The first step to identifying the best way of investing your hard-earned money is to understand what different kinds of assets are out there.
While most people will tell you that there are only two kinds of possessions: assets and liabilities, in reality our classification system is much more subtle. We need to take into consideration two factors when we examine any given investment: 1) its value and 2) whether or not it puts money in our pocket each month. Let’s look at both of those factors in more detail.
When you think of making a major purchase, like a house or a car, you may be thinking that the item should be classified as an asset because of its implied value.
Well, while that’s what the conventional wisdom says, the truth is that not all assets are created equal. For example, as soon as you drive a brand new car off the lot, it loses a significant portion of its value. Some experts say that a new car loses about 11% of its value the instant you drive it home and up to 33% after two years have passed. And new devices, like laptops, are quickly outdated and replaced by newer models. So taking the two factors we mentioned in account, let’s try to put common assets into four categories: GREAT, GOOD, OKAY, and TERRIBLE.
We’ll have a look at them, starting with the worst, over the next few blog posts.