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FOUR MODEL INVESTMENT PORTFOLIOS—ONE FOR EVERY STAGE OF YOUR WEALTH-BUILDING CAREER
So now you know how I feel about stocks, small business, and real estate. Bonds? I love bonds. Especially if you invest in them the way I do: Buy them. Be happy with the guaranteed return. And forget about them.
With this perspective made clear, you will see some sense in the following four model portfolios, each based on a stage of wealth building.
• Stage One: Your investable net worth is less than $25,000.
• Stage Two: Your investable net worth is between $25,000 and $100,000.
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• Stage Three: Your investable net worth is more than $100,000 but less than you need to be financially independent.
• Stage Four: You are financially independent.
Stage One: What Your Portfolio Should Look Like When Your Investable Net Worth Is Less Than $25,000
At a cocktail reception at a recent Early to Rise wealth-building conference, a gentleman approached me with a complaint. I suggested we take a seat together so I could give him the personal attention he seemed to want.
“What is it that disappointed you?” I asked.
“You spend too much time talking about working hard, starting a second income, and investing in real estate. That’s too much trouble for most people,” he contended.
“But it works,” I replied.
“Maybe it does. And maybe it doesn’t,” he said. “But what I’m interested in is stocks and stock options. You should give more information on that.”
I explained that while most “investment” conferences focus exclusively on stocks and options, we wanted to talk about safer and more lucrative ways to build wealth.
He didn’t seem to hear me. “Also, I wanted to hear about how I can get into futures and make some money by leveraging gold or natural resources,” he told me.
“I’m not going to give you individual advice about your passive investing,” I said—although I couldn’t help but wonder how many millions or billions of dollars this guy had. So I asked him. And this is what he told me: His entire net worth consisted of about $250,000 worth of equity in a home he loved and about $18,000 in the bank that he was actively investing in stocks.
This wasn’t the only conversation I had of this nature. Of the 80 wealth builders who attended the conference, at least a third of them were small-fry investors. Interestingly enough, when asked on the registration survey to rate their interest in various types of investments, there seemed to be an inverse relationship between net worth and the stock market. The wealthier attendees were very interested in real estate, side businesses, and alternative forms of investing, while the beginners wanted to make their fortunes by buying and selling stocks.
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The next day, speaking to the attendees as a group, I made a point of explaining what a beginning wealth builder shouldn’t do.
1. First, when figuring your investable net worth, you really shouldn’t count the equity in your present home unless you plan to sell it and buy a less expensive home during retirement. And even if you do that, you can count only the difference between what your house is currently worth, the mortgage, and what it will cost you to buy another house that you’ll be happy with. Using the example of our dissatisfied conference attendee, he admitted that there was little or no hope of finding a nice retirement home in a community he liked for less than the equity he had in his present house.
2. Next, you shouldn’t be investing in stocks and options if your investable net worth is less than $25,000. In our example, the gentleman was playing the stock market with his entire savings: $18,000. Think about the risk this guy was taking!
It’s true. And you will probably never hear this from any other wealth-building “expert.” Unless you have more than $25,000 to invest, you probably shouldn’t be investing in individual stocks—and you definitely shouldn’t be trading options and futures.
The reason is simple: You want to get wealthy in 7 to 15 years— preferably in less than 7. There is no way that $25,000 can turn into something that even sounds like wealth in that amount of time— though there are a lot of professional investment gurus who will tell you otherwise. In fact, there is a huge, multi-billion-dollar business that is determined to snow you on this issue.
So what can you do with $25,000? Or $18,000, for that matter?
If your scope is seven years or less, there is only one answer: Start a business. You can’t start a capital-intensive business with $18,000. You can’t, for example, open a restaurant or create a new line of pharmaceuticals. But you don’t want to be in those businesses anyway. (The risk/reward ratio isn’t working for you.)
Much better to start a business selling something you know about—such as gardening or collecting beer steins or taking care of pets. You can start a little business like this for a few thousand dollars if you start small and go slowly—at first.
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