How to be a better investor: episode 2 |
Tweet | ![]() |
<p><strong>Sophia:</strong> Man, I'd love to retire.</p>
<p><strong>Emma:</strong> Me too.</p>
<p><strong>Amna:</strong> Count me in.</p>
<p><strong>Emma:</strong> It's hard though. I spend everything I earn. </p>
<p><strong>Sophia:</strong> There's your problem. You got to make more income. </p>
<p><strong>Emma:</strong> But how? </p>
<p><strong>Amna:</strong> I'm glad you asked that. There are three main ways – labour, land and capital. </p>
<p><strong>Emma:</strong> Labour is all I have. I use myself to make money, my salary for instance.</p>
<p><strong>Sophia:</strong> There's also land. Land creates income in all kinds of ways. You can rent it out, sell what grows on it or just let its value appreciate. </p>
<p><strong>Amna:</strong> Don't forget capital. Capital is all the other stuff that can used – rented or put to work, like investing. </p>
<p><strong>Emma:</strong> Okay. But how do I get from using labour as my only source of income to not laboring anymore? </p>
<p><strong>Amna:</strong> You have to move your income from labour into land and/or capital.</p>
<p><strong>Sophia: </strong>Look at it this way. Each of us basically runs our own little economy in which we spend on the past, the present and the future. Spending on your past is like servicing debt. </p>
<p><strong>Emma:</strong> Like everything I bought on my credit card? </p>
<p><strong>Amna:</strong> Exactly. Your present spend is on your lifestyle. Eating out, vacations. </p>
<p><strong>Emma:</strong> Those I like. </p>
<p><strong>Amna:</strong> Sure. But that takes away from your future spend, your investments. </p>
<p><strong>Sophia:</strong> When you invest, you put your present income from labor, like a salary, into land and capital, maybe a home or a stock which will make money for you. When you have enough land and capital, you won't need to labor anymore. </p>
<h2><strong>Emma:</strong> Hello, retirement.<br /><br /><br /><br /><em><strong>Further Reading:</strong></em></h2>
<h3><strong>A Simple Plan for Financial Independence</strong></h3>
<p>What would you do if you could do anything? Not superhero anything, but if you woke up tomorrow and had all your bills paid from now until forever, what would you do with your time? Take your dream job that pays far less than your current one? Write your magnum opus? Volunteer full-time? Whatever you answer, the premise is the same. Financial independence means being master of your own time.<br /><br />Some people call this retirement, some call it independent wealth, and some getting out of the rat race--but in every case the goal is the same: to reach a point in life when you don’t need to work for a paycheck anymore. There are countless books that claim to have the “secret” to unlocking this path, but really there is no secret. By learning a couple of simple economic concepts, the way forward becomes obvious. You’ll still need to do the <a class="mdc-link mds-link" tabindex="0" href="https://www.morningstar.com/blog/2018/12/12/goals-based-planning.html?utm_source=mstarcom_content&utm_medium=referral&utm_content=article" data-v-82a5d2a6="" data-v-2b0bb2a8="" data-v-4387a7d2="">hard work</a>, but at least mapping your course will be easier.</p>
<h3><strong>Personal Economics 101</strong></h3>
<p>Here, I’m going to lay out for you a simple way of thinking about economics and personal finance that can help you make strong moves toward financial independence.</p>
<div class="article__container" data-v-7ba8d775="" data-v-2b0bb2a8="">
<div class="article__body" data-v-7ba8d775="" data-v-2b0bb2a8="">
<div class="mdc-article-body" data-v-7ba8d775="" data-v-2b0bb2a8="">
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">Economics is the study of how we direct our limited resources to meet all our needs. All the complexity boils down to that. Now, each of us is basically running our own little economy. We have resources, and we have needs. How we direct those resources affects how many of our needs will get met, how well, and for how long.</p>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">Here’s the big idea: In economics, we learn that there are only three ways to produce income--land, labor and capital. If you want to <em class="mdc-article-emphasis" data-v-e8a08c40="" data-v-2b0bb2a8="" data-v-4387a7d2="">stop </em>laboring (retire, reach financial independence, whatever), then you need to acquire other two.</p>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">Land creates income in all kinds of ways. You can rent it to others, sell the trees or other resources on the land, farm it, or just let its value appreciate over time. Labor, we all know about. Capital is all the other “stuff” that can be used, rented, or put to work. We typically think of three types of capital. <em class="mdc-article-emphasis" data-v-e8a08c40="" data-v-2b0bb2a8="" data-v-4387a7d2="">Physical capital</em> is stuff. For example, if you own a tractor, you can use it to produce value on your land, or you can rent it out to someone else. In both cases, the physical capital is creating value for you. <em class="mdc-article-emphasis" data-v-e8a08c40="" data-v-2b0bb2a8="" data-v-4387a7d2="">Intellectual capital</em> is the value of any assets you have based on legally protected ideas, like patents or books. <em class="mdc-article-emphasis" data-v-e8a08c40="" data-v-2b0bb2a8="" data-v-4387a7d2="">Financial capital </em>is just money itself.</p>
<h3 class="mdc-article-paragraph article__gated-content"><strong><span class="mdc-article-strong" data-v-76f3ace6="" data-v-2b0bb2a8="" data-v-4387a7d2="">The Path to Freedom</span></strong></h3>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">From these three sources come all the various income streams we can imagine. Some people are fortunate enough to start life with enough land and/or capital that they never need to labor for income. Most of us are not. Most of us, in fact, start without land or capital, and all we have to work with is our ability to labor. So, how do you get from using labor as your single source of income to the goal of not laboring anymore? You have to make a plan for how you will direct the flow of income from that labor toward investments in land and/or capital.</p>
