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.
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
If you liked this post, check out our Ultimate Guide to Financial Freedom.
