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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.
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You need to ask yourself how much you’re willing to lose. 10%, 20%, 30%, or 50%.
If you’re not willing to lose 30%, then you need some stability.
Having bonds is good when the stock market crash because you can sell and buy more shares. Try taking some asset allocation quiz and see.
A lot depends with your age. You can take a lot more risk in your twenties vs. later. Your asset allocation is based on you rpersonal risk tolerance.
Everyone’s risk tolerance is sky high while the stock market is growing. But watch it drop 5% and see the roaring lions scurrying to the exits like mice.
It’s incredible to me how much the stock market has grown the past 12 months. I see the digital printing presses minting money like it’s nothing, and wondering how long it will take before the new money is worth exactly that, nothing.
Frightening times we live in. No one knows how it will play out, but the only people I see predicting a rosy future are the ones trying to sell you something.
In this environment, I focus on owning physical assets that produce cash flow. Tental properties are the most interesting to me right now.
I have an asset allocation I’ve chosen based on a combination of understanding the research and my own emotional makeup. I plan on keeping that asset allocation steady through the coming decades. But the money I need to be safe (e-fund, and near-term spending) is kept in an online savings account. I don’t worry about the interest rate with that money. It’s just not important given its purpose.
By the way, over the past three years the US stock market is up about 16.7%, so anyone with decent exposure to stocks will have done well.
Sounds like you are doing well and are happy with your savings and investing. Good. The one thing I have done with our emergency fund that you might consider is rather than keep it in checking and savings accounts where it is earning almost nothing, switch to 6 5-year CDs that have a low penalty for early withdrawal. Each CD should have a month’s worth of expenses. We have our emergency fund in 5-year CDs at Ally Bank that are paying us 2%. You’ll lose 60 days of interest if you make an early withdrawal. 2% is not a lot, but it is a lot better than zero. Current rate on Ally 5-year CD is only 1.6%, but again, better than zero.
My other suggestion is to make sure you are investing in low-cost mutual funds. Over a long time, annual fees can eat a lot of money. Annual fees compound in reverse. A fee as seemingly small at 1% will eat up over 25% of your holding in that fund after 30 years. You can see the math at Vanguard’s site, Stopping the silent killer of returns.
I am that type of investor where I hate to invest in anything but still do it occasionally but then never expect to get anything back 😀 I think that you need to know that there is a possibility of losing money from it.