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
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…