THE principal idea of investment is to always seek out ways to build one’s asset base which may include equity, whether it be public or private. However, how do you improve the rate at which you build this equity and asset base without a substantial rise in the price of your assets? This will be the focus of today’s article.

Firstly, we have to define the terms “equity” and “assets”. Equity, in its simplest terms, is referred to as the defined ownership in a company through listed stock or shares or what can be measured as the difference between assets and liabilities. Assets refers to an item or concept which has value to the owner, or a resource controlled by a business or economic entity.

When one thinks of assets, the first concepts that come to mind are a house, car, land, listed stock in a company or cash in a bank account. However, there are also intangible assets such as music, software, royalties and intellectual property (patent, trademark, copyright) which can be used to derive income from the licensing of them. There are even luxury assets such as commodities, aged alcohol, rare jewellery, art pieces, antiques and unique cars. The increase in rarity of a highly desired asset results in a higher valuation, while the influx of that same asset can result in a lower price.

Stocks are the easiest financial assets which one can purchase without being restricted by investor classification or massive amounts of capital. Unlike bonds which tend to carry a minimum US$10,000 for subscription, stocks in most countries are not expensive, with investors in the USA now able to buy fractional shares of large companies like Facebook, Amazon, Apple, Netflix and Google (Alphabet).

The easiest way to earn from stocks is to buy the stock price when it costs less and sell high, plus collecting dividends from the company’s earnings. However, how do you build your wealth and increase your equity exposure?

One simple strategy is to identify the peaks of a stock, sell at that point, and buy back at a lower price. Imagine if you own 100,000 units of a stock at $10 and the price rises to $20. If this is the peak of the stock with an expected retraction to $15, you could sell at $20 and buy back 132,000 units. When that stock rises to $25, the exit and re-entry strategy would yield a portfolio value of $3.3 million compared to the $2.5 million from the buy and hold approach for a difference of $800,000. This would also result in a higher dividend payout in the future.

Another approach would be to average down on that stock through dollar cost averaging when the price goes down to a level you prefer, or just to buy increments of it at a specific time interval. This will result in your overall portfolio being valued at a higher amount as the price improves on the upward movement.

If one is investing in fixed income, one could always buy an asset below par once there’s a clear path for redemption on that asset. If you purchase a bond at $95 and the par value is $100, you can benefit from a $5 gain on your principal when it is time for the bond to be redeemed. There’s also the benefit where a company redeeming the bond early could result in the you getting paid $1,010 for every $1,000 invested. Even here in Jamaica, there are several preference shares listed on the stock exchange trading below par value with a redemption below three years. So, if there’s a par value of $1 with a January 2024 redemption and a market price of $0.70, you could effectively purchase this asset at a 30 per cent discount with the dividend payments acting as interest over that time frame.

Your assets can be used as collateral to access a margin or secured loan from a financial institution. If you hold $5 million in blue chip stocks, some brokers will allow you to borrow between 40 and 60 per cent of your stock holdings which you can then use for whatever purpose you want. This will allow you to capitalise on market opportunities without having to sell any of your existing stocks to realise those deals. This applies to not just listed companies but also to unit trusts, bonds, a property without an assigned mortgage or even a life insurance policy.

For property owners, they can take out a mortgage against the built-up equity on a rental property to secure additional investment properties. If the property has a capitalisation rate above that of the surrounding area, the return can be quite accretive for the investor.

Increasing your net worth (total assets minus total liabilities) involves the continued purchase of assets which can yield a positive return on your investment. Building equity (ownership) is key to improving one’s financial freedom, and this means acquiring assets which provide a real risk-adjusted return on your money.