The rich get rich by buying appreciating assets like stocks, bonds, real estate, and fine art. They have very diversified investment portfolios.
The people who don't get rich spend their money on depreciating assets. They buy cars they can't comfortably afford instead of using my 1/10th rule for car buying. And, they waste money on things like clothes they only use a few times a year.
It takes discipline doing research on investable assets. This is probably one of the reasons why many people don't even bother. But, investing and building a diversified portfolio are keys to growing wealth.
#1 Excuse: It's Too Hard To Build A Diversified Investment Portfolio
One of the biggest push backs I hear from readers who want to get rich, is that investing is too complicated. People don't like change either, because it takes effort. But anyone can learn how to invest.
And thanks to the boom in fintech companies, investing today is easier than ever. Not only that, fintech companies have made a wide array of investment types accessible to every-day investors. You don't have to be a hedge fund manager or a professional day trader to build a diversified portfolio.
Any novice can open an E-Trade account and the like. Just stay away from RobinHood trading platform.
#2 Excuse: I Can't Afford To Have A Diversified Portfolio
The second most common push back I get from readers is that they don't have enough disposable income to invest. People whine all the time that investing costs too much. In the past, broker commissions might have been a deterrent. But guess what folks – most reputable trading platforms like Fidelity now offer free trades.
And thanks to technology, some brokerages let you buy fractional shares of stocks. Fractional share trading was introduced by Motif Investing, which was acquired by Charles Schwab. Now anyone can afford to buy positions in stocks with 3 and 4 digit share prices.
Not only that, fintech companies have enabled both non-accredited and accredited investors to invest in a wide range of asset types. For example, you can now invest in real estate crowdfunding, farmland investing, fine art, collectibles, and more with just hundreds of dollars instead of millions of dollars.
A Diversified Portfolio Is A Wise Move
I've been encouraging folks to save, invest, earn passive income, and build a diversified portfolio for well over a decade.
It's been a while since I've had to carefully watch my own 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, 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 are moving, providing a tailwind for a couple industries. And I want to invest!
How To Cheaply Invest In A Diversified Portfolio Of Stocks
Common pain point: How do I build a portfolio of stocks at a low price if I don't have a lot of money to invest?
In the past, it used to costs $7.95 to buy or sell a stock online. If you've only got $1,000 to invest, buying a basket of 20 stocks at that rate would cost you 20 X $7.95 = $159. Paying $159 in commissions for a $1,000 portfolio is a whopping 15.9% fee! Even if you had a more chunky $10,000 to invest, $159/$10,000 is still a 1.59% commission. We all know that commissions and fees puts a drag on returns.
But, trading commissions aren't an excuse anymore. Competition in the fintech space has really helped retail investors save a ton of money. Online brokerages offer free trades now.
Given the high cost of investing, the following is what happens:
1) Don't bother investing. People who want to invest in a diversified portfolio of stocks, but who don't have a lot of money to invest, end up not investing at all. Savings is important, but buying assets that appreciate over time is the real kicker to generating wealth. Not bothering to invest due to cost and understanding are the two main reasons why people don't invest. It's much easier to spend money on a gourmet meal, a fancy watch, or a nice handbag rather than research and invest in a stock, and then hope it goes up.
2) Go the easy route. People who don't have a lot of money to invest will often end up buying a market index fund or ETF like VYM or SPY. This is not a bad way to go at all. In fact, this is the way to go for 70%+ of your investment portfolio. Low cost index funds and ETFs are about gaining exposure in a risk-adjusted manner. The only downside is that you lose flexibility in exactly what you can invest. For example, SPY is the ETF for the S&P 500 Index. What if you only like 100 companies out of the 500? You're stuck.
3) Invest in a risk inappropriate manner. People who don't have a lot of money to invest may end up investing way more than they should on a particular stock, ETF, or fund because they want to save on commissions. This action can be a penny wise and pound foolish, especially when things go bad. I've been guilty of this and lost thousands of dollars by overallocating into one stock.
If only I had invested in a bunch of different names, I would have lost much less or made money. It just feels like a waste to spend $79 on commissions to buy 10 stocks. But most of the time this isn't an issue anymore. If you're still paying for trade commissions, it's time to switch brokerages!
THE SOLUTION TO BUILDING A DIVERSIFIED STOCK PORTFOLIO
Thanks to the 270 or so participants in my survey on company loyalty, I took a part-time consulting job with Motif Investing (had a good two year run until end of 2016). I'm lucky to live in San Francisco where there are so many innovative companies in the area. I first heard about them when they won best in show at Finovate 2014. I believed in their value proposition for retail investors, but I wasn't 100% sold until I experienced the pain point of not having the normal amount of money I usually invest in stocks.
