Why It’s Important to Diversify Your Investments

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Now that tax season is upon us, it’s a good time to assess whether or not you are saving for retirement, and if so, are your retirement funds truly diversified? After reading this post, I hope that you will be able to answer that question. 

What is diversification?

 

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Diversification is defined as investing (spreading) your money among the following types of investment classes:

  • Businesses
  • Income-Producing Real Estate
  • Paper Assets–stocks, bonds, mutual funds
  • Commodities–gold, silver, oil

 

Why Diversify?

 

According to Robert Kiyosaki, author of the best selling book,”[easyazon_link keywords=”Rich Dad’s Conspiracy of the Rich” locale=”US” tag=”earweaforyouf-20″]Rich Dad’s Conspiracy of the Rich[/easyazon_link]”, he suggests that most average investors invest in paper assets mainly because they are the easiest to get into (buy) and do not require a lot of management. Therefore these investors may have their money in several mutual funds and/or own several different stocks, thinking that they are diversified. The problem however is that all of these investments are all in the same investment class–paper assets. This is NOT true diversification. Since paper assets are affected by the ups and downs of the stock market, if the market goes down, the average investor will lose money in all his/her investments.  This reminds me of the old saying, “Don’t put all your eggs in one basket”.  The basket might break, and you’ll lose those eggs. This is an important fact to keep in mind when saving money for retirement.

True diversification, involves investing into all 4 investment classes.  If you are able to do this, you will better minimize your risk of losing money. For instance, you have paper assets that can lose money if the market goes down, but at the same time, your real estate investments can provide money (cash flow) as rent. In other words, loss in one investment class can be offset by gains in another investment class, thus minimizing risk.

 

How the rich and middle class invest their money

 

1. Businesses:  The rich may own several businesses that all produce passive income (income earned on other people’s time and effort). The poor and middle class may work several jobs that provide earned income.

2. Income earning Real Estate:  The rich may own several properties that provide income in the form of rent paid by tenants. The middle class may own homes, but it most likely will be a primary residence in which no rental income is coming in, but money is going out as mortgage payments to a bank instead.

3. Paper assets: Both the rich and middle class may own paper assets. However, I think that the middle class may have more of them because they are relatively easy to buy, doesn’t require a lot of management, and they are easy to liquefy when needed.

4. Commodities: The average investor or middle class does not know how to go about purchasing these types of assets (gold, silver, oil) much less where to purchase them. The rich or sophisticated investor however, has no such issues because of superior financial education and knowledge.

 

My Investment Diversification Plan

 

My goal this year is to have money invested in all 4 investment classes. This is what I have done so far:

1. I am currently working on establishing an online affiliate marketing business.  This business (my #1 recommendation) allows me to earn income while I learn the fundamentals. My goal is to earn enough passive income so that I can leave my 9 to 5 job. Click here for more information .

2. Although I do not have any rental properties, I am however, investing in real estate through another lesser known vehicle called a Self-Directed IRA. These types of IRA’s allow you to have more control over how you want your funds invested. My self-directed IRA provides funding as short-term loans for contractors to develop land and build housing. Monthly interest-only payments are made; the principal is paid back to me when the houses built are sold.

3. I currently have both traditional and Roth IRA’s that are made up of different mutual funds.

4.  My goal is to open a self-directed IRA that purchases precious metals such as gold and silver. I can transfer some of my funds from my real estate self-directed IRA.

 

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I urge you to speak to your financial planner or tax accountant for guidance, as I am neither. Everyone’s financial situation is different; therefore, what may work for me may not necessarily work for you.  Do your due diligence and research regarding self-directed IRA’s and purchasing commodities.

It has been said by many financial experts that people should be saving for retirement. However, a large majority of people are either not saving enough or unable to save at all due to too much debt and expenses. Make the changes in your life that you need to do in order to prepare for retirement. The most important thing is to get started today; don’t procrastinate.

If you have any questions or comments regarding this discussion, feel free to post them below. I will be happy to respond.

Best wishes,

Deidre

 

 

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