<h3 class="mdc-article-paragraph article__gated-content"><strong><span class="mdc-article-strong" data-v-76f3ace6="" data-v-2b0bb2a8="" data-v-4387a7d2="">Needs: Past, Present and Future</span></strong></h3>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">Remember that economics is all about using our resources to meet our needs, and needs are a big part of the picture here. Now, we could talk about Maslow’s Hierarchy, or break our spending down into categories of “needs” and “wants,” but I’m going to suggest we do away with all of that and make it even simpler. Your needs fall into three categories: past, present, and future. <br /><br />Your current labor income is divided up into payments toward money borrowed in the past, meeting the needs and wants of the present, and investing in income for your future. Directing your “future” funds into land or capital slowly over time builds up income sources to eventually replace your income from labor.</p>
<h3 class="mdc-article-paragraph article__gated-content"><strong>Why It Matters</strong></h3>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">Simple rules of thumb help us by directing our focus to the most important thing(s) and ignoring everything else. This model of personal economics allows you to ignore all the details that make budgeting a huge pain in the neck, and it simplifies the problem into two steps. The first step: Making sure that you are directing some portion of your labor income toward land and/or capital. Otherwise, financial independence is simply not possible. To do this, you may need to take a hard look at how much of your income is going toward past purchases (which could motivate you to avoid adding to your debt in the future), or you might want to rethink the speed at which you spend on your current lifestyle.</p>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">This framework puts decisions about day-to-day purchases and borrowing into a long-term perspective. If you can’t find ways to invest for the future, you’re stuck with labor as your only source of income. If the future feels too far away to be real, try using the techniques I laid out in my previous article on <a class="mdc-link mdc-article-annotation--article mds-link" tabindex="0" href="https://www.morningstar.com/articles/944893" data-v-82a5d2a6="" data-v-2b0bb2a8="" data-v-4387a7d2="">Present Bias</a>.</p>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">This way of mapping things also helps put investment in perspective. The point of investing is to store up land and capital that will provide you with sustainable income. Focusing on that can help you weigh your choices. How secure is the income stream going to be? When comparing one investment over another, you can estimate them in terms of future income rather than initial value.</p>
<h3 class="mdc-article-paragraph article__gated-content"><strong>For Example</strong></h3>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">My mother recently retired from her job as a social worker and mental health counselor. She achieved this freedom despite spending many years as a single mother of four children with a low salary. How did she do it?</p>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">1) PAST -- She limited borrowing. When she invested in a master’s degree (more skilled labor meant a higher salary after graduation), she took one evening class at a time while working during the day, taking advantage of her employer tuition reimbursement to avoid debt. It took her many years, but she emerged with her dream job, a significant boost in pay, and no added debt.</p>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">2) PRESENT -- She lives simply. Present expenses can easily drain all our money if we let them. By living simply, being contented with small luxuries and finding value in non-material wealth (relationships, nature, and so on), she keeps her day-to-day expenses moderate.</p>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">3) FUTURE -- She made investments in both land and capital. When buying a home, she deliberately sought out properties that would allow her to generate rental income. Whenever she received a financial gift or bonus, she put it toward mortgage debt or capital investments like index funds and bonds.</p>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">She is not what most would consider wealthy, but she has built up for herself secure streams of income that are likely to last for the rest of her life. She is financially free, master of her own time, and she has never been more alive or happy.</p>
<h3 class="mdc-article-paragraph article__gated-content"><span class="mdc-article-strong" data-v-76f3ace6="" data-v-2b0bb2a8="" data-v-4387a7d2="">Your Turn</span></h3>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">To make this concept practical, you need to take stock. Where are your income streams springing from now? If you stopped laboring today, how much income would your current land and capital investments produce for you every month? What are some ways you might be able to make more out of the resources you currently have?<br /><br />Where is your current income flowing to? What percentage is paying off money borrowed in the past? What percentage is being put toward your future? When you look at those numbers, do you think they are in balance?</p>
<p class="mdc-article-paragraph article__gated-content" data-v-4387a7d2="" data-v-2b0bb2a8="" data-v-7ba8d775="">Who do you know that has achieved financial independence, and how did they use land or capital to do so? How might you direct your own funds toward land and capital in a way that will create steady income down the road?<br /><br /><em>The additional reading is by Sarah Newcomb, a member of Morningstar's Behavioural team</em></p>
</div>
</div>
</div>

