I don’t follow the index fund model of investing because I’m not wanting to just follow the U.S. economy. I prefer diversification by viewing stocks as businesses you are buying into and real estate assets as a buy, own, and hold strategy.
Value investing in stocks is treating the stock like I would a business investment. To me, diversification of investments is not about buying as many stocks as you can, it is about diversifying in a few different companies that you understand, just like you would only go into business in the industries and solutions that you understand really well. And then, owning real estate that cash flows for the long term.
Essentially, I think pretty much every American human being should invest in stocks, have a retirement account, and over the long term, seek to own real estate. And if you are entrepreneurial, you can own and run a business too! To me the retirement account is a given, but an investment diversification is to diversify among types of investments: own stocks (evaluated like you would a business investment) and own real estate. I hope to be an entrepreneur or a business owner in the future, but I am not at this time. As far as the owning real estate part goes, I don’t prefer counting my personal home as an investment. I consider it a reduction in expenses by paying it off quickly. So, I prefer buying a home and paying off your primary mortgage so you own your personal home. Then this allows for more investments in other real estate assets.
How We Did It
We bought a house and choose a house we could afford with a smaller mortgage to pay off. And we paid it off in 8 years. Early on, before marrying, I maxed out my Roth IRA for 2 or 3 years (even on a very small salary it can be done!) and I’ve always invested whatever 401k matching my current company offers. But, I only do the company matching when I am fully vested within 2 or 3 years. Why? Because I have not been at a company long enough to enjoy fully vested 401k matching plans after 5 or 10 years. What decade are we in where people, especially in digital marketing, stay in one company for 5 to 10 years? I wouldn’t mind that but it just doesn’t happen. Anyway, I highly recommend buying your house and paying it off faster by living off your day job pay and finding a higher paying odd hours job. There are lots of ways to make really good money on the side, but that money doesn’t translate into full time. When you are able to earn additional money, it helps you put more toward your mortgage debt. It is possible to pay off a house much faster than 30 years but it takes:
- persistence to habitually pay more than your monthly payment
- buying within your means. In other words don’t buy a house that requires a monthly payment that is too much for your income level, especially in order to put more principal down every month.
The Biggest Problem with Diversification
Most say that you should invest in lots of different stocks in order to be diversified. Or they say, buy a fund that just stays with the DOW or NASDAQ as a whole. I just don’t like this approach. First, buying a whole bunch of different stocks individually or an index fund that essentially does the same thing for you, means the compound interest is much more nuanced and will be slower to take hold. I want the returns of a business, not to follow a market. For that reason, I want the benefit of more money in a few stocks that I understand. Remember, consider stocks like you are a partner in a business. I would never buy every business in the U.S. Buying into several businesses as an investment is what I think makes the most sense because I can look at the business model and make a ‘value investment’.
This choosing a few stocks might scare some, but it shouldn’t. Especially if you take the long term approach and make it automatic. You can ignore the market fluctuations because you aren’t going to be pulling it out in a down market. Investing should be boring and I think most people just think that staying simple and being consistent just isn’t a good idea. Most people think they “need” a professional. Well, I have an MBA, and I can tell you for a fact, if you just read some books on value investing and follow Christian financial principles, that will get you what you need. Then just stay consistent with your monthly investments and you can do well in your financial investments.