Do you want to be an investor or a creditor? You may have never been asked that question but as an investor, it is highly relevant and worth exploring. First, let’s figure out the difference. If you own a home, you know all too well how a creditor works. Your mortgage lender is a creditor and they expect payment regardless of your financial situation. Did you lose your job? Do they want their money? Maybe you didn’t have a good past couple of months and don’t have the funds to pay your mortgage. Your creditor doesn’t care. They want their money and they’re entitled to it.
The creditor is in a good spot. Although the past couple of years have seen an unprecedented mortgage default rate of 1 out of 585 homes according to some reports, creditors who carefully examine who they make loans to find themselves in a relatively safe spot. Other than large-scale market meltdowns, creditors are largely immune to daily market moves. That’s a good spot to be in.
Investors, on the other hand, don’t have the same luxuries. If their investment doesn’t do well, they don’t get paid. When the market doesn’t do well, either do they. If you are a stockholder you know how investing works.
When you’re a creditor you trade unlimited capital growth for the promise of getting paid. As an investor, you may lose money but if you pick the right stock, business, or property, your gains are unlimited. Both the creditor and the investor have a place in your investment portfolio but as an income investor, you’re probably more heavily weighted towards being a creditor.
As a creditor, you may invest in stocks with a dividend, invest in bonds or bond funds, and for those of ultra high net worth, function as an angel investor. On top of that, you may bring in more income by selling covered calls against your stock or futures positions. Of course, it’s possible and appropriate to function as both by purchasing growth stocks that pay a dividend.
Being a creditor is almost always safer than being an investor but being completely safe may not allow you to reach your future goals. Most financial professionals advise a combination of both. For younger people, being more weighted on the investing side is best but especially for non-taxed accounts like traditional IRAs, having a 25% or more exposure to investments where you’re the creditor is well advised especially when markets are uncertain.
As an investor gets closer to retirement, they should become a creditor. For those only a few years away, is an 80% creditor is well advised in the current market environment.
Creditors get paid interest for loaning their money to somebody else. Investors get paid when their investment appreciates in value. Investing is riskier than being a creditor and especially when global events aren’t making anybody feel good about the near-term market prospects, investors have to be extremely careful how much investing they do. Income investors who function more as creditors know that collecting interest payments may be boring but living as a creditor are much more secure than living as an investor, at least right now.