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Diversification Beyond Stocks/Bonds


It is important to diversify within your future retirement funds. Putting all of your nest egg in one basket is asking for trouble. For example, imagine that you had 20-25% of your IRA in Mylan. You tell yourself it's a safe, low-to-no-risk investment because the Epi-Pen is the only FDA approved injectable insulin. Black swan events happen and if you do not diversify your portfolio to keep an individual holding below 5%, you may find yourself swimming in a sea of red. Worse yet, you will likely panic and lock in steep losses that compound the problem.

I believe a very small percentage of investors actively manage their portfolio. Most of the population rather set up a target date fund, contribute to earn the match and put it on cruise control. Excessive fees are just beginning to be addressed and frankly was long overdue. Secondly, target date funds can and do fill a void to lower risk automatically as we near retirement but the manager of the account does not know you. You and I may be similar in age, but several factors and interests alter our life’s long-term goals. Money is an oxymoron to most people. We obsess to receive as much as possible only to waste most of it on impulse purchases and depreciating assets. Confirmation bias is a huge hindrance when it comes to justifying a poor decision.

While all the focus up to this point was on your portfolio, it's important to remember that diversifying should be done throughout life in general. I suggest acquiring multiple skill-sets as you age to prevent hitting rock bottom in the event of a job loss. There are always opportunities to learn - such as college, seminars, workshops, volunteering, etc. An emergency fund is the ultimate buffer and I suggest two at all times, unless you have one of our Budget Blueprints!

The first one is miniature and only for general household or vehicle emergencies. We all know that those are inevitable to occur over time. I'm sure you have heard the phrase, “This can't happen now, it's at the worst possible time!” To be blunt, there is never a good time for something to break. That's why it's called an emergency. I suggest this fund to maintain the budget in times of short-term need.

The second emergency fund is much larger in value and is only to be used if you or a significant other either lost a job or suffered a catastrophic medical emergency. Unfortunately, those two events can create a cause and effect scenario that you can never fully prepare for. Also, I would like to point out that I consider emergency funds to be an individual responsibility. Saving too much is a blessing in an emergency! In the beginning, continue to add small increments to these funds and feel good about your progress. You will thank yourself later.

Lastly, I think real estate should be a part of everyone’s portfolio. It does not have to be a complex, hands-on project. If you are like me, your job keeps you busy enough. Then, there are family commitments and social functions that you choose to enjoy in your free time. You may be asking: How do you expect me to commit to another endeavor?

The simplest approach is to invest in REITs, Real Estate Investment Trusts. They are publicly listed stocks available to purchase. Caution: there are hundreds of these companies listed and they are not created equal. Also, macroeconomic issues can cause this sector to be more volatile. You have to do the homework or hire someone to research for you. However, there is no grunt work to do once you find a quality team of investors. You typically can receive a dividend and the possibility of capital appreciation.

The other approach is to consider working alone or joining a team of investors to find property that you can purchase. We have a close friend that has the goal of owning several apartment buildings and living off the proceeds. He is tired of the daily grind of corporate work and is looking to take a different path. We also know a small group of older investors that essentially pool their money together for larger purchases and split the proceeds (currently way above our financial bracket). However, there is increased risk when multiple parties join the fray.

We are in the process of finding our first real estate venture and will keep everyone updated! The goal is to start with one multi-tenant property with the hopes of owning a few. To limit risk, we plan to put >20% down, and be in close vicinity to where we live so we know the neighborhood. It does take additional time up front, but it's important to find the right balance so you have more time later when your money is working for you!

This was an introduction of basic diversification and was not all-inclusive. We would love to hear your experiences and what other avenues you all have taken to get ahead in life!


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