Diworsification: How Much Diversification is too Much or Little?

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Diworsification

When I was picking stocks, I saw my portfolio lose 15% of its value in one day.  Simply put, I had too many of my eggs in one basket or too many of my investment dollars in one stock.  I wasn’t diversified.  Sure, I could hit it big with a stock, but I could also lose.  I saw the amount of time I was spending on picking stocks and knew it could be put to better use if I let the professionals handle my money.

My portfolio was under diversified, but many people also suffer from too much diversification of their portfolio or diworsification.  Diworsification occurs when you continually invest in the same asset class and keep your risk low but hurt your overall return potential.  It would be the equivalent of investing in many different mutual funds that only contained U.S. stocks.  If you want exposure to the U.S. domestic stock market that is great, I highly recommend it, but pick a fund that gives you just that and move on.

My investment strategy has come a long way from my earlier days when I was picking and choosing stocks.  I thought just like many that I could pick homerun stocks that nobody else could.  I did well on some and poorly on others.  I would come home every day from work and watch Jim Cramer’s show Mad Money.  I soon realized that the effort I was putting in wasn’t yielding the rewards I desired.  I quickly shifted all my investments to a mutual fund.  Being young, I knew I wanted a large exposure to stocks.  What better stocks to invest in than the U.S. Stock Market?  Warren Buffett has been noted to say that when he passes he wants the remainder of his fortune put into a low-cost index fund that mirrors the S&P 500.  That’s right, just one fund.  If he wanted his fortune to be spread across many funds that mirrored the S&P 500 he would be subject to diworsification.  I decided to follow Warren’s advice.

While my investment dollars are placed into a single low-cost Index fund that mirrors the U.S. Stock Market, not everyone will agree with this position, and that is fine.  Investment advice can be given to you from a hired professional or you can decide on your own.  My knowledge came about through the reading of numerous books.  If you want to invest in South America, there are funds for that.  If you want exposure to corporate bonds, there are funds for that.  If you think that the pharmaceutical sector is the next big thing, then by all means find a fund that suits you for that investment.  There are many ways you can invest your hard-earned money, but try and keep to the One and Done Philosophy when investing in mutual funds to prevent diworsification: Pick one mutual fund that covers the class or sector you are wanting exposure to and leave it at that.  Not only does it simplify your portfolio, but it keeps you diversified and away from diworsification.

How Rookies Can Invest in Real Estate

If you are interested in investing in real estate property, you may have started doing research about it. However, there is so much information out there about the topic that it can sometimes be confusing and leave you wondering how you should get started.  Fortunately there are a few not so complicated ways how rookies can invest in real estate.

1 Rentals

If purchasing a single family rental appeals to you but a lack of time to research and find an investment property is holding you back, there is a way to get it done fairly easily; Let someone else do the research for you. But saving time may not be the only thing making you hesitate. You also have to find renters, collect rent, do upkeep, and the many other tasks involved with owning a rental. It all takes time and it can be somewhat intimidating to a rookie real estate investor. So why not allow someone else to do some of the work for you? In addition, it is possible to purchase turnkey rentals even if you don’t have the expertise or time to manage the property yourself. Also, if you think you are locked into buying rentals only in the area where you live, think again. You can invest in properties in a different part of the country altogether even if you haven’t personally seen the property. Does this sound like a dream? There are companies in existence that can help you overcome these hurdles so you can purchase a rental and get started investing in real estate even as a rookie.

2 Crowdfunding

Crowdfunding is another way to help you get started as a rookie real estate investor, especially if you don’t have much money to get you started. By choosing this method you can put your money together with money from others and invest in real estate so everyone benefits. This is done through an REIT, or Real Estate Investment Trust.

REIT’s are a lot like mutual funds in that they give investors the power to diversify their investments and have steady money coming in. They are made up of knowledgeable team members who devise ways of investing pooled money in real estate investment options not usually available to the lone investor. They do this by putting the investment capital into more than one property, which makes the risks low and raises the growth potential of your investment. There are several companies that offer this type of investing, so it shouldn’t take too much time to research and find one to your liking.