15/01/2021 Morningstar's head of policy research Aron Szapiro explains what sort of changes a Biden government will make and how they will affect company valuations.

14/01/2021 Freight-rail, building temperature efficiency, and carmaking are among the sectors Aviva Investors' Jaime Ramos Martin has his eye on.

13/01/2021 Dividend investors had a hard time in 2020, but Morningstar analyst Dan Lefkovitz think the outlook is brighter for the year ahead.

11/01/2021 Morningstar Investment Management's Dan Kemp reveals the three investment themes on his mind for the year ahead.

06/01/2021 Morningstar equity analyst Allen Good looks at the prospects for oil and gas giants in the year ahead.

05/01/2021 China had a strong year after a rocky start, but can it continue—and what does a US President Biden mean for the region? Morningstar analyst Lorraine Tan explains.

04/01/2021 Morningstar equity director Alex Morozov considers the outlook for tech, travel and beyond for the year ahead.

01/01/2021 How to plan for things you can't plan.

25/12/2020 2020: we look back at the highs and lows of an unprecedented year in financial markets and explore the themes shaping 2021.

22/12/2020 Music streaming companies have seen stellar growth in user numbers. We ask Morningstar equity analyst Neil Macker if the trend can continue.

21/12/2020 While it stands as the largest addition in the index's history, this likely won't impact everyday investors all that much.

18/12/2020 Will there be opportunities to deploy cash in the new year? Will there be a reprieve from covid? And what will the incoming Biden administration mean for markets?

18/12/2020 Companies that specialise in solar, building efficiency and renewables underpin Aviva Investors' Climate Transition Global Equity Fund, says Jaime Ramos Martin.

16/12/2020 Why does liquidity matter to investors, and how can it affect your returns? Morningstar equities director Tom Whitelaw explains.

14/12/2020 Learn what we look for when rating a company.

14/12/2020 Morningstar's new approach unpacks the environmental, social and governance risks that companies face.

10/12/2020 Industrial companies typically generate better cash flows and can offer a steady income stream, says the IML founder.

09/12/2020 The lofty valuations of Tesla and Afterpay typify the effervescence and speculation in the market, says the IML founder.

08/12/2020 Car makers may not be an obvious investment choice for ESG-conscious investors, but Morningstar analyst Tancrede Fulop says some of the largest companies score highly in some measures such as safety and human capital.

07/12/2020 Janus Henderson's Matt Peron considers how the relationship between the US and China will evolve under a President Biden.

04/12/2020 What is active investing, and what is passive investing? We're at the whiteboard to explain the pros and cons of each

04/12/2020 Treasury Wine Estates remains an undervalued stock in spite of China's demand-destroying tariff on Australian wine. Morningstar director of equity research Adam Fleck explains why.

03/12/2020 And do any other assets currently compare?

02/12/2020 We're at an inflection point in ESG investing, says Sustainalytics founder Michael Jantzi. Here's why.

01/12/2020 Beaten-down travel stocks and BNPL providers featured heavily, says nabtrade’s Gemma Dale.

30/11/2020 Many people were waiting for the opportunity to buy shares at historic discounts, says nabtrade’s Gemma Dale.

27/11/2020 The 171-year-old wealth manager has had its scandals but there's merit to its turnaround strategy and the quality of its other assets, says Morningstar's Shaun Ler.

