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Diversify Your Money by Joseph Hogue, CFA

Diversify Your Money The MoneyNerve Blog
Diversify Your Money

Diversify Your Money with

My Three Favorite Investments

Part of planning a sound investment plan is diversifying your money from simple stocks and bonds. Let’s look at how to diversify your money with my three favorite investments.

It’s nearly a decade from the last big crash in stocks and people are beginning to wonder if the stock market will just keep going up forever. It’s a nice thought but that always seems to be about the time that the market makes fools of us all.

Part of being ready to invest means understanding the terminology and creating a simple plan around your goals.

That long-term focus on investing will help you look beyond stock prices whether they’re rising or falling and reach your retirement goals. A slow and steady approach to personal finance and investing often leads to financial freedom.

There’s another important idea in investing though, one that will protect your money when stocks do tumble. It will also help you reach your long-term goals, but this idea will make it easier to put up with the short-term hiccups in the market.

It’s the idea of diversification and it’s one of the most critical pieces in any investing plan.

What is Diversification?

Diversification is the idea that investing in different assets will help smooth the ups-and-downs in your overall wealth, especially when stocks tumble. If stocks are 100% of your investments, then a stock crash can wipe out much of your hard-earned money.

Many investors try to balance out their stocks with some investments in bonds, which are loans to companies, but there’s a real problem here for most investors.

Bonds don’t make much money!

Most bonds earn less than 5% a year and that’s before inflation takes a 2% chunk out of the return. That’s not bad and I’m not saying to avoid bond investing but many investors don’t have the patience to stick some of their money in bonds and wait for them to protect their portfolio.

They end up getting tired of that lower return on a piece of their portfolio, especially while stocks are producing double-digit returns each year. They sell their bonds and stick it all back in stocks…then get hit with a market crash.

How Do I Diversify My Investments?

Even if you had the patience to keep some of your money in bonds, there is a better way to diversify your money(ie. your investment portfolio).

Looking for other assets, other broad types of investments, will do several things for your portfolio:

• Help you earn a higher return than bonds but not have all your money in volatile stocks
• Reduce the amount of money you need in bonds to protect your portfolio from a crash.
• Produce a higher level of cash flow to pay expenses when you start spending down your investments

Now that you have an idea of how diversification can help create wealth and keep you from freaking out over the next stock market crash, here are my three favorite investments to diversify your portfolio.

Real Estate is the Great Wealth Creator to Diversify your Money

Few assets have created as much wealth as real estate. Like the man said, “It’s the only thing they’re not making anymore.”

If you’ve only got few thousand dollars to invest, buying property is out of the question but there are other alternatives.

• Real Estate Investment Trusts (REITs) are real estate funds that trade like stocks. These are special companies created to hold commercial real estate. They get a special tax break for paying out most of their income to investors which means these investments pay out massive dividends.
• Real Estate Crowdfunding is a newer way to invest in real estate. Developers offer their projects on crowdfunding websites for investors. You can invest as little as $1,000 in a debt or equity investment in each property.

Peer to Peer Lending isn’t Just for Borrowers

I learned about peer-to-peer loan investing from my cousin several years ago. Platforms like Lending Club allow borrowers to apply for personal loans for up to $35,000 and investors can invest as little as $25 in loans that meet their criteria.

Actually, the idea of investing in loans is nothing new. Banks traditionally package and sell their loans to investment firms which then sell the packages to anyone that needs consistent cash flow. That means pension funds, insurance companies and college endowment funds are some of the biggest investors…and that you probably already have money invested in loans and may not know it.

Returns on Lending Club generally range from 5% to 14% depending on the types of loans in which you invest. I invest relatively conservatively in borrowers with a lower risk of defaulting and have earned a return close to 10% for several years.

The best part about Lending Club is that you can automate your investments to tell the website to invest your money in any loans that meet certain criteria. Since you receive money monthly from your loans, in principal and interest, it’s important to reinvest this money quickly to keep earning a return.

Go West for Diversification, Way West

This last investment isn’t necessarily a different asset class but it’s one that most investors avoid. Investing in stocks of foreign-based companies, will help protect your portfolio from the ups-and-downs in the American economy.

It’s true that the largest U.S. companies sell products overseas and that can help immunize your portfolio from trouble here at home but that doesn’t quite cut it. Investing directly in foreign stocks can help you diversify even further by investing in companies with most of their business outside the United States.

Many foreign stocks trade on the U.S. exchanges as American Depository Receipts (ADRs) so you can buy them just as you do shares of a U.S. company. You can also buy funds that hold shares in hundreds of foreign companies like the Vanguard FTSE Developed Markets ETF (NYSE: VEA).

These aren’t the only alternative investments that will help you diversify your money but they’re three of my favorite. All three pay consistent cash flow that is regularly well above that of stocks. Putting it all together in a portfolio with stocks and bonds will smooth out any stock market troubles while still providing a return you can count on.

Joseph Hogue, CFA
Guest Blog by Joseph Hogue, CFA |  The Money Nerve

 

Joseph Hogue worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs five websites in the personal finance and crowdfunding niche, makes more money than he ever did at a 9-to-5 job and loves building his work from home business. He holds the Chartered Financial Analyst (CFA) designation and has appeared on CNBC and Bloomberg. To learn more, visit: https://mystockmarketbasics.com

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Being Honest

take-an-honest-lookBeing Honest
It is challenging for many people to discuss feelings of financial fear without a sense of shame. Behind closed doors, people may open up about their feelings and embarrassment and be honest about their current financial situation. By voicing their fears or shame, many people feel as though a weight has been lifted and can then take stock of where they are; to formulate a plan to get financially fit.

