Smart Reasons to Save, Use and Invest Money

Asset Class Diversification For The Middle Class

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 the comment left by Investor Junkie, I now realize that my friend already has a decent amount of asset class diversification. 

The following list are the ways that he is already diversified:

  • Real estate (mostly business related)
  • U.S. Treasuries Bonds.
  • Local Municipality Bonds
  • Solidly rated Company Bonds
  • Investmenting in small businesses.
  • Mutual Funds and ETFs
  • Certain low risk, but high growth individual stocks
  • Others?

So my question is, how can we experience some of the diversification that my HNW (High Net Worth) friend experiences?

  • Real Estate:  We can invest in REIT stocks, but 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 REIT route.
  • U.S. Treasuries:  He buys the $10,000 issues, so we might be able to buy 1 of these, but there are lower issues that we could affort.
  • 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 fairly easily.  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 tiny business such as Ebay selling, or blogging (I haven’t made any money with blogging, so ebay could 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 so is mine).  This is a good way to go especially with index funds…  You might want to do one better by looking into ETFs instead of mutual fund!  ETFs have much lower expense ratios… 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).

I mentioned the Age based allocation for bond and stock ownership, and just in case you aren’t familar with this approach, there it is:

  • SOP: Stock Ownership percentage (of your investment portfolio) =   110   –   (your current age)
  • BOP: Bond Ownership Percentage (of your investment portfolio)  = 100 – (Stock Ownership Percentage number)

So if you are 35 years old, your SOP would be 75 and your BOP would be 25  Since my friend doesn’t need as much risk in his portfolio, he has a high BOP number and most that are is age.  But us middle class folks 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…


UPDATE: Check out Enemy Of Debt‘s post:  “my interview about being debt free“.

9 Responses to Asset Class Diversification For The Middle Class

  1. Why not just invest in a diversified group of separate mutual funds and ETFs that cover all of the areas you mention above?

  2. @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.

  3. 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!

  4. 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.

  5. @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!

  6. 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.

  7. @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.