27/11/2020 BNPL products such as Zip Co help boost consumer spending but they come with risks and are overvalued, says Morningstar analyst Shaun Ler.

26/11/2020 The Magellan co-founder argues the ecommerce acceleration is here to stay and ponders the effect it will have on other sectors such as travel and commercial real estate.

25/11/2020 Greg Dean of Cambridge Global Asset Management explains why the consumer services sector has yielded healthy returns.

25/11/2020 Magellan's co-founder explains which tech behemoth the Magellan Global Fund no longer owns, why one was too tricky to value, and why regulation is no threat.

24/11/2020 Magellan's co-founder on why 2020 resembles 2000 and why covid-19 is a dry run for something that could be much worse without proper planning.

23/11/2020 Their shares have gotten hammered this year. Are they opportunities or value traps?

20/11/2020 Our new rating highlights the degree to which a fund or asset manager considers environmental, social, and governance issues.

19/11/2020 Morningstar's Grant Kennaway explains why sustainable funds are increasingly popular and why they're performing well.

17/11/2020 Morningstar director of equity research Johannes Faul looks at home improvement retailer Bunnings.

16/11/2020 From climate change to workers' rights, ESG is a big part of the investing world. We're at the Morningstar whiteboard board to explain what it means and why it matters.

12/11/2020 We're not out of the woods yet, says our head of equity research, as he looks for safety in businesses we can't live without and shies away from the banks.

11/11/2020 Perhaps it is time to have exposure to this economic powerhouse and its 1.4 billion population, says Morningstar's Peter Warnes.

10/11/2020 What happens when you buy something when your bank card? Morningstar analyst Niklas Kammer explains which companies are benefiting from your transaction.

09/11/2020 With travel bans and economic lockdowns, the luxury sector has been hit hard in 2020. But there are still opportunities, says Morningstar analyst Jelena Sokolova.

05/11/2020 A discussion of taxes, stimulus, regulation, and the likely market reaction as results from the 2020 poll come in.

03/11/2020 Why you should resist the urge to make predictions when there's a disconnect between the economy and security prices.

02/11/2020 Etoro analyst Josh Gilbert shares his thoughts on Beyond Meat and two other companies making inroads into the plant-based meat sector.

30/10/2020 The Magellan rainmaker explains why he doubts the Republican leader will prevail and why investors should brace for volatility—and ignore it.

29/10/2020 The market for plant-based meat is worth $14bn today and is expected to grow massively, says eToro's Josh Gilbert.

28/10/2020 Morningstar equity analyst Johannes Faul explores the flipside to the surge in growth in online sales.

22/10/2020 China and Hong Kong have been a happy hunting ground, says Longlead Capital Partners' co-founder Andrew West, who singles out tech, pharmaceuticals and power tools.

22/10/2020 These names stand to benefit from a resumption of leisure travel - and are all trading below our fair value estimates.

20/10/2020 Morningstar's Mark Preskett looks at three reasons why bonds are an important tool in your investment portfolio.

19/10/2020 A bigger stake in the online conveyancer PEXA could be the key to increasing Link Administration's revenue, says Morningstar's Gareth James.

16/10/2020 Longlead Capital Partners co-founder Andrew West reveals how his Asia-focused fund managed to make gains during the historic covid-19 sell-off.

16/10/2020 The investment board is back with an explainer on why you might invest in bonds.

13/10/2020 How to handle this decision—even when it is made for you.

12/10/2020 Nick Griffin of Munro Partners reveals why and where he sees opportunities in renewable energy, diagnostics and software.

09/10/2020 Take stock of your spending to determine if inflation is an issue for you.

09/10/2020 Morningstar analyst Chelsey Tam explains why investors are excited about the flotation of Ant Group and why it's different from Alibaba.

06/10/2020 Companies that address the growing demand for decarbonisation will have a 20-year growth opportunity, says Nick Griffin of Munro Partners.

30/09/2020 EXCLUSIVE EXTRACT: Morningstar's Mat Hodge and Lex Hall talk to the CEO of the independent producer and exporter about the company's fortunes and its future.

30/09/2020 Slow and steady wins the financial race.

29/09/2020 American Century Investments' low-turnover strategy invests in companies developing vaccines, treatments for neuro-cognitive diseases and innovations in telemedicine.

25/09/2020 By 2050, almost 20 per cent of the global population will be over 65 and demand for healthcare will climb, says Michael Li of American Century Investments.

22/09/2020 The destruction of an indigenous cave shelter was unforgiveable but there are other reasons why the iron ore heavyweight is overvalued.

