Over the weekend I have been pondering over investment. We haven’t invested in a new account since opening and funding our first peer-to-peer lending account with Prosper. Ever since I bought a certified preowned BMW, three weeks back, I was having it in my mind constantly; What if I invested the money instead? How much money had I lost actually,as it was not only that I had to get away with $25,000 cash, but I lost potential income on the money.
OK, no more ranting about the car, although it was not a brand new car. Let’s focus on the investment aspect of my finance now. I have taken a few quizzes on the net, to determine the type of investor I am. The purpose was to gauge self progress and to check whether I am the type of investor I wanted to be at this age. Those survey’s all unite to declare me a risk tolerating investor, which I would have told about myself without taking those quizzes anyway.
Well, I am heck of a risk tolerating investor, else why’d my portfolio increase at a rate of 12% over last three years? more the risk, more the return, isn’t it?
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But, this exceptional growth has nothing to do with my prudence or my knowledge. I am lucky, sheer lucky. The stocks I own, performed very well. The funds I hold, performed exceptionally well and lastly the lenders I loaned my money to, are all repaying their dues on time (through Prosper).
This phenomenal rise is part of the reasons why I was not too critical about my decision to buy an expensive car.
Damn it SB! why to cry for a few thousands, you’ll make that up in a few months – great self consolation!
What if this change?
What if sock market starts going south? What if lenders start defaulting?
My heaven would fall apart, suddenly I would start beating up myself for buying the car.
This fear is good, we should all have this fear, it controls one from being reckless. This fear induces balance and control. Now, I got back my mojo.
I have only emergency cash (which is 6 months of my salary) in checking and savings accounts. Distributed among 3 checking and 2 savings account. Apart from having an IRA and an employer 401(k) accounts, I have stocks and fund portfolio targeted at various life events, like new home, our unborn child’s college and marriage, a trip around the world at some point of time in our life, etc.
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I do not have a bond or a CD investment. I started Peer to peer lending experiment with $500. Now gradually the investment is at $5,000.
See, all these investments are risky, no CD, no bond, no notes and not even commercial papers. Am I taking too much risk?
It’s good to be a balanced investor, to have a balanced ratio of growth vs. income investments. It’s good to have healthy mix of stable vs. risky vehicles. But, do I care? I should, but I don’t. I lost too much money in 2008 stock market crash, still I don’t care. We are still young, I have almost 30 more years to work. We are healthy and we have no child.
Well, having a baby would soon change the stability. A sudden illness would change this equation any time. But what change I would bring in? We have emergency fund, sufficient for any kind of emergency. Even if a situation comes where we need to pay more than the emergency fund, we can sell assets and bring cash to the table.
No one is going to ask for that much cash within a day or two or even three. We can do with the emergency cash for first few days till I can get the asset (read stock) sell proceeds deposited in our checking account.
I have all other sort of diversification in my stock and fund portfolio, I have global stocks, I have blue chips, I have small and medium caps. Within those I have well diversification in terms of companies. Now what extra I should do, to further lower my investment risks?
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Easy way to lower risk would be to sell some stocks and put the money in to a CD or a CD ladder. But, with today’s rate, I can’t even make up for the inflation with a CD or a bond. Now, what if stock market nose dives and I need more than emergency fund?
Well, I suddenly become a loser! in that situation I have to sell my already depreciated asset, kind of short sell. Even though CD’s and bonds won’t earn me anything, what they’d ensure is preservation of capital. Slightly better option than stacking money underneath your mattress. They are safer, burglar proof and earn about 1%, give or take few decimal points, return.
Now the next question to think about is, our money is earning great return, at what point of time we should convert some of the stocks to CD’s or bonds? Or, do we need to do it at all?
Tell me readers, what should I do to be a safer situation or do you think this is what should be done? Today I need your advice.