NEXT BEST USE

Each of us has specific needs, knowledge, and abilities. Oftentimes, how you go about saving and investing is a reflection of these characteristics.

When thinking about where you should use your dollars and put them to work, there is almost always a best use. There is a sequence to the flow of funds and the corresponding investing opportunities.

You should know what opportunities are available to you and assess your capacity. Do you have time to manage this investment? Do you have a trusted advisor or mentor to help guide you? Do you have the funds to fully take advantage of the opportunity? There are many things to consider.

Don’t allow hesitation to hold you back! Be aware of the possibilities and opportunities available to you, and invest.

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Retirement Accounts

This is the simple part because there are many easily accessible ways to save and invest for retirement.

You are probably familiar with many of the accounts available to you but here is a quick summary:

1. Individual Retirement Accounts: the IRA and Roth IRA

2. Employer/Government Sponsored Accounts/Plans: the 401(k) and Roth 401(k), 403(b), 457, and Thrift Savings Plan (TSP)

3. Self-Employed/Small Business Accounts: Solo 401(k), SEP IRA, and Simple IRA

These accounts (and more importantly the funds you funnel into them) are at the core of your investing activities. This is your start on the road to wealth accumulation.

Many investors prioritize transferring dollars into a Roth IRA, an account where you contribute after tax dollars. The contributions AND growth will be tax- and penalty-free after age 591/2, making it a seriously powerful tool. For young folks, utilizing a Roth IRA allows for maximum growth potential.

The Roth IRA is still a valuable tool for retirees and pre-retires. There are no RMDs (required minimum distributions), which allows your invested assets to continue growing throughout retirement. Another highlight - if you pass your Roth IRA to heirs, there still will be no taxes. They will be able to use the funds without worrying about any complicating factors related to taxes.

Since it is such an important and popular savings tool, you will want to learn more about the Roth IRA.

The 401(k) and the other similar accounts are sponsored by your employer. A significant benefit of this account is that most employers will also make contributions to the account, known as an employer match.

The other key benefit of these tools are their “set it and forget it” nature. You will complete any initial forms, determine a contribution rate (typically a percentage of your paycheck), and select the investment vehicle (typically a mutual fund). Once these easy steps are complete, the funds will automatically be deposited each pay period.

You’ll barely notice that dollars are regularly deposited and growing. You also won’t be tempted to actively churn in the account or sell during a downturn, making the 401(k) a behaviorally optimized tool as well as a great place to hold retirement assets. Many individuals become a millionaire through their 401(k).

If you are a solopreneur or have self-employment income, the Solo 401(k), SEP IRA, or Simple IRA are available to you. These can require a bit of extra work and strategic planning alongside a tax preparer and financial planner but are great solutions for those willing to do so.

The IRS provides some general guidance for these plans which is helpful, but this simple roundup and explanation is a great place to start for the self-employed.

These are the foundational pieces of your saving and investing on the road to retirement or financial independence. If you are blessed enough to maximize the value of funds utilized in this category, there is room for exploration.

Alternative Assets

The rise of accessible alternative assets has been a major trend in recent years. Alternative investments require more research and often a higher degree of execution, but many investors are curious about the growing list of opportunities.

Previously, this asset class was reserved for mostly commodities, namely gold or oil. Many would argue that these “old world” assets still have a place in one’s portfolio. Ray Dalio notably allocates a meaningful portion of his assets to gold and Warren Buffet has been hoovering up shares of Occidental Petroleum.

It is hard to argue with these famed investors, but some do.

Recently, much attention has been devoted to the growing list of modern alternative assets.

A new era of technology and innovation has fueled the growth of cryptocurrencies like bitcoin, ethereum, solana, and others. The birth of the blockchain gave previously physical assets like trading cards or art a place in the Web3 world.

There is wisdom (and potential upside) in seeking out alternative asset classes that may be overlooked or searching for new opportunities that may be relatively unknown. That being said, it is easy to be over one’s skis. The commodity markets for gold, oil, or other alternatives have traditionally been a game for insiders. The tech-related modern alternative assets can be complex (at best) and fraudulent (at worst).

There may be opportunities to use your capital to invest in alternative assets, but it is best to use discretion and carefully research. If this isn’t within your area of expertise, double down on traditional retirement accounts or consider the next options.

Real Estate

There are many advantages to owning real estate, so it has been a long-held method of creating wealth. There are many different types of real estate investors and investments. There are a few notable ways to use your capital and invest in real estate.

Although not typically viewed as an act of investing, a primary residence is often too large of an asset not to mention here. When thinking about the next best use of your investment capital, it may be wise to use additional capital to pay down or pay off your mortgage.

It is important to understand the specific circumstances and opportunity cost of this decision. Everyone’s financial life and circumstances are unique. There is not a broad consensus on the topic of paying down your mortgage. Recent trends in regards to interest rates may make it more attractive for those who have a higher interest rate mortgage.

Typically real estate investing is associated with owning a property (can be residential or commercial) and renting it to someone else. This can be a great source of cash flow but does have significant barriers to entry.

There are obviously significant capital requirements to qualify for an investment property loan (or to pay entirely in cash). This is a big hurdle.

Another pronounced aspect of real estate investing is the dependence on occupants. If the property is not rented, it does not generate any income. This can be expensive and generate undo risk.

Despite these two factors, investing in real estate can be a wildly profitable activity. The presence of leverage (borrowing money) can juice the potential return of a property. Before you take the leap, study the common real estate analysis/valuation formulas.

There are many great resources to learn about the industry, and there is a great chance that someone you know is a successful real estate investor. Schedule some time with them to learn alongside them. This is one of those asset classes where it is best to learn from someone’s example.

Private Equity

Another rising trend in the investing world is the use of funds to purchase small businesses, either as a member of an investor syndicate or as an individual acquirer.

If you join a syndicate, you will likely deposit a required minimum investment and a fund manager (often called a general partner or “GP”) will select private companies to invest in or acquire. This definitely simplifies the process for you. There is little or no knowledge or expertise requirement, and you won’t add much to your workload. Depending on the fund, you may have to be an accredited investor which admittedly is a significant barrier.There is an alternative to the more traditional private equity investment. It is a rising trend popularized by generally young, non-traditional investors targeting a business with high cash flows and an aging owner. This is known as “Micro PE” (3) and loosely defined as acquiring a small business valued at or under $5 million.

There are a large number of small business owners operating a legacy business with no clear succession plan. Those seeking to invest in this type of business believe there is untapped potential and/or efficiency through further modernizing and/or optimizing an already strong company.

It is an incredibly interesting space with significant opportunity, but it clearly requires some level of business savvy/capacity, the desire to work in the business (at least for a short period of time), and the capital to acquire the business.

You should only invest in a company in this way if you are genuinely interested in the company and the activities associated with operating the company. You may eventually pass the majority of these duties to a second-in-command but initially you will need to be actively involved in order to understand the business.

Owning a business (in the many potential forms) is often the fastest path to wealth but is most effective when the owner has the capacity and desire to operate the business too.

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There is no single solution, portfolio, or investing strategy that will guarantee high returns. Different investors have found different paths to success.

You (and all investors) have a unique set of abilities and capacity to maximize the dollars you invest. Some will do so by focusing on simple, tax-efficient retirement accounts and others will focus more time/attention to manage assets like real estate or micro PE acquisitions.

You are the Chief Investment Office and driver of your wealth!

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What investment opportunities do you find most interesting? Where will you be investing your next dollar?

Forward this email to someone who could optimize their use of capital or a potential business partner to see if they possess the same passion for investing as you do.