Wednesday, June 4th, 2008
We have all heard people harp on having a financial plan and investing for the future, but what does that mean? What happens when you develop your asset allocation, purchase your Dividend Growth Stocks and Dividend ETF’s and have saved for an emergency fund with a high interest online account like ING Direct?
We have also heard all of the “talking heads” on television talk about diversification. They are more than likely talking about diversifying within the stock market. Diversifying between stocks, sectors, and industries as well as between fixed income investments like bonds and equity investments like stocks. This is usually good advice, but what about other types of investments? Where do they fit in the picture and how can they help you to further grow and protect your wealth?
What Happens Next?
At Blueprint for Financial Prosperity, they ask what is next in your financial plan after you have successfully accomplished the following:
- Paid down all your debt until all you owe on is your mortgage.
- Maintain six months of expenses for your emergency fund in a high yield money market account.
- Fully fund your and/or your spouses 401k, 403b, 457, etc.
- Maximize your and/or your spouses Roth or Traditional IRA up to the allowable limit.
- Invest some money each month in a 529 plan (and possibly even a Coverdell “Education†IRA) for each of your children’s future educations.
- Set aside some additional money each month and at bonus time into a taxable brokerage account for such goals as that long-awaited trip to the Orient, the sunny vacation property on the water, or even retirement.
- All your investments are properly diversified by asset type according to your goals, time frame, and risk level.
The article goes on to mention investments in tangible assets such as gold coins or a stash of gasoline, although the latter is difficult to manage.
Diversify Away From The Stock Market!
I would suggest that diversification away from the stock market take into account a variety of tangible assets such as precious metals, raw land (vacation property is preferred), Real Estate, and valuable collectibles or antiques.
You should be aware that these tangible assets typically have narrow markets and can be very illiquid. However, they can be very valuable in times when the stock markets are out of favor and should comprise a small piece of one’s overall investment portfolio.
It is essential that you do your due diligence with every form of investment. Purchasing these tangible assets can be tricky if you are not well versed in the particular niche market. That said, thorough research could yield tremendous value so get out there and test the waters!
I have little in the way of antiques and coins, but I have had some success with Real Estate and I do own some semi-valuable sporting collectibles.
I am a strong believer in diversifying away from the stock market and I prefer rental Real Estate because I am adamant that cash flow is the engine that drives wealth. Real Estate is the only avenue where the average person can utilize the power of a mortgage as financial leverage to compound their wealth.
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Monday, May 5th, 2008
The “opportunity fund” is a concept that I have used for many years now and, only recently, did I discover the name for it. Jim at Blueprint for Financial Prosperity coined this term over at his site and it struck a chord with me.
What Is An Opportunity Fund?
An opportunity fund is simply a stash of money that I set aside for investment opportunities that are almost certain to be profitable, but come about unexpectedly. They also usually require that the cash be accessible in a short period of time.
Jim outlines the opportunity fund as akin to the emergency fund, which I have talked about as well. Many folks like to keep their emergency fund and “opportunity money” separate. This is probably the ideal situation for most. However, over the past several months, I have been raising cash awaiting investment opportunities. I have also sold a condo in March for a nice profit and needed to store the cash until another opportunity came along.
Instead of opening an additional account for this opportunity money, I simply added it to my ING Orange Savings Account 
where it earns higher interest as part of my emergency fund.
How Much Opportunity Money Should I Have?
That depends.
The amount of money in your opportunity fund should not be a significant portion of your net worth and it certainly shouldn’t be more than your emergency fund! My rule of thumb is that I like to have about 1-2 months of net salary in an accessible account for opportune investments.
For instance; after I sold a condo in March I kept the profits available and liquid while searching for another opportunity.
Normally, I would have invested the majority of those funds in dividend paying stocks. However, I didn’t like the way the market was performing at the time and I am overly invested in the stock market as a whole.
Why Not Use A Line Of Credit
While I do have a large line of credit on my home that I use for quick purchases of undervalued real estate, I don’t advocate that the average person do so. My home equity line of credit is used in the same fashion that my opportunity money is, but it takes on a lot of risk. I only use this type of financial leverage when I have done some serious homework and the asset is very undervalued.
My most recent purchase as an example:
I just purchased a 2BR condo in a growing community for $89,000. Comparable units have recently sold for between $104,000 and $124,000. As you can see the asset is at least 15% undervalued.
(More on this in a future article)
Using financial leverage like a line of credit or mortgage can be an excellent tool to building wealth, but it can also make you poor in a hurry if things go wrong. I have written an excellent example on this subject in the past and I strongly suggest that you read it if you have not already.
Here is the link to the article:
http://dividendmoney.com/understanding-mortgages/
For Assets Only
Opportunity fund money and money borrowed (credit) should only be used to purchase assets. That is, if the object purchased does not appreciate in value or put cash flow in your pocket, then it should not be purchased using a line of credit or opportunity money.
This is where the average person is steered wrong by the pressures of consumerism in our society. Many folks see money in their account as “extra” money that can be spent on anything. It is up to use to develop our own financial will power to make sure that we are investing our “extra” money for a more prosperous future.
How do you fund opportunity investments?
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