What to Invest In When
You Have More Than $100,000 but Less Than You Need to Retire
by Michael Masterson
Yesterday, I made the case that in the first
stage of wealth building -- when you have less than $25,000
to invest -- the only investment to consider is to start
a side business. When you pass that initial plateau, you
can branch out into conservative investments. Aside from
some emergency cash, during the second stage of wealth building
your money should be in equity-building real estate and
fixed-income instruments. Not stocks.
I recommend investing in stocks only after
you have passed that $100,000 plateau. While you are still
actively building wealth and are not yet in the final (retirement)
stage of managing your money. So today, let's talk about
that -- where your money should be during the third stage
of wealth building -- when you have built up your investable
net worth to between, say, $100,000 and $1,000,000. Here's
what I think your "stage-three" portfolio should
look like.
1. Emergency Cash
Everyone needs some cash hidden away for immediate
access. There are different opinions as to what constitutes
a "safe" minimum. Some say as little as one-month's
pay or expenses. Others argue for six months or more. My
suggestion is a little more than three month's worth of
expenses. If, for example, you spend about $75,000 per year
after taxes to maintain your lifestyle, you'll want to have
about $20,000 in cash somewhere . . . just in case.
2. Hard Assets/Collectibles
You shouldn't view hard assets and collectibles
the same way as you view stocks and bonds. Yet, if you buy
and sell them right, they can give you a consistently much
higher rater of return, even over a longer period of time.
Longtime ETR readers know that my preference
in terms of hard assets is fine art. Most of the advantages
of fine art are also available to collectors of antique
furniture, dolls, rare coins, Americana, vintage guns, cameras,
etc. So long as there is an active, inter-connected market,
you can enjoy yourself and make some decent money -- or
simply enjoy a reasonable appreciation -- by collecting.
I recommend collecting art because it brings with it so
many other gifts:
* The pleasure of learning
* The excitement of building a collection
* The stimulation of new friends
* A wider, more sophisticated view of history
If you focus your collection, you will develop
a feel for what is good and likely to appreciate and what
is overpriced. As with other collectibles, it usually pays
to pay extra for quality and rarity.
3. Real Estate
Yesterday, I recommended investing in equity-building
real estate during your second wealth-building stage. In
stage three, you should add income-building real estate
to your portfolio. (Through
ETR's real estate guru, Justin Ford, we've developed an
entire program to help you do it)
Real estate is an essential part of my investment
program. I have almost half of my investable net worth in
real estate. About 25% of that is invested in buy-and-flip
properties -- transactions that I used to do myself and
now have someone handle for me. The majority is in rental
apartments and office space. These investments have been
relatively easy to run.(I use professional management companies
for all my properties that are 10 units or larger.) They
not only provide me with regular income, they have also
been appreciating at an average rate of about 12% per year.
4. Side Businesses
Having a significant share (i.e., 25% or more)
of a small but growing business is truly the single best
way I know of to get rich. There are several ways to do
this:
* Find a small, fast-growing business in your
local area and buy into it. This is easier to do than it
seems. Many entrepreneurs are happy to trade a little stock
for cash if it can help them grow faster, reduce their risk,
and boost their confidence.
* Identify a smart, hard-working relative
or friend and back him in some small but potentially sizeable
business that doesn't require you to risk a lot of cash.
* Create a side business selling a skill you
currently have (accounting, legal, writing, editing, purchasing,
etc.) or could develop (graphic design, copywriting, resume
writing, etc.).
* Turn a hobby or passion (stamp collecting,
gardening, pets) into a profitable, Internet-based, direct-marketing
business. We already have a program to help you with the
direct-marketing
side of the business. and are developing one to help
you with the Internet side as well.
5. Bonds
A significant portion of your portfolio --
15% to 20% -- should be in ultra-conservative fixed instruments
-- Treasuries and top-quality government or corporate bonds.
What you're looking for here is safety, not yield. You'll
be getting plenty of maximized returns in your side businesses
and real estate.
6. Stocks and Stock Funds
If you invest in quality real estate and develop
at least one side business, it won't be long before you
have more cash coming in than you can reinvest in those
enterprises. Even if you invest a good deal of that extra
money in bonds, you'll probably still have some left over.
That's when you consider stocks and stock funds.
Most of the money I put in the stock portion
of my portfolio (never more than 10% of my investable net
worth) is invested in no-load funds that track major markets.
But now and again I'll have some fun with an individual
stock that is recommended by someone I trust and follow.
In either case -- stocks or stock funds --
I don't look to get the best possible return for my money.
With side businesses and real estate giving me relatively
high, risk-free yields, why would I want to take a chance
with speculative stocks? I look for the average return that
the market has historically afforded -- about 10%. Even
so, by following good advice, I've been able to achieve
a slightly-higher-than-average rate of return on stocks
-- between 12% and 15%.
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