Types of assets

Assets that can be invested can be broadly divided into real estate, stocks, bonds, and commodities. Businesses that are owned by individuals are also assets, but we will not cover them here.

1. Real estate 

Real estate is profitable in the form of rent by owning stores and houses. However, many people make frequent transactions in a short period of time with the aim of gaining a profit from buying and selling real estate, which is a definite speculation. When you own real estate and receive tax, the profit margin does not exceed 5% after tax. Therefore, the productivity of real estate is less than 5%.

Due to the lack of awareness of assets, many people invest in their homes with a greater debt than their own money, which is quite risky. Real estate, like any other asset, is affected by the economy. There is a lot to do with household debt in the price formation of real estate. For example Korea's current household debt to GDP is near 100%, similar to the situation before the collapse of the real estate market in Japan. It is not unusual to see a drop in real estate prices at any time, but due to the low interest rate, a lot of money is being directed to the real estate market.

It is also necessary to take into account that deteriorating personal credit and falling asset prices as collateral are a risk factor in the real estate market, and that the tax rate that is applied when owning multiple real estate increases.

2. Stocks 

Stocks are a proportional right to an entity's shares. Having stock means becoming a partner of the company. In addition, it is accurate to think that being a company is only a means of partnership between management and investors.

Stock productivity is the productivity of a company. Those who want to invest in non-listed companies rather than listed companies must make investment decisions based on the productivity of the company, not the market price. You can also invest in companies listed on the stock market. Take a moment to kick stock prices and see your business productivity. Then, whenever the price is reasonable or cheaper than the value of the company, you can collect the stock. Buying too expensive should be avoided.

A company's productivity is close to ROE, the simplest investment indicator. ROE is a company's net return to capital, which varies widely by business that a company operates. The average ROE of US companies is in the 13-15% range.  So, compared to real estate, you can see that stocks are a more productive asset.

The price of a stock is the market price of a company. The price of the stock and the company's performance move in the same direction in the long run, but not in the short run. Long term here means at least 5 to 10 years. In the short term, prices may move regardless of performance within a year or two, and market marginalized stocks may have a longer period. In the long run, corporate performance drives the stock price, and in the short run, liquidity drives the stock price. Liquidity is the movement of money, and this liquidity causes the price of stocks to become volatile.

Because of the volatility of prices, many people approach stocks by speculation rather than investment. Both betting one's own money on short-term price fluctuations with news irrelevant to the company's fundamentals and betting only based on past price changes, not understanding the company's business, are both speculation.

So, if you understand the companies you're investing in, investors can take advantage of this volatility. The company's business is still going well, but if stock prices drop for a short period of time, then it's a good time to collect those stocks. Likewise, if there is no big change in the business of a company and the stock price rises significantly in a short period of time, then you should know that you are buying the stock at a higher price than the value of the company and avoid recklessly increasing your holdings.

Always keep in mind that the risk of investing in stocks is not the volatility of prices, but the deterioration of a company's productivity. This means that if your company's productivity has been improving and sustaining for a long time, you might have it for a lifetime. If you find 4 or 5 such companies or invest in companies all over the world through ETFs, you can succeed easily.

It is the quality of the management that has the greatest impact on a company's productivity. It is enough to judge the quality of management indirectly. You can monitor whether the company's ROE is maintained high and shareholder value is the top priority. In terms of shareholder value, you can look at whether the company's profits are fairly distributed to shareholders. There are dividends, treasury stock purchases, and liquidation of corporate capital. It can be found indirectly through financial statements and public information.

3. Bond 

Bond is a contract that sets the money to be borrowed and the interest to be paid by the government or corporate. Depending on the issuer, it is divided into government bonds and corporate bonds. Therefore, the productivity of the bond is the interest rate stated by the contract. The most reliable 10-year U.S. bonds currently have an interest rate of 0.7% and high yield bonds, the highest-paying corporate bonds, have an interest rate of 8-9%. High yield bonds have a significantly higher risk compared to government bonds as they provide high interest due to difficulties in financing insolvent companies.

Bonds can be measured for safety according to the issuing entity's investment grade. The investment rating of the US, which issues the dollar, the key currency, is AA, which is safer than any other country's government bonds.

However, bonds, like any asset, are affected by the macro economy. For example, if the 10-year interest rate on US bonds is 0.7%, there is little room left for an interest rate to fall, and inflation is expected to exceed 2%, investing in US bonds is not wise. Rather, investing in Chinese bonds or inflation-linked bonds that still have room to cut interest rates are appropriate in this situation.

For bonds, the risk factors to consider are inflation and the resulting rise in the base rate. When excessive inflation occurs, governments will raise their benchmark interest rates to recover the excess currency on the market. When that happens, the price of the bond goes down.

Bond investment is still valid as a safety asset, but it seems wise to invest in Chinese bonds, which have room to cut interest rates, or inflation-linked bonds that can protect against inflation.

Individual investment in bonds is possible indirectly through ETFs. Direct investment is also possible, but limited.

4. Commodities 

Commodities are traded in the form of ETFs, ETNs, and futures options as investments in various raw materials such as gold, silver, copper, and crude oil. The price of commodities rises mainly when inflation occurs during the upturn.

Among commodities, gold, in particular, also acts as a safety asset, causing prices to rise in the face of a weakening dollar and uncertain economic conditions. Nevertheless, gold is a highly volatile asset, so over-investment should be avoided. During the period of more than 80% in the history of gold prices, it declined or moved sideways, and the rising period was around 15%.

When investing in gold,  ETFs have the lowest transaction costs. Also, recently, Warren Buffett's Berkshire Hathaway has invested in gold mining companies with a very small proportion, and the stock price of that company also moves similarly to the gold price. (This is 0.25% of the Berkshire stock investment portfolio.)

Raw materials are assets without dividends and interest, and productivity is zero.

Summary

In summary, the productivity of all assets excluding raw materials is in the order of stocks> bonds> real estate. Therefore, you can keep the share of stocks, the most productive asset, higher than other assets and hold it for a long time.