Every Investment Strategy Ranked (So You Don’t Waste Your Money)

Summary

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Takeaways

• 😀 Speculation investing (F tier) is essentially gambling with borrowed money, not a real investment strategy. It attracts beginners looking for quick wins but often results in heavy losses.
• 😀 Momentum investing (D tier) involves chasing hype and trends, like meme stocks or overheated markets. It may work for early players but ultimately fails for most, as growth slows down or reverses.
• 😀 Capital preservation (C tier) focuses on safety and liquidity, such as savings accounts and CDs. It’s not a strategy for wealth, but it prevents loss and builds a foundation for future wealth-building.
• 😀 Long-term compounding (B tier) is the most recommended investment strategy for the majority, where you invest in low-cost index funds and let time and compounding growth work for you.
• 😀 Active investing (A tier) allows for more control than B tier, enabling you to diversify or focus on specific sectors. It’s still based on long-term compounding but with a more personalized approach.
• 😀 The majority of active investors underperform compared to simple index compounding, but a few skilled ones can outperform and accelerate wealth accumulation faster.
• 😀 Ownership and capital gains (S tier) is the strategy used by billionaires, involving private equity, venture capital, and the ability to borrow against appreciated assets to avoid taxes.
• 😀 The 'buy, borrow, die' strategy (S tier) is how the ultra-wealthy accumulate wealth: they don't sell assets but borrow against them, living tax-free while their wealth compounds.
• 😀 While long-term compounding (B tier) is boring and takes time, it is the most reliable path to wealth for regular investors, outperforming most other strategies in the long run.
• 😀 Wealth-building strategies like A and S tiers are reserved for those with significant capital, access to exclusive deals, and the ability to make high-impact investments unavailable to most people.
• 😀 The key takeaway from the video is that most people need to move away from speculative, high-risk strategies and focus on proven, long-term approaches like compounding and value investing to build real wealth.

Q & A

What is speculation investing, and why is it considered risky?

Speculation investing, often associated with platforms like TikTok finance, involves using borrowed money (like CFDs) to make short-term bets on price movements. It may appear like investing with charts and brokers, but it's essentially gambling. The risk is high because small market movements can wipe out entire investments, and studies show that a large percentage of day traders lose money consistently.

How does momentum investing differ from speculation investing?

Momentum investing involves buying into assets or markets that are currently experiencing rapid growth or hype, such as meme stocks or real estate bubbles. Unlike speculation, which relies on borrowed money, momentum investing involves actual ownership. However, both are risky since they often depend on short-term trends that can quickly reverse.

What are the main issues with capital preservation strategies?

Capital preservation strategies, such as savings accounts and CDs, prioritize safety and liquidity but fail to beat inflation. For example, a typical savings account might pay 0.4% interest, while inflation can run at 2.9%, meaning the real value of your money declines over time. While these strategies prevent loss, they do not lead to wealth growth.

Why is long-term compounding often considered the best strategy for most investors?

Long-term compounding is seen as the best strategy because it allows investments to grow steadily over time without requiring active management. By investing in low-cost index funds like the S&P 500, investors benefit from average returns of around 7% after inflation. Over decades, this steady growth can significantly increase wealth without the need to outsmart the market.

What differentiates active investing from long-term compounding?

Active investing involves a hands-on approach, where investors select individual stocks or make changes to their portfolio based on personal preferences or perceived opportunities. Unlike long-term compounding, which relies on passive investment in broad market indices, active investing seeks to outperform the market by actively managing and customizing investments.

What is value investing, and how does it relate to active investing?

Value investing is a strategy within active investing where investors seek undervalued companies that have strong fundamentals but are temporarily priced low. This method requires skill in identifying companies that are overlooked by the market but have the potential for significant future growth. It is an advanced form of active investing that can lead to higher returns if done successfully.

Why do most active investors underperform compared to passive index fund investors?

Most active investors underperform because beating the market consistently is incredibly difficult. Studies, such as those by Morningstar, show that the majority of actively managed funds fail to outperform their benchmarks over 10 to 15 years. Active investing involves more risk, and many investors lack the skill or patience to make successful long-term decisions.

What are the key characteristics of S-tier investment strategies?

S-tier strategies, such as private equity and venture capital, are available only to the ultra-wealthy and involve high-scale, high-return opportunities. These strategies leverage ownership and capital gains to build massive wealth through investments in private businesses or early-stage ventures. S-tier also includes the 'buy, borrow, die' strategy, where billionaires borrow against their assets rather than selling them, allowing their wealth to grow tax-free.

How do billionaires use capital gains to build wealth?

Billionaires use capital gains as a major source of wealth by investing in assets that appreciate significantly, like private businesses or startup ventures. Instead of selling these assets for cash, they borrow against the appreciated value, allowing them to live tax-free while their wealth continues to grow. This strategy is not available to most people, as it requires massive amounts of capital.

Why is the 'buy, borrow, die' strategy so effective for the ultra-wealthy?

'Buy, borrow, die' is a strategy used by the ultra-wealthy to avoid taxes and keep their wealth growing. By buying appreciating assets, borrowing against them, and never selling, billionaires can continue to accumulate wealth without triggering capital gains taxes. When they pass away, the assets are passed on to heirs without incurring taxes on the gains, allowing wealth to continue compounding over generations.