Have you heard this investing strategy?
“Put all of your eggs in one basket and then keep your eyes on the damn basket”
Well, I put most of my eggs in one basket and have a big mess of broken eggs right now. Here’s what happened…
- I sold my real estate business with financing. This means one of my assets is a note receivable, which is dependent on the real estate market.
- Minton Publishing provides products and services to real estate agents, who are dependent on the real estate market.
- I own numerous real estate investments, including apartment buildings, single-family homes and commercial properties. All of these investments have lost a significant amount of value.
The real estate market crash has had a major impact on my net worth because almost everything I had surrounded real estate. I worked my ass off to build my net worth and have watched the majority of it disappear within the last 20 months. All of my eggs were in one basket and I couldn’t protect the damn basket.
My mindset was to invest into assets that I understood. I lived real estate, just like you do, so it seemed to make sense to focus my investments in real estate. Hell, we know property values; rent rates, demand, financing and can spot great deals. We would be stupid not to take advantage of this, right?
Wrong – at least in my case.
This recession and market crash have provided another major lesson and that lesson is to diversify our investments outside of real estate. All of my major assets have suffered significantly because I didn’t diversify. Please don’t make this same mistake yourself.
As the real estate market rebounds, set a goal to invest 10% of every penny you make into something outside of real estate. It’s more important for you to invest outside of real estate, because your day-to-day income comes from real estate. If your income comes from real estate and the majority of your money is invested into real estate, you’re going to have a problem or two. This may not sound exciting, but I can assure you it’s the safest thing you can do. You might be wondering where you should invest this 10%?
I suggest checking out the Permanent Portfolio outlined in a great little book titled “Fail-Safe Investing – Lifelong Financial Security in 30-minutes a Year” by Harry Browne.
In Harry’s book, he recommends a simple portfolio designed to protect you from financial loss and based on all of my experiences investing, I believe this is the best strategy. Up until now, my investment objective was to maximize my return. Not any more. My objective today is simply to preserve.
Greed is definitely not good.
Harry recommends dividing your investment savings into 4 different categories:
- 25% in U.S. stocks, to provide a strong return during times of prosperity. For this portion of the portfolio, Browne recommends a basic S&P 500 index fund such as VFINX or FSKMX.
- 25% in long-term U.S. Treasury bonds, which do well during prosperity and during deflation (but which do poorly during other economic cycles).
- 25% in cash in order to hedge against periods of “tight money” or recession. In this case, “cash” means a money-market fund. (Note that our current recession is abnormal because money actually isn’t tight — interest rates are very low.)
- 25% in precious metals (gold, specifically) in order to provide protection during periods of inflation. Browne recommends gold bullion coins.
He refers to this approach as the Permanent Portfolio because it’s designed to protect you against ANY “ugly” economic cycle. In fact, here’s a quote from his book:
“The portfolio’s safety is assured by the contrasting qualities of the four investments — which ensure that any event that damages one investment should be good for one or more of the others. And no investment, even at its worst, can devastate the portfolio — no matter what surprises lurk around the corner — because no investment has more than 25% of your capital.”
If this approach appeals to you, I suggest Goggling “Permanent Portfolio.” You’ll probably be surprised at what you find. As an example, in 2008, one of the worst years in history, the Permanent Portfolio returned 1.97%. Compare this slight gain in 2008 to the 37% loss in the S&P 500, the 36% loss in the Total Stock Market Index Fund, the 41% loss in Real Estate Investment Trust and the 18% loss in High Yield Bonds.
The Permanent Portfolio’s results for 2008 are actually very impressive considering the large losses in almost every traditional investment class. You can find several other studies of this approach for longer periods of time online, and I promise you’ll be happy with the results.
Browne’s book was written in 1999, and I wish I had read it then instead of now. Had I invested all of the money I put into real estate into creating my own Permanent Portfolio, I would have a hell of a lot more money. I also wouldn’t have to worry about the economy, value of the dollar, national deficit or the real estate market for that matter.
In his book, Browne specifically recommends that you don’t invest into anything in which you can lose more than you’ve invested in cash. For real estate investments, this means you shouldn’t invest unless you obtain a non-recourse loan or pay cash for properties.
Years ago, I learned there were two kinds of debt: good debt and bad debt. Good debt was debt incurred to buy an asset that pays you every month. Bad debt was incurred to buy consumer-related items like clothes, furniture, cars and vacations.
I’ve lived below my means for many years and have invested a great deal of money into real estate using what I believed was “good” debt to compound my returns and have watched every penny of equity disappear. This has taught me that all debt is bad. There ain’t no such thing as “good” debt. Debt creates obligation and you cannot have financial freedom with obligation. Sure, it can help you make more money in prosperous times, but it can and will take you down in bad times.
What have you learned about investing, real estate and debt from this recession? Please share your lessons in the comments to this post!
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