By now most of us are familiar with the benefits of diversification. We’ve lived through the Enrons and the Worldcoms, the tech and real estate bubbles, and various forms of international monetary crisis. We’ve all seen a segment or two of Jim Cramer’s “Am I Diversified” on Mad Money. But when a deep recession hits, little is safe from being affected regardless of how well you are diversified. That’s why it is more important than ever to diversify beyond market sectors or brokerages.
Think Bigger When Diversifying
It’s no longer enough to spread your money across a variety of stock funds, such as international, growth or value. Think bigger. How else can you broaden the diversification of your portfolio outside of traditional index mutual funds? Here a few places to consider.
P2P lending. I’m convinced peer-to-peer lending is the next generation financial product that will even the playing field between big banks and the average borrower (and lender). I like the idea of funding loans for causes I believe in, and at a level of risk acceptable to me personally, not a banker.
I recently signed up for a lending account at Lending Club and plan to dabble with a small investment to get to know the lay of P2P lending land. Of course, I’ll put together a post when I do.
Cold, hard cash. Beyond having a solid emergency fund in place, there are good reasons for keeping a significant amount of cash on the sidelines. First, it is an additional hedge against a catastrophic event such as death, job layoff, or serious illness. Second, having some available cash on hand makes it easier to react to investment opportunities when and if they arise.
CD ladder. With at least a portion of your cash it might be a good idea to create a CD ladder, which is a great way to average out changes in interest rates over a period of time. Divide your money into four CDs at various terms (3 months, 6 months, 9 months, 12 months). When the three month CD matures roll the proceeds into a new 12 month CD. When the 6 month CD matures roll it into a 12 month CD, and so on.
Real estate. If you are fortunate enough to have a significant amount of cash on hand, this is a terrific time to hunt bargains in the real estate market. Rates are low and sellers are motivated, which provides a golden opportunity to buyers with cash and good credit. We are pretty well established in our own home and are not quite ready to take on any additional properties, but it is something I would consider down the road if we see a similar real estate environment.
Small business. Do you have a side hustle you could convert to a full-fledged business? Now is a great time to invest a little cash in an idea that could result in a stream of income earned outside of your full-time gig. Try to avoid using debt to fund the operation, so if you have to back out down the road you won’t be left with a mountain of debt as a constant reminder of your failed attempt at entrepreneurship.
Stocks. Yes, there is still a place for stocks in your overall portfolio. I’m not sure the idea of being 100% in stocks at an early age is still valid, but I leave that up to the experts. I personally plan to continue investing in stocks, particularly in retirement accounts, but for any additional investing I will spread money around the various investment options noted above.