency
We will look at some of the pros and cons of investing in crypto. Cryptocurrencies have drastically outperformed stocks and real estate in the last 10 years with the top coins like Bitcoin and Ethereum turning even just a one dollar investment into more than a thousand dollars.
In 2011 one bitcoin was worth a dollar and as of the writing of this article is more than $40 000. No other investment has grown in the last decade like cryptocurrency. As the oldest cryptocurrency Bitcoin is probably the furthest along in terms of growth potential. The general consensus is that Bitcoin is becoming a substitute for gold as a store of value, digital gold if you will. If that’s the case Bitcoin still has a long way to go. The market cap of gold is 10 trillion dollars whereas the market cap of Bitcoin is not even one trillion dollars.
If Bitcoin truly replaces gold as a better and more convenient store of value, then its price should grow 10x from here at least.
Theoretically, moving right along to another feature we want to highlight about investing in cryptocurrencies — passive income.
Of course, you have to be living under a rock these days to not know of at least one person who made a
fortune buying very early. It’s not as widely known that you can also generate passive income simply by holding crypto as well. This comes under the general term DeFi (Decentralised Finance).
Whereas stocks generate dividends and real estate generates rental income crypto can generate interest just like banks can make money by lending out their customers deposits in exchange for interest.
DeFi projects can lend out to their customers crypto deposits in exchange for interest as well.
Below you see the top DeFi lending projects by APR (Annual Percentage Rate), compared by defirate.com.
Clearly, the passive income from crypto is great but the trade-off is that if you want to hold, or in crypto terminology hodl, cryptocurrencies you also have a strong stomach and diamond hands. These investments are highly risky because of their crazy volatility. In 2021 alone bitcoin went from $10 000 to $65 000 then back down to $30 000, and now is again around $40 000. Sometimes, the price action is caused only by a single tweet (by Elon Musk).
For bitcoin to drop 15% in one day is normal, smaller-cap cryptocurrencies can drop or jump by tens or even hundreds of %.
If you don’t have the risk profile for these types of moves, you better think twice before casually putting your life savings into cryptocurrency.
However, there are some ways to use the volatility of crypto to your advantage.
- Dollar-cost average. It is a strategy where you buy the same dollar amount of investment at regularly recurring intervals this could be weekly, bi-weekly, monthly, or whatever interval you choose. Dollar-cost averaging automatically forces you to scale back when the market is high and to load up when the market is low. Best of all, dollar-cost averaging takes all the emotion out of it.
- The second way to use volatility to your advantage is to hold your crypto in DeFi platforms that pay you a yield on your crypto. That way you’re accumulating more crypto in times of falling prices without spending more of your own money. When the prices go back up the crypto that you’ve passively accumulated by collecting yield will then be worth more.
It all can work out and volatility isn’t necessarily something you need to be afraid of if you know how to use it in your favour.
Many people are saying that crypto is a bubble right now and they’re probably right to some extent but then again, everything is in a bubble because of all the stimulus and money printing that’s been happening in the last few years. There’s just a lot of cash sloshing around looking for a place to go which drives asset prices up. That being said, crypto and blockchain, which is the technology behind crypto, are truly the future. Even if we are in a bubble right now and prices come down a lot in the short term, we’re in the beginning phases of a long journey upwards.
That doesn’t mean you should buy any random cryptocurrency because there are a lot of weird and scam coins out there that don’t serve any useful purpose.
It’s really tempting to try and go all-in on crypto but we need to look at the facts. Stocks have been around a long time and they’ve generated a historical return of 10% over the last 100 years
Real estate has been around even longer and that has generated a historical return of 5.5%.
Bitcoin has generated a historical return of 85% per year but that’s only been over about 10 years.
If we exclude Bitcoin the vast majority of coins haven’t even been around for more than three years. Although crypto is probably here to stay, it doesn’t have a track record that we can rely on the way we have with stocks and real estate. All this to say, have exposure to crypto in your portfolio but be smart about it. If you’re new to investing, you better limit your crypto portfolio to no more than 10 of your overall assets and invest the other 90 in safe ways to build wealth.
Between the analysis paralysis and fear of losing money, it’s hard to make a move but at the end of the day, no one ever got rich sitting on money in a bank account. It’s up to you to take care of yourself financially and the best way to do that is by putting your money to work.
To wrap it all up, how do you decide where to invest your money — stocks, real estate, or crypto? At the end of the day, diversifying by having some money in several investment types is the best approach.
However, you can skip the brokerage account, researching stocks and bonds, and crypto projects.
There is no need to dedicate your precious time and energy to investigating what criteria you should rate and what are the good investments and still get some 10 to 20% ROI.
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