How To Cheaply Build A Diversified Investment Portfolio If You Don’t Have Much Money

Diversity by Kongaline.com

Diversity by Kongaline.com

The rich get rich by buying appreciating assets like stocks, bonds, real estate, and fine art. The people who don’t get rich spend their money on depreciating assets like cars they can’t comfortably afford, and clothes that are never worn more than a few times a year. It takes discipline doing research on investable assets, which is probably one of the reasons why many people don’t even bother.

One of the biggest push backs I hear from readers who want to get rich, but don’t have enough disposable income to invest, is that investing costs too much and is too complicated. This post eliminates one more excuse people have for not building additional wealth.

It’s been a while since I’ve had to carefully watch my cash position, but since I spent a lot of money buying a fixer last year, cash flow is tight. I have a goal of rebuilding my liquid cash hoard to $100,000 in 2015, while also paying off roughly $85,000 in rental mortgage debt. It won’t be easy because I don’t want to cheat by selling assets to pay off debt.

Despite my debt elimination and savings goals, I want to continue investing in stocks and bonds when I see opportunity. With the recent volatility in the market, I see A TON of opportunity right now. Oil and energy stocks have gotten crushed, but aren’t going to zero. Market darlings such as Tesla, Pandora, GoPro, Yelp, and Lending Club have all taken a beating, and I love all their products and services. Interest rates have collapsed, providing a tailwind for a couple industries. I want to invest!

The only problem is, I’ve only got about $10,000 I can spare in this market volatility vs. a normal investment of $50,000 if I want to reach my savings and debt pay down goals.

Managing A Complicated Net Worth: How Messy Is Your Money?

Antique Chinese Coin Collection Part Of Net Worth

Started collecting Chinese coins in 1997

A blogging buddy of mine named J from Budgets Are Sexy publishes his net worth figures every month. Although I generally advise against sharing all of one’s financial details, if the figures are reasonable, then that’s probably fine. Otherwise, the pitchforks will be focused on those who brazenly display obnoxious amounts of wealth with no regard for others. May Stealth Wealth live on in us all.

Remember, it’s more about what you have to show for your income, not so much about how much you make. Your net worth figure should be carefully protected as it grows.

J is in his early-to-mid 30s and has a family of four with a very respectable net worth of ~$470,000. Given he has around $37,000 in cash, the next time I see him at a conference boondoggle, of course I’m going to let him buy me a steak dinner! Instead of letting his cash earn nothing in a money market account, he might as well take care of his friends right?

What I noticed about his net worth picture is how pleasantly streamlined it is. He has no more than 10 financial accounts to track. Have a look.

Net Worth Chart

After seeing J’s net worth chart, I got to thinking about how complicated my own net worth picture is. I used to track my net worth with an Excel spreadsheet every single month since 2000. It was pretty fun for a personal finance enthusiast like me, but it started getting a little cumbersome after my account total grew. By the time I aggregated my accounts online in 2012, I had 25 accounts to track. I felt relieved when I no longer had to write everything down and update figures every month. Now everything just gets updated automatically thanks to technology.

But something funny happens when you just leverage technology to track your net worth. You stop being as analytical with your finances as you used to because you just rely on technology to do everything for you. In other words, you start getting a little lazy. Laziness is a net worth killer because it prevents you from taking action when opportunities arise, e.g. refinancing a mortgage.

My net worth has grown since 2012, like I’m sure most of your net worths have. What I’m curious to know is how many financial accounts I have now, because I haven’t checked in over a year! Perhaps you’ll share your count as well.

What Is An Accredited Investor And Is The Definition Fair?

Accredited Investor, Wall St. Bull In The United States, an accredited investor is someone who has a net worth of at least one million dollars, excluding the value of their primary residence, or has income of at least $200,000 a year for the last two years or $300,000 together with a spouse, with the expectation to make at least as much every year going forward.

Once you become an accredited investor, you’re now allowed to invest in certain types of private investments, which are usually less liquid, potentially more risky, and sometimes more complex than public equities and bonds. These investments include: private equity, venture capital, angel investing, limited partnerships, and hedge funds.

I’ve written consistently about how I think an adjusted gross income of roughly $200,000 – $250,000 is the ideal income for maximum happiness due to the maximum you can put away in a SEP-IRA or Solo 401k, a more agreeable federal tax level, less persecution by the government, a more digestible AMT, and enough income per individual to survive happily anywhere in the world. Now we can include being an accredited investor as yet another reason to shoot for $200,000 – $250,000 in income.

Investment Lessons From The Most Profitable Trades Of 2014

Investment Lessons Learned by AjariOne of the 10 misses in my 2014 year in review post was missing out on some great investments. I truly believe there are fortunes to be made every single day if we look hard enough. The problem is, we all get busy with our lives and don’t really bother.

Part of the reason why investors hand their money over to professional money managers is so that they at least know someone is spending their working hours trying to make them money, even if it is for a fee. The busier I get, the more amenable I am to farming out more money to people who pick stocks for a living. That said, I’ll never stop chasing unicorns.