There's a great feeling of making money from investing that's hard to explain. There's also a terrible feeling of missing out on investing opportunities that you strongly believe will do well. I was planning on buying Amazon and Netflix before their 4Q2014 results, but I didn't because life got in the way. As a result, I lost out on 12%+ returns. Just in case oil and my favorite tech stocks snap back, I want to participate in the recovery, even if I only invest a much smaller amount that I'm used to.
I'm generally a VERY aggressive investor when it comes to actively investing 20% of my investment portfolio (~80% of my investment portfolio is passively managed and pretty conservative with index funds and structured notes). I'm aggressive because of my experience as a 22 year old who turned $3,000 into $165,000 with one very lucky trade.
If I had invested $25,000 into VCSY, I would have been an instant millionaire after taxes! At least I parlayed the $165,000 into a $580,000 San Francisco condo in 2003, which has since grown in value thanks to inflation and a robust economy.
How I Built A Diversified Investment Portfolio
Although Motif Investing was acquired by Charles Schwab and isn't available anymore, here's a look at how I constructed my motif at the time. I decided to bank transfer a lower than desired, but still respectable $10,020 into my Motif Investing account in order to build a meaningful portfolio full of stocks and ETFs I think are attractive at this moment.
I added the $20 for commission purposes, but I realized afterward that every new account with at least a $2,000 balance over 45 days gets at least $50 in free trade credit if they make at least one transaction (up to $150 total free credit). That's me because as soon as the ACH transfer was confirmed, I got to work in building my motif that day.
Originally, I was thinking of just buying around 10 highly speculative stocks to punt around. But then I was reminded that I can buy up to 30 stocks in one Motif for the same price of $9.95. That's a $228.55 commission savings if I were to buy the same names at E*TRADE or Fidelity, my other two brokerage accounts. Furthermore, $10,000 is not exactly chump change. It can buy half a Rhino, my 2015 Honda Fit beast.
Given I'm all about getting the best deal possible, I decided to do just that by actually building a real 30 stock/ETF portfolio divided into seven main categories: International/Defensive, Internet, Oil & Gas, Autos, Financial Institutions, Property, and Technology.
I built my diversified investment portfolio under the following assumptions:
1) Stocks that have corrected and are currently out of favor. Target beaten up stocks that have corrected by 20% or more from their highs. I'm biased towards growth stocks that have brand names.
2) Buy companies I use and understand (the Peter Lynch model). One of the easiest ways to get over your fear of investing, or finding stocks to buy, is to research and buy stocks that you know. Names in my portfolio include: Apple, Yelp, Netflix, Hawaiian Airlines, Chevron, Bed Bath & Beyond, and GoPro.
3) Stocks that may benefit in a low interest rate environment: real estate, home furnishing/remodeling, banks. Rates have fallen off a cliff recently with the 10-year yield now at ~1.63%. If stocks start falling out of favor, real estate and real estate related stocks may be relative outperformers.
4) Stocks that may benefit from a sustained low oil and gas price environment: autos and airlines. Nobody expected oil to collapse by 50% in one year. Airlines have already zoomed higher, but not Honda partially due to supply constraints. Low oil should actually hurt Tesla Motors at the margin, since this makes their product more expensive on a relative basis, but I like their upcoming product cycle. I'm a buyer of oil here, rather than a seller, hence the oil ETF USO.
5) Create a total portfolio performance that severely underperformed the S&P 500 over the past year. Once you've built your motif, the platform will show you how it would have done over the previous three month, one year, and five year periods. This particular motif would have returned -15% over the past year, while the S&P 500 returned +16%, a 31% spread. Picking stocks with a downward bias generally leads to more losses over the shorter term as it's impossible to pick bottoms. My hope is that these stocks will return back to favor if the markets stabilize over the next year.
Grow Your Wealth Today
Building a diversified investment portfolio is a wise move. I would spend most of your time focusing on a proper asset allocation of stocks and bonds. Once you have the proper asset allocation, then consider investing in real estate.
With a limited amount of funds and a strong desire to invest now, I completely understand the frustration of paying expensive commissions that inhibit one from investing. A large part of the reason why I want to save up $100,000 again is so that I never have to feel like I can't invest in something because I don't have enough money.
For those of you who want to improve your own financial health, check out my top financial products page. There are a lot of great resources that I've regularly used to invest and grow my own wealth.
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