Investing With Purpose
What, Where, How and Why I invest my money
I recently wrote about how you manage money is making you miserable. The premise of the article was simple. Many people are stressed out by money because they don’t spend it on things that make them happy or that they value.
The example I used to illustrate this point was travel. People always tell me they love to travel, and when I ask them how much they save each month for a future trip, they reply “nothing.” It doesn’t take a genius to figure out how money can help you live a little happier.
- Don’t spend money on things you don’t value.
- Do spend money on things you do value.
You should have a game plan to guide how you spend your money. You also need a game plan for how you invest your money. What you invest your money in and where you keep those investments are significant decisions, but few people stop and think about investing with any purpose other than “getting rich.”
To give you an example of investing with purpose, I’ll share with you how I invest my money with purpose. I am not saying my way is the right way, but I at least have thought it through and invested in a way that fits my life and my goals.
I’ll share with you;
- The Four asset classes I invest in; Physical real estate, REITs, stocks, and bonds.
- How I invest in each asset class.
- Where I hold each asset class and why
- The purpose of my investment in each asset class serves.
I should also note that my wife and I are both lucky enough to have a Defined Benefit pension plan through our employers. These pensions provide us a guaranteed income during retirement. This gives us the luxury to focus on long term wealth building and building short term passive income streams.
Asset Class 1: REITs
Real Estate Investment Trust’s (REITs) are companies that invest in commercial real estate. There are some conflicting views on whether to consider REITs as a separate asset class from stocks, but for the purposes of this article, I’ll treat them as a distinct asset class.
Why I invest in REITs: I invest in REITs to generate passive income. Since I don’t need this income today, I can reinvest that income and begin compounding the stream of passive income that will be available to me should I ever need it.
I should also be upfront that I have a bias towards real estate. I love the idea of owning real estate, so it is overweighted in my portfolio. All of the money I have invested in REITs is “fun money.” The bulk of my portfolio is invested in index funds.
How I invest in REITs: There are two ways to invest in REITs.
- Investing in individual REITs
- Investing in a basket of REITs through an ETF
I invest both in individual REITs and REIT ETF’s. Most people would be best served simply investing in a REIT ETF and not bother trying to pick individual REITs. However, I am a finance nerd and enjoy analyzing real estate and REITs, so I do invest in individual REITs.
Where I invest in REITs: I invest in REITs through what we call in Canada a Tax-Free Savings Account (TFSA), which is like a Roth IRA. I can contribute up to $6,000 per year into a TFSA and pull any dividends or capital gains out completely tax-free.
I invest in REITs through my TFSA so that I can build a stream of tax-free passive income. A TFSA is the perfect place to invest in REITs or other high-yield investments.
Dividends received from REITs do not receive the same tax credits that dividends received from stocks receive. Therefore, it would be inefficient to invest in REITs in a non-tax-sheltered account, whether you live in Canada or the U.S.
The purpose REITs serve to me: REITs are all about income. The more income I have, the less stressed I am about money. My greatest fear is not having an income, so REITs serve to calm my financial anxiety.
I should note that “income investing” is a definite investment bias I have. The only thing that should matter is “total returns.” This is a bias I have recognized and have been reducing my exposure to REITs and increasing my exposure to the next asset class.
Asset Class 2: Stocks
Why I invest in stocks: I invest in stocks to build long term wealth.
How I invest in stocks: I invest in stocks exclusively through index funds that track the global stock market. I never invest in individual stocks.
Where I invest in stocks: I invest in stocks through my Registered Retirement Savings Plan (RRSP), which is like a traditional IRA. Once I run out of the contribution room in my RRSP, I will invest in stocks through a taxable brokerage account.
The purpose stocks serve to me: I view my investment in the stock market as a top-up to my pension income during retirement or as a secondary source of retirement income if my company pension were to become insolvent.
Asset Class 3: Bonds
Why I invest in bonds: I invest in bonds as a hedge against the stock market. Typically, as the stock market declines, bonds perform well. If the stock market crashes, I’ll sell all my bonds and buy up stocks at a discounted price.
How I invest in bonds: I invest in bonds through an ETF that tracks every government and corporate bond in Canada.
Where I invest in bonds: I have bonds in both my TFSA & RRSP.
The purpose bonds serve to me: I think of investing in bonds the same way I think of eating vegetables. I don’t really want to do it, but I do it because it’s good for me. Bonds are viewed as a hedge against stock market declines. If/when the market has another meltdown, I will be very thankful to be invested in bonds on that day.
Asset Class 4: Physical real estate
Physical real estate holds a unique position in my life, so I want to take some time to focus on “why” I invest in physical real estate. I’m also going to speak about it from the perspective of “we” as in my wife and me.
To quickly cover “how” we invest in physical real estate, we own two properties; Our primary residence and a second house we rent out to the family.
Let’s start with our primary residence as it has generated more wealth for us than any other investment.
I know it has become fashionable for personal finance writers to trash homeownership, and I will be the first to admit homeownership is not for everyone. That being said, we were fortunate enough to buy in a market right before prices took off and our home has increased in value by more than 10% each year, we have lived in it.
Considering we only put 5% down to purchase the house (again not something I would recommend), our initial investment in this house has increased by over 700% in 3 years (excluding maintenance costs).
Our primary residence serves two purposes in our lives:
- To build long term wealth that we will cash in on during retirement.
- It’s a beautiful place to live.
The second point is where the true value of owning our home is for us. We own our house because we love living in it. A house is as much of a lifestyle choice as it is an investment.
The same goes for the second house we own. We rent it out to family, and although they live in a different real estate market than we do, we have been lucky enough to see significant price appreciation in a short period.
Like our primary residence, our second house has helped us create new wealth rather quickly, and again this is an added bonus. The purpose of the second house is to align our money with one of our core values; family. This is a family home. We have a family that lives their full time, and when Trish and I visit in the summer, we have a place for the family to be under the same roof.
So, while there are short term profits to be made in buying physical real estate, we buy it for long term wealth and lifestyle reasons.
There it is. The “what,” “where,” “how,” “Why,” and most importantly, the “purpose” of each investment in my portfolio. Do you have a different purpose for the investments you put your money in? Let me know in the comments.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.