112: Making Your Money More Valuable: Risk, Yield and Time
Considered by many to be the founder of modern business management practices, Peter Drucker once stated that “whenever you see a successful business, someone once made a courageous decision.”
Every week we, the Kitti Sisters, review properties or business opportunities that we are either looking to purchase or looking to passively invest in. Recently, we had a conversation with a friend who said that in today’s market environment, he just doesn’t see any way he can grow his real estate portfolio. And in our opinion, this is just not true.
For real estate investing, specifically for us, apartment investing, we really evaluate any investment through these three lenses: risk, reward (i.e., yield), and time. ⏳
Now we know you are very well aware of investment risks, especially in light of all the shenanigans happening in the crypto world. If you want to learn more about that mess, check out our most recent episode where we dive into all things crypto and Ponzi schemes. 👀
So it’s definitely top of mind, and this is one major area that can destroy your investment altogether, let alone hinder its growth.
In another previous episode, we talked in depth about the two types of risks in apartment investing, so definitely check out that episode as well, which has a lot more information for you to review on your own time.
As a brief summary, there are two major overarching types of risks. One is asset class risk and the second is execution risk.
At the end of the day, you should always invest in an asset class that has an extremely favorable risk/reward profile.
🏢 Apartment investment would be on top of that list, in our opinion.
On top of that, the asset class must have true intrinsic value and not be valuable just because someone says it is and other people believe them. That’s what led to the huge losses experienced recently by those duped by FTX – literally the most perfect example of Shiny Object Syndrome. This brings us to another important aspect of asset class risk that you should consider, which is does the asset actually provide 💰 cash flow? 🧐🧐
And the other type of risk that we mentioned above is execution risk.
What this really means is do you believe the asset manager you are investing with has the experience, know-how, and also integrity needed to fully maximize and safeguard your investment with them? It has to have all of these, so if any of these key elements are missing, you will find yourself SOL, which isn’t where any of us want to be.
Ask yourself if you know the team’s track record – the KLT or know-like-trust factor is critical here.
👉 The moral of the story is don’t invest with randos that DM you on the gram.
Or random Bitcoin Bros or any other seemingly promising investor who doesn’t pass the KLT test.
Time vs. Yield
When we listen to a lot of talking heads in our various mediums, we hear them say, hey compound interest will grow massively if given enough time. And they typically cite a hockey stick-style graph that says, your x dollars in 40 years will be y dollars, so you must start earlier!
Every time we hear this we want to scream through the screen and say, what? 40 years!!! 🤯🤯
That’s way way too long!
Look, we get the value in having patience, but your girls The Kitii Sisters have some boss moves to make and we can’t afford to wait 40 years, and neither can you. 😨😨
So, what’ their incentive, or motivation behind driving home this narrative? Could it be that they are trying to indoctrinate you into believing and accepting that their incredibly low yield is probably the highest you’d get?
But the major flaw in this investing philosophy is it ignores the other and we would like to argue, the more valuable aspect, which is reward or yield. And the yield, friends, is way way more powerful than time, and also way more fun cause you actually get to make money when you are still young and vibrant and do not have to wait 40 years.
This is where the rule of 72 comes into play.
Simply put, the rule of 72 calculates how long it will take for your money to double. The formula is 72 divided by the yield or interest – keep in mind this applies to compound interest only, not simple interest.
For example, if the yield is 3%, you’d take 72 divided by 3 and you’ll have 24 years. That’s how long it will take for your investment to double at a 3% per year interest rate.
If you are going to make your money more valuable, you are definitely going to want to flip the script. If we rearrange the formula a bit you’ll see a completely different result. If we take 72 and divide it this time by 24 for a 24% yield, we’d get 3 years. 🤔🤔
Let us pause for a moment for that to sink in for you.
That’s 24 years versus 3 years.
Which one sounds better to you?
Most people will ask – how did you get 24%? But that’s the wrong question.
The right question is “are there really people out there who get a 24% rate of return?”
And our answer to that is ⏬
The moral of the story is that you need to increase your investment frequency or velocity.
Obviously, this only works when you have more sand in your sand bucket to play with, we get that. But we know a lot of people who are hesitant and are standing on the sidelines even though their wealth is being silently robbed by inflation.
Instead, you should strategize ahead of time and calculate how much you plan on investing and at what frequency. The more money you have invested, the faster your money will grow and thus become more valuable.
Don’t let a lack of knowledge paralyze you from taking action.
Hey, who knows, with the right investment you may be thanking us in 3 short years. ❤️️
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