With things looking better for me and my family financially (alright, there’s still a ways to go, but to paraphrase Monty Python, ‘It got better’) , I’ve been thinking about investing. It’s one of the things that first brought me towards personal finance, after all, and one that I fully intend to resume when I have more money available. That, unfortunately, could take awhile…
Until then, though, it’s good to simply think about investing and try to come up with some thoughts about where to go with my money when it becomes available. Being the investment dork that I am, I’ve put together a short list of items I intend to include in my portfolio when it comes into being. A major point to consider when investing, though, is the level of risk that particular investments have, when it comes to losing your money (and the corresponding potential for higher gains). Which brings us to
The Four Levels of Investment Risk
Here are the harmless investments (well, as harmless as any investment). Little chance of losing money, but little chance of gain, too. Best case scenario, you’re probably going to just stay a bit ahead of inflation. In most suggested portfolios, this is the ‘cash’ portion. Speaking of which, here’s what I plan to include:
- Cash: I’ve written about this before, noting that there are quite a few things that you might classify as ‘cash’, depending on your situation. I won’t get too deep into the differences here; suffice it to say, money market funds are probably my ideal way to go for most of this portion.
- Treasuries: Admittedly, much less fluid than cash, but Treasuries are about as safe as you can get. Not a bad addition since safety is the goal for this part of the portfolio.
Amount For Portfolio: Not too much, as it doesn’t provide much growth (but does add some stability). I’m going to try to limit it to about 10% of my portfolio, if only to have some safe money to invest if the riskier portions come down in price. (Note: This ‘cash’ portion is separate from the emergency fund I’m keeping for troublesome times; when it comes time to retire and live on my investments, I’ll start to draw from this segment, but until then, a line shall be drawn.)
Here’s where a little more risk is drawn. During market downtimes, they should hold up fairly well in price, but not have a huge potential for growth. This is the ‘bond’ portion of most investment portfolios, where you attempt to add some safety while not completely giving up on profit potential. A healthy amount should keep a portfolio (mine included) more stable while still profitable. What I plan to include:
- Bond Mutual Funds: Obviously, bonds are a solid representation of this segment, and I intend to have a few funds in my portfolio. The length of the bond’s term determines the level of growth and risk of decline (both increasing with the length of the term). I’m planning to go with short- to intermediate-term funds myself.
- Peer-to-Peer Loans: Peer-to-Peer lending is increasing as an investment style, and I hope to include some loans as part of my portfolio. They might prove to be riskier than ‘slightly’, but they make a reasonable bond-style loan (and my overall experience has been very positive), so I’m putting them in this segment.
Amount For Portfolio: The greater my age, the more bonds I should have in my portfolio. I’m thinking only about 10% when I start investing, increasing to about 30-40% at retirement. As for the Peer-to-Peer loans, while they currently represent my entire portfolio, I hope to get them down to only about 20-30% of this portfolio portion eventually, enough to benefit from them, but not lose too much should the lenders not be able to repay or other problems arise in this area.
Here’s where we get into the fun part, the ‘stocks’ in typical allocations. They show impressive earnings, at least over time, but lots of risk in the short term. The ‘stocks’ in asset allocation, definitely a requirement in any portfolio, mine included. Now’s where we start to get lots of investment choices:
- Stock Mutual Funds: The bread and butter at this level of risk, a solid stock mutual fund (or five) will make up the bulk of my portfolio. There’s quite a few to choose from, and more than a few strategies to follow, as well, but I’m planning to lean towards the smaller, value side of the arena (and stay with index funds).
- Individual Stocks: These add more risk and the need to do a lot more research to the stock investing process, so I’m not sure that I’m sure I’m up for it. On the other hand, cutting down on diversification means that good stocks can increase my net worth more easily. On the other, other hand, finding the good stocks brings us back to the research I don’t know that I can handle, so…probably not, at least for now.
- Real Estate Investment Trust (REIT) Mutual Funds: Another solid investment, allowing you to invest in real estate without having to buy a home (or other property and care for it individually. REITs will definitely need to be part of my portfolio, at least a small part.
- Commodity Mutual Funds: Yet another type of mutual fund (there’s a lot), this one allowing you to invest in physical goods like gold, silver, oil, and corn without buying the product (or futures in the product) yourself. By getting a commodity mutual fund or two, I should add some further diversification to my portfolio.
Amount For My Portfolio: This segment will cover all the remaining portion of my portfolio, which means about 80% of the portfolio now (or when I can restart my investing, anyway) and winding down to 50-60% around retirement time. (Note: I don’t claim to have my investing fully planned out at the tender age of 31; depending on where I stand financially come retirement time, this amount might be lowered so there is more cash/bonds to cover my regular expenses. Or I could have a completely different strategy; who knows?) Most of that will be in stock mutual funds (with no few individual stocks, at least until I have a lot more time and experience researching them), with about 10% of this segment in REITs and another 10% in Commodities, to diversify my investments further.
As noted in the very title, these are investments where you can lose your entire investment (or in some cases, even more) should things go bad. While tempting, I’m not terribly interested in these ‘alternate investments’ (at least until I’ve built up the rest of the portfolio):
- Forex: Investing in foreign currency exchanges. (Or actually, pairs of currencies, but that’s getting more technical than I want to go for this article.) One of the investments with a chance of losing more money than I invest, so I’m staying away (until I have lot more practice, time for research, and available funds).
- Futures: Futures are contracts to buy products or financial products for a given price in the future (hence the name). Since I don’t need oil at a particular price in the future, and I’m nervous about an investment that is this risky, I’m planning to stay away for now.
- Options: Options allow financial products to be sold at given prices at some point in the future. Depending on how they’re used, they can be very risky or not so much. Some methods have potential for profit with limited risks, but tend to require individual stocks and more effort than I need.
Amount For My Portfolio: Given the level of risk and amount of research involved to make a reasonable profit, these investments probably have to wait for many year before I’m able to invest in them (if I ever do, that is; I’m not sure that’s a good idea). Even if I decide they they are worth a shot, I’ll probably limit my investment amount to only a small portion of my portfolio; 5-10% should limit the potential loses to reasonable amounts while still allowing me to benefit from the good ones.
A Final Note: As I tried to note in the title and throughout, this article should not be taken as advice on your portfolio; it’s only some thoughts regarding what I want to include in mine. I’m not a professional financial advisor, just an eager amateur. (Albeit, one who hopes that after five years of writing about these sorts of issues that he has a decent grasp on investing strategies.) Please make sure to do further research and/or get professional advice before investing your own money.
There you have it, a guide on what I hope to invest in myself when I have the opportunity. How do you invest your money (or hope to, if you are in the same boat as me)? What do you plan to change things as you get older?
Image Source: Morguefile