3 Partnership Investing

Of course, you could also pool your money with someone else without the help of an outside company. Choose someone you trust to get started with and you could still invest in real estate even if you don’t have a lot of money or experience. When you work with someone else who has real estate properties already, you can learn a lot from them about choosing, financing, and managing rental properties or flip properties. It may also allow you to start investing a lot sooner than if you were to try to purchase a property on your own.

As you can see, even if you are new to real estate investing, there are different ways how rookies can invest in real estate. Don’t let whatever is holding you back prevent you from securing your future.

What other options do you know of how rookies can invest in real estate?

Kayla is a personal finance blogger in her mid-20s who loves to write about money topics of all kinds.

Should I Invest in Stocks?

The U.S. Stock Market is at an all-time high, and many are wondering how much longer this can be sustained.  People are asking themselves if it is still worth investing in stocks at this high.  The simple answer is: YES!

Below is a chart of the S&P 500, which covers the broad range of the stock market.  The chart below illustrates performance from 1950 until the end of last year.

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Should I Invest in Stocks?

As you can see based on the chart, there are rises and falls, some of which are quite big.  If you look at the chart as a whole, you can ultimately say that U.S. stocks have increased in value over time.  Here are three reasons why one should consider investing in stocks.

Should I Invest in Stocks? Reason 1:

U.S. stocks have outperformed almost every other investible asset over the past 100 years, especially government and corporate bonds.  People often think of bonds as a safer alternative to investing in stocks, but what they really mean by “safer” is less volatile.  Yes, stocks can fluctuate with higher highs and lower lows in a given period of time, but over the long-run they will outperform bonds.

Should I Invest in Stocks?  Reason 2:

Stocks are the easiest and safest way to build wealth.  What I mean by this is that continual investment in stocks will yield higher and higher returns over time if you let your returns compound.  Compounding interest is a great thing when it comes to building wealth and all it takes is two simple steps:

Step 1: Continued investment and reinvestment

Step 2: Time

By continually putting money into your stock investment on a consistent basis and allowing your returns to reinvest, after a period of time you will be able to build a substantial amount of wealth.  And again, since stocks outperform other investments over the long-term, you are compounding a greater percentage each year.

Should I Invest in Stocks?  Reason 3:

Because Warren Buffett says so!  At the time of this post, Buffett’s net worth is estimated to be in excess of $75 billion USD.  It has been said that he is the greatest investor the world has ever seen.  How did Warren and others like him make their great fortunes?  Through investments in stocks.  Warren has constantly invested in companies throughout his time via stock purchases in what he calls “value investments”, which is a simple way to say in companies he believes to be cheap in valuation.  Buffett has gone so far as to say that even upon his passing he would like the remainder of his fortune to be placed in a low-cost index fund that mirrors the S&P 500.  The greatest investor ever believed and still believes in the power of stocks.

Hopefully by now you have been convinced that investing in stocks is the right thing to do, but how do I get started?  Simple, to begin investing in stocks I would recommend investing in a mutual fund that covers a wide range of the U.S. Stock Market.  Investment firms such as Vanguard and Fidelity offer these sorts of funds that will allow you to get exposure to the broad range of the U.S. Stock Market and begin reaping the rewards.

How to Become Independently Wealthy

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How to Become Independently Wealthy

Becoming wealthy is a goal many of us hope to achieve in our lifetime.  Whether you want to be wealthy so you can have unbelievable lifelong experiences or to validate your success, the goal is often dreamed of but rarely achieved.  Ken Fisher, the author of The Ten Roads to Riches, discusses the many ways people can achieve wealth throughout their lifetime, ten to be exact.  All of these roads have proven to make someone independently wealthy throughout their lives.  Some are more common than others.  So if the question of how to become independently wealthy has crossed your mind, I will discuss two of the ten Ken illustrates in his book.




