A Balanced Investment Portfolio: There’s More to Investing Than Stocks…
These are the two questions I get after people find out what I do for a crust:
‘Where do I start?’ Followed by ‘How do I invest?’.
You see, people want to invest. You’ll be amazed how many people are interested in learning more about the markets, the economy and how to increase their wealth within it.
They want to learn, but so much information put out by financial firms is wrapped up in jargon and can often deter people from investing.
Which is why a couple of weeks ago, I explained how to create your own investment portfolio.
I mean, The Daily Reckoning Australia has only been around for a decade or so.
Even though you might be an experienced investor, there are always newcomers to the markets.
Many people are interested in financial events, but still not sure where to start when it comes to preparing their own investment portfolio.
I remember what it was like to be daunted by this. I remember when I first started out nearly two decades ago thinking I would never get my head around the intricacies of the market.
And you know what?
I’ll bet there was a time when fund managers and stock brokers felt the whole financial world was too big to know where to start.
They just don’t like to admit it now that they are masters of the financial universe…
Avoiding cookie cutter advice
The most important thing to know when starting out is that you can do this on your own.
By doing thorough research, and taking the time to plan your investments, you can avoid paying a fortune for financial advice, which often results in ‘cut and paste’ investment information anyway.
The financial industry is heavily geared towards confusing you with a bunch of terms no one in the real world uses.
It’s designed to draw you in, leaving you to believe it’s ‘too complicated’ and best left to a professional.
In other words, the entire $4.6 billion financial advice sector rests on convincing you that it’s too hard to understand.
That’s not the case. Once you get past the jargon, you’ll surprise yourself with how quickly you adapt.
Two weeks ago I showed you how to get started with stocks. What to look for, and how your career or hobby can be useful when it comes to picking stocks.
Today, let’s round it out by looking at what other investments you can include…
Don’t throw everything into stocks
A balanced portfolio is one that invests across many assets…not just stocks.
That’s why I believe investors should consider splitting their money like this:
- 50% of your cash into stocks
- 10–20% into gold and silver bullion
- 10–20% into cash
- 10% into bonds
- 10% ‘fun’ money
To long-time readers, it will come as no surprise that I advocate an allocation to physical bullion.
Not gold or silver exchange traded funds, but the actual metal you can touch.
Why? Gold is like an insurance policy. It can’t be manipulated or devalued. The purchasing power of gold endures over decades of central banking policies.
Let’s look at it a different way.
A decade ago, I bought a very fancy suit. A grey, pinstriped little number that blended in with my financial market surroundings. (I was a walking cliché, but that’s a story for another day.)
That suit cost the same as an ounce of gold in 2008. If I were to buy that same suit today, it would still cost me an ounce of gold.
You see, the price of gold doesn’t go up. It’s the value of your dollars that goes down.
That’s why the cash in your wallet buys you less…yet gold can buy the same thing many years later.
The follow-up to this is, ‘How much gold and silver should you hold?’ Well, again, the exact ratio is up to you. Silver is much cheaper to buy at $22 per ounce, so it’s a lower-cost way for new investors to start with bullion.
If you want to have both gold and silver bullion, aim to have about $1,000 worth of silver to $10,000 in gold. Don’t know how to buy gold? I have you covered. Click here to access a free report on how to buy gold.
Cash is king
Aussie tradies are right.
Cash is king…and crucial to any investor’s portfolio.
People have been conditioned to think that their money needs to ‘work’ for them. And that cash at the bank is simply money doing nothing.
Again, that’s a myth.
Cash in the bank is power.
Odds are any cash at the bank is earning bugger all interest these days, but cash on hand makes you nimble. The chance to seize on a good investment when you see it.
A chunk of your investing money in cash means you can move with the market.
Some people like to keep a bigger buffer than others, depending on the stock market conditions.
Another conservative investment idea is to add bonds to your portfolio.
Now, Australian government bonds aren’t available to ordinary investors. However, you can buy what’s called exchange-traded Treasury bonds on the Australian Securities Exchange (ASX).
They are relatively straightforward. You buy and sell them on the ASX, like you would shares. Plus, they pay a yield (the ETF Treasury bond coupon interest rate) twice a year.
These tend to be considered a conservative type of investment.
The slightly riskier version to ETF Treasury bonds is corporate bonds for the top 30 or so Aussie companies.
If you do want to go down this path, definitely do your research. You can start here with ASIC’s own guide to accessing Australian corporate bonds.
Investing for future you
Finally, that brings me to ‘fun’ money.
What is fun money when it comes to investing?
Treat this pool of money differently to your cash allocation.
The fun investing money doesn’t have to be about something that will bring you a financial reward immediately.
This is the money you set aside to invest in ventures you think could be a good idea.
Maybe a small amount could go towards a great start-up idea a friend has in return for some interest in the company. If you are going to put money into a friend’s venture, don’t be afraid to get some legal documents drawn up in the process.
A couple of hours spent on legal fees can drastically change any long-term outcome.
‘Fun’ investing money could be used in your community, on art…or on yourself.
We spend so much time thinking that our investments must make even more money that we forget the whole point of investing is about protecting ‘future you’.
Sure, future you does need to be taken care of financially.
But you still need to get yourself there. Investing in ‘things’ that may not provide a financial reward is all part of the process.
Until next time,
Editor, The Daily Reckoning Australia
PS: Why Australia is set to become the next ‘gold epicentre’ — which could result in a HUGE spike in Aussie gold stock prices. Click here to learn more.