Financial shame often comes from not living up to a particular ideal. It may be a false expectation or a false belief. The banker “tells” you that you can afford the monthly payment for a brand new home. The car dealership points out that you can purchase a new car and keep your payments the same. Ads on television “sell” us a dream: we deserve to have all the “things” we want now. You may believe you should own a big home, multiple cars and provide for all of your extended family, but perhaps you lost your job, and that is no longer possible. Many of us live with an illusion of the sort of person we should be (or what we should have) rather than being honest about our situation.

It is smart to have an accurate benchmark for what you consider to be a healthy financial goal or lifestyle. For example, you may want to have 500,000 dollars in your retirement savings account as your measure of being financially healthy. Not meeting that benchmark doesn’t mean you are a bad person. However, it may result in a different outcome. If you have 485,000 dollars in your savings account, don’t beat yourself up over the difference, but if you only have $45,000 saved for retirement when you turn 65, be prepared to live on a lot less than you are used to. You are delusional if you think you can postpone saving and live in better style than you do now.

Most people imagine that their retirement will be even better than their current situation and will live exactly as they do now — if not better! But the reality is that many of us have not saved enough money to make those dreams come true. Now is the time to keep feathering the nest. Make an appointment with your CPA or a financial coach who can help you assess your net worth and develop and a plan for staying financially fit. Creating an honest budget and reevaluating what is important long-term may change some of your choices today. Our current cultural and political mindset of deserving it all now and never stopping to say, “I can’t afford that,” isn’t doing you any favors. Set yourself apart, be honest with your money choices. You can do it. You can live abundantly for many years to come.

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PAY DOWN CREDIT OR SAVE?

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One of the most asked questions I get is: Do I Pay down credit or save? I say do both at the same time!

If a lower income is the cause and you hate your job, find your passion and work in that field. If you don’t have skills, take classes. While the classes may have a cost, the benefits often generate higher income. Just like a game of Monopoly, when you circle around the block each month, you can pick up that extra money!

If you hate being broke, start saving. If you are unhappy with your debt, make a plan to pay it down while curbing spending. What is working for you and what isn’t? Start creating your financial freedom now, even if it’s scary or feels too big.  Making proactive choices is the way to begin heading in a new direction.

Financial security may feel like it is unattainable, but you may need to change your perspective. The cure for being financially overwhelmed is persistence and knowledge. Want to know the best way to a robust savings account? It is one step at a time! Pay down credit on your lowest balance and then start saving ten dollars per paycheck knowing that, over time the account balance will add up to a significant sum. In that way, you can create a new habit that is not painful and creates more wealth.

Surround yourself with books and people that provide financial advice or go online to reputable sites. If you are more comfortable with personal interaction, try to find a personal friend or colleague who excels in your area of weakness, then schedule a time to have coffee with them, and seek their advice.

Financial stability may not happen overnight. Setting goals starts the journey, and you may find the distance to realign your life is closer than you thought. Just put one foot in front of the other and get moving! Pay down your credit AND Save.

Step by Step!

(image available as a screen saver at http://www.hasbro.com/en-us/media/monopoly-money-screen-saver:D4496164-19B9-F369-10B8-4A25863AC342)

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Focus on Your Future

the money nerve

Have you ever heard Aesop’s fable about the grasshopper and the ant?

The grasshopper loved hopping about and singing during the warm summer. One day he saw an ant working hard to move an ear of corn and cried out, “Why in the world are you collecting food on this bright and beautiful day? Stay and play with me!” The ant shook his head and said, “I am saving this for the cold winter, and you should do the same.” The grasshopper laughed and went off to play but perished during cold weather. The moral of the story: It is best to prepare for the days of necessity.

The story seems harsh, and many people wish for a fairy tale ending where others solve all of our financial dreams (i.e., winning the lottery, getting an inheritance, marrying a rich spouse). In 1934, Disney created the delightful film short “The Grasshopper and the Ants” where the Ant Queen and her colony felt pity for the grasshopper and took him in during the winter. Have you ever seen the video? Check it out below.

Sometimes a project or goal seems so far away that it is easy to procrastinate. There is so much time left and we get bogged down in our busy-ness, that daily decisions feel more urgent and important than long-term investments in life.

Reality check: It’s your life; it’s your money! How are your plans for retirement going? Do you have savings for a rainy day? Life happens – when you least expect it.

Saving and spending are part of living a life of abundance. Let’s change the words being used from short-term desires like “I need those shoes” to some long-term goals such as, “I am making better choices with my money, to maintain my lifestyle when I get older.” As you discover the best balance between living for today like the grasshopper and stashing some wealth like the ant, you will come to realize that both are investments in yourself.

Ignoring regular maintenance on your car because you don’t want to spend the money can result in major car expenses down the line. In the same way, poor spending or saving habits may also result in a later retirement and fewer choices down the road. What should you do?

Here are three easy ways to get started:
1. Take the quarterly plan you created last week and imagine retirement is a “big purchase” like a house.
2. Determine the price of this long-term goal (the amount of money needed) with this calculator.
3. Tweak your quarterly plan (budget) to begin investing toward your targeted “quality of life” in your later years. You will be glad you decided to invest in yourself!