21/09/2020 Morningstar equity analyst Kristoffer Inton on the outlook for the seven producers under coverage.

18/09/2020 Morningstar's Seth Goldstein singles out three undervalued stocks that span the entire electric vehicle supply chain.

18/09/2020 The bumps and bruises of election time may tempt you to shift your portfolio strategy.

17/09/2020 UK-based Premier Miton's Simon Evan-Cook says the tech rally of 2020 is reminiscent of the dotcom boom, but inflation could be a bigger threat.

16/09/2020 By 2025, the cost of batteries and manufacturing will fall and EV functionality will improve, says Morningstar's Seth Goldstein.

11/09/2020 Estimating the length of your retirement with personalized information will help you save the correct amount.

09/09/2020 Morningstar's Chelsey Tam reveals which stocks and sectors have shone—and which have underwhelmed.

28/08/2020 Products, services, what is what in the world of finance—and how to look out for yourself

24/08/2020 A raft of companies have cut their dividends this year, leaving income investors concerned. But Morningstar's Dan Lefkovitz says there are still plenty of options out there.

18/08/2020 DNR Capital's chief investment officer Jamie Nicol profiles some of the top ten holdings in his Australian Equities High Conviction fund.

17/08/2020 Morningstar's Brian Han explains why he has trimmed his fair value estimate for Australia's dominant telco and the future of its dividend payout.

14/08/2020 DNR Capital's Jamie Nicol reveals how his Australian Equities High Conviction fund finds quality businesses that will endure difficult conditions.

13/08/2020 Put your money to work if you're looking for financial freedom.

10/08/2020 Learn how to picture your goals so you can better reach them.

05/08/2020 Morningstar's Gareth James identifies three sector names trading at attractive discounts in an increasingly 'essential' sector.

05/08/2020 Reports of the strategy's demise are greatly exaggerated, says Morningstar's Christine Benz.

04/08/2020 Investors may assume a fund's yield to determine how much income it will pay, but it's not always so simple, warns Morningstar analyst Rajesh Yadav.

03/08/2020 It depends on your expectations and timeframe. Look at bonds as being portfolio stabilisers—sources of cash flow you can draw on when your equities are down, says Christine Benz.

28/07/2020 When utility stocks plunged during the onset of the pandemic Lazard Asset Management's Warryn Robertson knew it was time to jump in.

24/07/2020 Lazard Asset Management's Warryn Robertson looks at how the pandemic has affected toll roads and airports and what the future of travel holds.

23/07/2020 Morningstar analyst Tancrede Fulop singles out a few companies that have performed well and also led the way in looking after staff.

21/07/2020 New stock-pickers are prone to lose money. Are the lessons worth the price? We ask Morningstar's Christine Benz.

20/07/2020 Elevated iron ore prices have lifted mining company earnings to eye-watering levels but this doesn't make them income stocks, says Morningstar's Mat Hodge.

17/07/2020 Local miners should deliver stellar fiscal 2020 results but such outperformance is unlikely to last, says Morningstar’s Mat Hodge.

17/07/2020 --

16/07/2020 How to make some upgrades during this down time.

16/07/2020 Covid-19 has made the intended public offering impossible, says Morningstar's Andrew Willis.

15/07/2020 JPMorgan's Nicholas Weindling talks opportunities in Japan and reveals the stock that has been his largest holding for almost a decade

15/07/2020 The asset class has a habit of outperforming but Morningstar's Ross MacMillan sees signs of a bubble.

13/07/2020 Rachel Winter of UK fund manager Killik & Co talks payments, social media and investing in her monthly stock pick round-up

09/07/2020 And what we expect to see moving forward.

07/07/2020 Large growth maintains its supremacy in the Morningstar Style Box during a volatile first half for mutual funds.

06/07/2020 Nikko Asset Management's Peter Monson looks for strong sustainable returns and he sees that in Asian stocks that span financial exchanges, computer game makers and condiments suppliers.

02/07/2020 China’s ongoing recovery from COVID-19 presents solid investment opportunities, says Nikko Asset Management.

01/07/2020 Aviva Investors' Mark Robertson on the 'second wave', the widening gap between the West and China, portfolio protection and how covid has accelerated the tech revolution.

29/06/2020 Does the rise in smartwatches show that data, not diamonds, are a girl's best friend?

26/06/2020 They may be 'boring' says Fidelity's Bertrand Lecourt but these names offer solid and long-term returns by delivering essential services.