How to Become Independently Wealthy: Save and Invest Wisely

I usually sign off my posts with a simple phrase: Budget Smart, Invest Wise.  Budgeting allows you to allocate your funds to various categories, and hopefully one of those categories is savings.  Whether your savings vehicle is an IRA, Roth IRA or other type of investment, saving money is critical to building wealth.  However, saving is only half of the battle to building wealth this way.  The other key ingredient is investing wisely.  Investing wisely means creating a smart investment plan, be it with a financial advisor or through acquired knowledge, that creates a return on one’s investment.  For example, I have found that investing on a monthly basis in a mutual fund that covers the broad range of the U.S. Stock Market to be of most benefit to me.  I recognize that this investment, although it has risk involved, prevents me from being susceptible to the failure of one company or one sector of the market.  Saving and investing wisely is the road most traveled, but it also provides the greatest chance of reward.

How to Become Independently Wealthy: Invent Income

Inventing income can cover a wide spectrum of earning additional money.  For example, if you are a song writer or musician, you can create an ongoing stream of royalties from your lyrics or music.  If you purchase a property that you decide to rent out, you could turn it into a cash flow positive stream of income.  The possibilities are endless.  Maybe you have a specific skill that people are willing to pay for you to teach them.  Perhaps your area of expertise at work can lead to consulting other companies on the side.  Do you have something you’re passionate about that you can create into a blog or website and charge for ad revenue?  Many of us have the tools, knowledge and capabilities to put our talents towards creating additional income.

Becoming independently wealthy or successful all boils down to one’s level of commitment.  If you are committed to becoming independently wealthy, then most likely you can find a way.  Some individuals, like Bill Gates or Mark Zuckerberg, created an enormous amount of wealth.  Maybe you want billions like these company creators, or maybe you will be satisfied with millions or even a million.  Only you can determine what being wealthy is to you.

Compound Interest

Some have called compound interest the unofficial 8th wonder of the world.  It is definitely a wonder when it is applied to your financial life.  The best part about compound interest is that it allows for exponential growth of a portfolio.  The concept is simple.  When you earn interest/dividends/capital gains, you reinvest them into your portfolio instead of withdrawing the funds.  The video shows just how powerful compound interest can be in increasing your wealth over time.

 

Budget Smart, Invest Wise

Don’t Get Emotional

The other day I was sitting in a conference room with some coworkers.  Our company was restructuring it’s retirement plan for employees.  After the changes were announced, general conversation started taking place.  The financial recession of 2007 through 2009 came up.  One employee joked how he lost over $3,000 in the market downturn.  While it isn’t a large sum of money, it was enough of a loss for him to take his money out of stocks and place it in bonds.  He has had it in bonds ever since.

It is often said that losing money is more painful than gaining or winning money.  It is human nature for us to make rash decisions when our livelihood is being threatened.  And yes losing retirement money does effect one’s future quality of life and thus his or her livelihood.

My fellow coworker got too emotional during a time when he shouldn’t have.  When the market goes down, we hear “SELL, SELL, SELL”.  And when it goes up, “BUY, BUY, BUY”.  Don’t watch the news, don’t watch CNBC and their stock reports, and please don’t get emotional.  Investing consistently over time is the best way to ensure that you invest during dips and spikes in the stock market.  Right now the market is currently down about 6% from it’s all time high.  I consider that 6% a sort of holiday discount that we should all be benefiting from.

Budget Smart, Invest Wise

A Declining Market

 

As you might or might not be aware of, the US Stock Market has been declining and may continue to do so.  The market fell over 5% last week and looks to possibly continue the negative trajectory today.

This is the first 10% + pullback we have seen in a while.  10% is what experts call the correction, or when they feel stocks have gone up so much that they need to be corrected to allow new buyers to enter the market.  Markets will always continue to rise over a long-term horizon; however, these pullbacks that occur do cause fear and worry in the eyes of many investors.  I am here to tell you that you should not worry.

In one of my favorite books, Simple Wealth, Inevitable Wealth, by Nick Murray, Nick talks about how a declining market is one of the best things for your portfolio.  If you buy an index fund on a constant basis, then putting the same amount of money into that fund will yield a purchase of more shares of that fund.  Reversely, the more the fund increases the less shares you can purchase with the same amount.

