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Four more ways to diversify your savings or retirement account
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This is the third in a series of articles for the financial novice about investment diversification. Following are four more asset classes to consider. Real Estate
Until recently most real estate investments in growing markets were a slam-dunk for success. Not anymore – but like stocks – if you bought your home or investment property several years ago, prior appreciation may more than make up for the recent loss in current value.
Let's study the situation from the perspective that you are a person about to retire.Younger readers can project into the future, based on the historical facts.
Here’s the question. If you purchased your house in 1982 for $100,000 and last year it was worth $800,000, but today its market value is $700,000, –has it been a good or bad investment?
It is possible you might have done better in another investment vehicle, but remember, you probably didn't plunk down the whole $100K in 1982 –did you? You have been paying off your mortgage in depreciated dollars, and you have been writing off your mortgage interest from your taxes for years. Perhaps most importantly, you have had a roof over your head for over a generation. These are all good arguments for investing in your family dwelling.
Gold Coins
If you had purchased generic gold coins as a "hedge" against inflation in the early 1980s, you would have paid about $800 for each of the coins. If they were in your safety deposit box for the past couple of decades, you gained no interest on their value, and of course, the dollar has depreciated. Today they may be worth –over $900 each. You can decide if that is a good long-term investment.
Bank Certificate of Deposits (CDs)
If you had purchased generic gold coins as a "hedge" against inflation in the early 1980s, you would have paid about $800 for each of the coins. If they were in your safety deposit box for the past couple of decades, you gained no interest on their value, and of course, the dollar has depreciated. Today they may be worth –over $900 each. You can decide if that is a good long-term investment.
Bank Certificate of Deposits (CDs)
The Federal Deposit Insurance Corporation (FDIC) insures each account up to $250,000 –until December 2009. That's good, because we have had several bank failures in recent history, so it's nice to have the increased federal backing. Presently, CD interest rates are running close to the inflation rate, and you must pay ordinary income tax on the CD interest you earn. Bottom line – money invested at today’s CD rates is safe, but will lose value and buying power.
Tip: When shopping for FDIC insured CDs, check out www.bankrate.com and look for the best national (not local) rates. Since the government is insuring your investment, you should get the highest rate available. One caveat –be sure to check out the bank rating on the website as well as the interest rate offered. You will always get your money if an insured bank fails, but who needs the hassle.
U.S. Savings Bonds
Up to a few years ago, you could buy $30,000 of face value each series I or EE US Savings Bonds on your credit card and get mileage –but no more. Even worse, the familiar EE and I series now have lower limits on annual purchases. The limit is $5,000 per social security number over the internet (paperless), and $5,000 per social security number when purchasing paper bonds from a banking institution. Savings bonds have a penalty for early withdrawal. The good points –you do not pay taxes on the interest until you cash in the bond, and the bonds are free of state income tax – a big deal in states like California and New York. I have always favored the series I bonds. Click here for more information.
Other Investments
There are several less common ways to diversify your investment portfolio. They are generally more complex, and you need to get good professional advice before you venture into such things as annuities, municipal bonds, international markets, commodities, gas and oil exploration, general and limited real estate partnerships, real estate investment trusts (REITS), second mortgages, premium paid life insurance policies, and life and viatical settlements.
There are several less common ways to diversify your investment portfolio. They are generally more complex, and you need to get good professional advice before you venture into such things as annuities, municipal bonds, international markets, commodities, gas and oil exploration, general and limited real estate partnerships, real estate investment trusts (REITS), second mortgages, premium paid life insurance policies, and life and viatical settlements.
In prior articles about investment fundamentals, I wrote about the importance of diversification and the role that bonds could play in your asset allocation.
With the conclusion of this series, you now understand the principle of diversification, and why your investments should be diversified. You also have a basic appreciation for other assets that can help you diversify your portfolio.
What you haven’t seen is a clear-cut answer to investment uncertainties –because there isn't one. The best you or I can do is spread our investments so we have exposure to several opportunities, while protecting against a major downturn in any one, or more, of the investment vehicles we choose for our accounts.
I have not yet discussed the all-important subjects of stocks, equity funds, and exchange traded funds (ETF). In a future article, I will simplify the subject, and give some practical advice on purchasing stocks in today’s unstable financial environment.
Before you act on any financial advice that you read here or elsewhere, be sure to seek the counsel of your financial, and/or tax advisor. There are many roads to financial prosperity, get to know all your options.
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