Take a look at a pretty sweet infographic created by Motif Investing on some of the most profitable investment ideas of 2014. We’ll then discuss some investment lessons at the end of the post. The benchmark comparison is the S&P 500, which has returned roughly 13% YTD.

How To Make More Money By Doing Nothing

Infinity Pool Makes More Money Doing Nothing

A still pool does nothing in Sao Paolo, Brazil

It’s been over a year since I swapped property management companies for my Lake Tahoe vacation rental (it’s snowing buckets btw), but it was only recently that I marketed the property here to help boost its income for the second year. The property used to be managed directly by the hotel, which would obviously garner the most amount of incoming calls and online inquiries compared to an outside property manager. When reservations were booked through the hotel, they randomly assigned which units those reservations went to. So when I was in their rental program, the only way I used to benefit was when the overall volume of guests increased.

That all changed when I moved to an outside property management company who charges a lower commission. They market my specific units on their website. Therefore, the challenge is for them (Vacasa Rentals) to get well known enough to be a favorable company for vacationers to book living arrangements vs. the hotel’s challenge of simply marketing The Resort At Squaw Creek as the premier Lake Tahoe vacation destination.

I used to try and help my cause by advertising my property on Craigslist while it was still managed by the hotel as well, but I stopped because it takes a lot of time dealing with inquiries and bookings. You would think I’d be worried about seeing a drop in income by switching management companies, especially if I didn’t market my unit on the side. But I wasn’t because I wanted to let them earn my business for the first year, so they wouldn’t take me for granted. They gave me a guarantee that I would earn at least as much as I did from the hotel, or else they’d refund the difference.

Should I Invest In P2P Lending? Prosper Performance Review

live-long-and-prosperAt long last, Lending Club went public recently with an estimated $5 billion market cap. It’s the first really big new generation fintech IPO, and boy is it going to make a lot of people a lot of money. To give you some perspective, at a $5 billion market cap, Lending Club is ~$1.3 billion larger than Yelp! I’ve been following both Lending Club and Prosper since their inception as their offices were right next to mine in downtown San Francisco.

In 2013, I finally decided to invest some money into P2P lending with Prosper to see what the fuss was all about. I had a friend working at Prosper at the time who helped teach me about the market place and the company over several lunches. I’ve written a post on tips for P2P borrowers from a lender’s perspective, a post highlighting the P2P lending returns by borrower rating and credit score, and how P2P lending can even get a little addictive due to the ability to pick and choose who gets to borrow your money.

I was relatively gung ho about allocating several hundred thousand dollars to P2P lending, but I didn’t because I still wanted to do more research given I expected rates to stay low and the stock market to outperform as a result. I also ended up buying another house, so I only invested several thousand in P2P lending as a result, and basically ignored the account for much of the year until now.

MY EXPERIENCE WITH PROSPER ALMOST TWO YEARS IN

Here’s a snapshot of my current performance: Prosper Annualized Return

A 7.43% overall return isn’t too shabby for 2014 given the stock market has returned about ~9% over the same period. I’m a very conservative investor with P2P lending since it’s only been about two years of actual investing. As a result, I pretty much invested in A and AA Prosper Rating borrowers along with several B Ratings to get some juice.

Motif Investing Review: The ETF And Index Fund Killer?

Various MotifsAfter spending 13 years in equities on Wall Street, I’ve been able to personally speak to some of the most successful institutional investors around on how to invest and manage money. The one consistent piece of advice I always hear is to invest in long-term trends and forget about the day-to-day minutiae. For example, shorting/underweighting Japanese equities since the late 1980s and going overweight commodities in the 1990s have been great winning decisions.

As a result of my experience working with successful fund managers, I weaned myself off of trying to constantly trade around the market after the NASDAQ burst and have been focused on long-term, idea-driven investing ever since. I’ll always have a Unicorn Fund to punt around for the next multi-bagger stock, but the fund is always less than 5% of my net worth or 10% of my entire equity exposure.

Motif Investing is a fascinating company based right here in the San Francisco Bay Area. I’ve been following them for the past couple of years after they raised a $25 million round of funding led by Goldman Sachs in 2013, won the Finovate Fall 2013 and Finovate Spring 2014 “Best In Show,” and raised another $35 million round in 2014 led by JP Morgan. Motif Investing makes most of its money off transactions (trades) when you buy or sell one of their “motifs” based on an investment idea you have. They might also expand into the money management business as well.

A motif is essentially a basket of 30 stocks you can invest in, which are aimed to profit from a specific idea or underlying theme. Let’s say you think new housing construction is going to quicken in the US next year. You could buy a housing motif which might contains Lennar, KBH, Home Depot, Bed, Bath, and Beyond, Zillow, and more in various weightings. Given my focus on buying winning long-term ideas and ignoring the short-term volatility, I really like Motif’s value proposition for retail investors.