Yesterday, I blogged about my high net worth friend that has over 5 million in assets in my post Ways To Invest Money Once You Have Over 1 Million in Financial Assets.
After reading a comment left by another blogger, I now realize that my friend already has a decent amount of asset class diversification.
The following list contains the ways that he is already diversified:
- Real estate (mostly business related and a vacation rental property)
- U.S. Treasuries Bonds.
- Local Municipality Bonds
- Solidly rated Company Bonds
- Investments in other small businesses.
- Mutual Funds and ETFs (Exchange Traded Funds)
- Cash and Money Market funds
- Gold and other precious metals
- Preferred Stocks (or preferred ETFs or mutual funds)
- safe Dividend Yielding Stocks
- Moderate risk, but high growth individual stocks
- Financial preservation, I would guess he has life insurance for his wife and kids?
how can we lower our investment risk with some of the asset class diversification like HNW (High Net Worth) Individuals have, as a middle class member?
- Real Estate: We can invest in REIT stocks or ETFs. I don’t think we truly get the full leverage that we would need to become rich, but at least we would have that diversification via the Real Estate route.
- U.S. Treasuries: He buys the $10,000 issues because of the higher yield rates, maybe we should buy one of these, or buy $1,000 issues for a lower yield rate?
- Local Municipality Bonds: My HNW friend buys these too for the tax benefits. I don’t think they would benefit me much at this point in time.
- Solidly rated Company Bonds: He does this, but so can we. I plan on using the age based approach to determine my amount of bond ownership
- Small Businesses: His small businesses are large to me, but from a U.S. perspective they are small. I’d recommend starting with a lost cost business like selling on Amazon or Ebay, or blogging (I haven’t made much money with blogging, so amazon or facebook marketplace might give you more bang for your buck quickly). After playing with the small stuff for a few years, jump into something that you have a true passion about.
- Mutual Fund & ETFs: Most of my HNW friend’s money is in mutual fund and ETFs (and so is mine). This is a good way to go especially with index funds… Today it makes more sense to go with an ETFs instead of mutual fund! Usually, ETFs have much lower expense ratios too… or at least the ones I own do…
- Individual Stocks: My HNW friend has me beat here. He buys for the long term, and not the high risk, high growth stocks that I buy. He has outperformed me in this area! Surprisingly, he has just a hand full of these stocks. (he’s owned stocks like soft drink and entertainment stocks).
- Preferred Stock or ETFs: I’m just starting to dabble in this, but mostly you buy for the yield so in many ways it’s properties are somewhere between common stock and bonds.
In past articles, I mentioned the Age-Based allocation method for bond and stock ownership, and just in case you aren’t familiar with this approach, there it is:
- SOP: Stock Ownership percentage (of your investment portfolio) = 120 – (your current age)
- BOP: Bond Ownership Percentage (of your investment portfolio) = 100 – (Stock Ownership Percentage number)
So if you are 25 years old, your SOP would be 95% and your BOP would be 5% Since my friend doesn’t need as much risk in his portfolio, he has a high BOP number than most that are his age. Those of us in the middle class though, we need that growth…
Most of us will never own a small business, and many will not own real estate other than our primary home. But, like my HNW friend, perhaps we should…
Good luck!
-Don
Why not just invest in a diversified group of separate mutual funds and ETFs that cover all of the areas you mention above?
@Night Owl
That’s an option too… Except for the small business route.
I think it’s cheaper to buy the bonds directly. I guess if you aren’t concerned about the additional fees, this is a viable option.
What’s investmenting? Is that like investing/mentoring?
I think another benefit with having that HNW, is you can approach small businesses from partners perspective by supplying capital.
Remember reading something were one of the first facebook investors put up something like $1mil for however many shares – with all that dilution who knows what it’s worth now!
I’m a big fan of real estate and looking to invest more money there. Depending on your goal and financial situation, you can choose a different strategy at different stage of your life. At the moment, my requirement is cash-flow rather than growth.
Another thing is it pays to look at real estate investment overseas if the local market is out of your reach (such as in Australia). The risk is higher with currency fluctuation and the local regulation you are not familiar with, so it’s absolutely not for the newbies.
Since you mentioned forex at your previous post, it’s probably good to hold high-yielding currency (like Aussie dollar) for long term. But AUD is so high right now, it’s not as profitable as if you bought it last year. I work for a company who caters for forex speculative traders. Most are casual traders who will lose money. My take is, do it for fun and don’t buy into the “get rich quick” selling point 🙂 Like gambling, if you try to take the house, you will lose.
@Bytta
Thanks for the great comment! Especially the Forex advice!!
Someday, I would like to invest in real estate… I’m not sure I’m quite ready yet though!
What about commodities? Especially Gold? I’m curious about your friend’s take on this. The arguments are either all for it or completely against gold as an investment.
@MoneyCone
So far he hasn’t invested in gold yet. I think historically gold has been a fair investment, and he believes that he can get a higher return on his small businesses
However, with countries like India gaining in wealth, gold usage by consumers may increase dramatically! I’m teetering on the fence on that one personally, especially with gold up so high already…
I know he doesn’t invest in commodities, that would require too much of his time and energy.
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