My 3 tips for a downturn in the market:

  1. Continue buying stocks.  Just because stocks are going down doesn’t mean you should get out of them.  That is what everyone else is doing.  Cover the purchase of a range of stocks through an all-stock index fund.
  2. If you have extra funds, then put them to work.  If you have any spare cash lying around and your financial life is in good health, then use this as an opportunity to enter extra funds into a down market.  Investing in an all-stock index fund means that the price of that fund is decreasing right now, so investing extra amounts of money at a decreased price means you can take advantage of that discount.
  3. DON’T PANIC.  Don’t watch the news, don’t follow the markets, whatever it takes, don’t panic.  That is what many do during a downturn, they sell.  Can the market potentially drop an additional 10%?  Absolutely, there is no way to tell how far it will drop, but if you sell when everyone else is you are giving in to the panic.  Be a disciplined investor and continue buying while prices are falling.

Budget Smart, Invest Wise

The Idiot’s Guide to Investing

Want to invest like a genius?  It is actually quite simple.  Very few have been able to accumulate wealth overnight; however, many have built wealth over their lifetime.

Ever heard of Warren Buffett?  I’m sure you have.  He’s preached this advice before and continues to recommend it to the average investor.  Another genius investor and entrepreneur… Jack Bogle pitches the same advice as Buffett.  Jack is the founder of Vanguard, which offers low-cost investment options for the average consumer.  Buffett, Bogle, and Charlie Munger all agree on your best bet for investing in your future.

http://finance.yahoo.com/news/investing-pros-john-bogle-warren-160000796.html

Take a lesson from these billionaires of our time.  Investing is as easy as dedicating your money into an index fund.

Budget Smart, Invest Wise

The Annual Raise

Do you get an annual raise from your employer?

If yes, listen up.  There is a way to allow that 2, 3 or 4% your employer gives you to add enormous amounts of wealth to your pocket.

There is a thing called lifestyle inflation which ultimately means the more you make the more you spend.  It is human nature for us to increase our standard of living as our income goes up.  For instance, when I was in college, I rarely went out for a nice sit down meal.  Now, I go a few times a month.  Lifestyle inflation is bound to happen to a certain degree.  You make more money, you start a family.  You start a family, you need a bigger house.  It isn’t a perfect cause and effect relationship but you get the gist.

So what are you doing with your annual raise this year?  If you are like most employees then you get a tiny piece of satisfaction out of seeing a slight bump in your paycheck.  Not like an extra $30, $50 or $70 a paycheck makes a huge difference, but it can if it is put in the right place.

Let’s say you are the recipient of a 3% annual raise from your employer.  Instead of letting the raise go straight into your paycheck take 2% of that raise and increase your 401k contribution by 2%.  Then let the 1% add a little more to your paycheck.  Now on an individual with a $50,000 a year salary, increasing your 401k contribution by 2% is only $1000.  However, if you let that money compound and you continue to put your raise into your 401k each year, then over time it can add up to thousands if not hundreds of thousands of dollars.

Nobody ever looks back and says “I saved too much money.”  So give it a shot, and let the savings pile up.

Budget Smart, Invest Wise

Constant Investing

In case you missed it the DOW jumped 236 points yesterday.  The S&P was also up over 1% yesterday.  Before yesterday’s rebound the market had pulled back approximately 2.5%.

While these numbers might seem minuscule in the big picture of things, there is an important message to take from this.

The market moves every day.  Sometimes by a little, and sometimes by a lot.  If you take the emotion out of your investing the daily, weekly or even monthly moves of the market shouldn’t be an issue to your portfolio.

The Key…

Constant investing!

Every Friday I put a $100 deposit into my brokerage account.  Every month I put $500 into my Roth IRA.  By investing on a constant schedule I can ensure myself DCA (Dollar Cost Averaging).  By doing this, when the market goes up I am investing the same amount as I would when the market goes down.  The only difference is that when the market is down for the week or month, I buy more shares of the mutual fund.

By sticking to my investment plan and constantly investing, I have little care for how the market swings each day, week or month.  Timing the market is never a good idea.  Very few have the ability to beat the market.

My advice: Keep it simple.  Constantly invest the same amount each month into a mutual fund, stock, etc.  Allow compound interest to accrue.  Give it time.

Budget Smart, Invest Wise