This makes sense but then what are some useful ways to use cash to build wealth if not buying stocks and other investments? I'm a young guy with plenty of money in the bank (in the tens of thousands; obviously not enough to retire but I could quit my job and do nothing for a while) and basically no debt. I find and I'm sure I'm not alone here with this feeling that, while I could spend a lot more money, I'm perfectly happy spending significantly less than I make. Right now, it's mostly in a bank, waiting for me to spend it on god knows what. Any advice on how to use it to build wealth?
Until you've figured out what to do with it, just buy shares VTI. Vanguard Total Stock Market. Or get the admiral version if you're in the US. Essentially it's a tiny fraction of ownership of all publicly traded companies. As long as the economy doesn't go completely down the drain it's a very good place for your money. It's not the optimal place for your money, of course, but compared to sticking your money in a checking or savings account it's a no-brainer.
Figuring out what to do with your money isn't easy. So until you've got a good plan, go with a sensible default. That's VTI. Every day you procrastinate on this you're simply burning money.
Really, there's no such thing as "optimal" because no one has a crystal ball. A portfolio of 100% VTI is indeed diverse, tax-efficient, and has low expenses. Personally, I'd add some amount of VXUS (international stocks) for further diversification and MUB (tax-free municipal bonds) for safety. You could do very well with just these three ETFs, often known as a "lazy" portfolio:
Keep in mind, though, that there are no guarantees. Stocks will have bad years, and you should expect that some years they will lose 50% of their value. The key is to choose an allocation that you can live with so you don't panic and sell when things get bad. Keep contributing and rebalance regularly (once or twice a year is usually enough). Tune out all the noise and stick to your plan. Even with these dips, most people expect stocks to perform better than any other asset class in the long term (20+ years).
I'd also recommend The Little Book of Common Sense Investing:
It's written by John Bogle, who founded Vanguard to bring diversified, low-cost investing to the masses. Vanguard is different from other companies in that it's client-owned. The Bogleheads forum is pretty good for this kind of investment advice:
You might also check out Wealthfront and Betterment. They are software-based financial advisors that use Modern Portfolio Theory and the Black-Litterman model to allocate your money optimally given their assumptions about expected returns and correlations between asset classes:
One reason is that you get greater returns by diversifying. Unfortunately, diversifying correctly is hard. A second reason is that younger people typically can afford to invest more aggressively and older people should typically invest more conservatively. So an investment strategy depends on your personal goals and attitude towards risk. Finally, it doesn't take personal aptitude into account. By investing in an index fund you can inexpensively get average performance, but you can get greater gains by investing your money in a way where you can do better than average. Start a company, real estate, art, etc.
Ideal situation for growing your money, imho: using your expertise, try and figure out some kind of investment that looks very risky to people who don't have your expertise, but isn't risky to you because you know the market better than most people. Invest in that, managing the risk sensibly, and you should be able to grow your money.
If you don't have any such areas of expertise, then the best thing you can do with your money is use it to learn - gain one or more or many of these areas of expertise.
> what are some useful ways to use cash to build wealth if not buying stocks and other investments?
This article lacks the humility to recognize that a large collection of publicly traded companies are going to have much more time, experience, and resources (wealth and leverage of it) to properly manage a company toward profitability.
This really depends on your specific goals, your time frame and other aspects of your financial situation. Personal financial planning doesn't have to be complicated, but you need to be aware of your investment options and which are suitable for a given goal and/or time frame.
When will you need the money? In one year, or not until retirement? What are you planning on doing with the money? (If you don't have any plans, at least have an idea of when you might need to withdraw it)
Probably the biggest factor going to be your time frame. If you are going to need the money in 1-5 years (say for a house down payment), I would stay away from equity/stocks; in general, the proportion going towards equity should decrease as the time available decreases, because the volatility can result in negative returns. If you're going to need it in less than a year, just dump it in a savings account or similar where principal is guaranteed.
At the polar opposite is if you're just concerned about long-term growth. Then, I would in invest in a broad-market ETF like some of the Vanguard ones. Come up with an asset-allocation plan that ensures an acceptable level of risk.
Personally, I'm not a huge fan of directly investing real estate for the purposes of producing rental income. I just don't have any concern for property management, maintenance or dealing with tenants.
If you do go down this route, be sure to do the analysis and compare the expected income and risk with the alternatives (i.e. stocks/bonds, etc.)
This is one area the author of the article falls short in. There's lots of mention of "income generating assets" (with somewhat of preference to real assets) but not really any thought given to the different risks associated with each.
There seems to be an oversimplification that the only way to increase your wealth is to own assets that produce a cash flow (i.e. stocks that pay dividends, properties that generate rental income) with no focus given to capital gains. Capital gains have traditionally been a huge part of wealth gains and furthermore, may be more tax-efficient. None of this is mentioned, instead anything that doesn't produce a cash flow is hand-wavingly dismissed as "buy and pray".
There are also intangible assets. e.g. Some people give to charity to get into the right networks.
Being able to afford time off work to build an open-source project, having the money to pay people to do some of the work (graphic design, documentation): you can build a high-value consultancy this way.
Two ideas:
Buy bitcoin mining equipment.
Have a kid and use money to spend maximum time with him/her doing cool stuff so he/she grows to be awesome and thankful to you.
