Do you have kids? Are there children in your life? Were you once a child? If you plan on helping pay for a child’s future education, then you’ll benefit from this complete guide to 529 plans. We’ll cover every detail of 529 plans, from the what/when/why basics to the more complex tax implications and investing ideas.
This article was 100% inspired by my Patrons. Between Jack, Nathan, Remi, other kiddos in my life (and a few buns in the oven), there are a lot of young Best Interest readers out there. And one day, they’ll probably have some education expenses. That’s why their parents asked me to write about 529 plans this week.
What is a 529 Plan?
The 529 college savings plan is a tax-advantaged investment account meant specifically for education expenses. As of the passage of the Tax Cuts and Jobs Act (in 2017), 529 plans can be used for college costs, K-12 public school costs, or private and/or religious school tuition. If you will ever need to pay for your children’s education, then 529 plans are for you.
529 plans are named in a similar fashion as the famous 401(k). That is, the name comes from the specific U.S. tax code where the plan was written into law. It’s in Section 529 of Internal Revenue Code 26. Wow—that’s boring!
But it turns out that 529 plans are strange amalgam of federal rules and state rules. Let’s start breaking that down.
Taxes are important! 529 college savings plans provide tax advantages in a manner similar to Roth accounts (i.e. different than traditional 401(k) accounts). In a 529 plan, you pay all your normal taxes today. Your contributions to the 529 plan, therefore, are made with after-tax dollars.
Any investment you make within your 529 plan is then allowed to grow tax-free. Future withdrawals—used for qualified education expenses—are also tax-free. Pay now, save later.
But wait! Those are just the federal income tax benefits. Many individual states offer state tax benefits to people participating in 529 plans. As of this writing, 34 states and Washington D.C. offer these benefits. Of the 16 states not participating, nine of those don’t have any state income tax. The seven remaining states—California, Delaware, Hawaii, Kentucky, Maine, New Jersey, and North Carolina—all have state income taxes, yet do not offer income tax benefits to their 529 plan participants. Boo!
This makes 529 plans an oddity. There’s a Federal-level tax advantage that applies to everyone. And then there might be a state-level tax advantage depending on which state you use to setup your plan.
Two Types of 529 Plans
The most common 529 plan is the college savings program. The less common 529 is the prepaid tuition program.
The savings program can be thought of as a parallel to common retirement investing accounts. A person can put money into their 529 plan today. They can invest that money in a few different ways (details further in the article). At a later date, they can then use the full value of their account at any eligible institution—in state or out of state. The value of their 529 plan will be dependent on their investing choices and how those investments perform.
The prepaid program is a little different. This plan is only offered by certain states (currently only 10 are accepting new applicants) and even by some individual colleges/universities. The prepaid program permits citizens to buy tuition credits at today’s tuition rates. Those credits can then be used in the future at in-state universities. However, using these credits outside of the state they were bought in can result in not getting full value.
You don’t choose investments in the prepaid program. You just buy credit’s today that can be redeemed in the future.
The savings program is universal, flexible, and grows based on your investments.
The prepaid program is not offered everywhere, works best at in-state universities, and grows based on how quickly tuition is changing (i.e. the difference between today’s tuition rate and the future tuition rate when you use the credit.)
Example: a prepaid credit would have cost ~$13,000 for one year of tuition in 2000. That credit would have been worth ~$24,000 of value if used in 2018. (Source)
What are “Qualified Education Expenses?”
You can only spend your 529 plan dollars on “qualified education expenses.” Turns out, just about anything associated with education costs can be paid for using 529 plan funds. Qualified education expenses include:
- Room and board (as long as the beneficiary attends school at least half-time). Off-campus housing is even covered, as long as it’s less than on-campus housing.
Student loans and student loan interest were added to this list in 2019, but there’s a lifetime limit of $10,000 per person.
How Do You “Invest” Your 529 Plan Funds?
529 savings plans do more than save. Their real power is as a college investment plan. So, how can you “invest” this tax-advantaged money?
There’s a two-part answer to how your 529 plan funds are invested. The first part is that only savings plans can be invested, not prepaid plans. The second part is that it depends on what state you’re in.
For example, let’s look at my state: New York. It offers both age-based options and individual portfolios.
The age-based option places your 529 plan on one of three tracks: aggressive, moderate, or conservative. As your child ages, the portfolio will automatically re-balance based on the track you’ve chosen.
The aggressive option will hold more stocks for longer into your child’s life—higher risk, higher rewards. The conservative option will skew towards bonds and short-term reserves. In all cases, the goal is to provide some level of growth in early years, and some level of stability in later years.
The individual portfolios are similar to the age-based option, but do not automatically re-balance. There are aggressive and conservative and middle-ground choices. Thankfully, you can move funds from one portfolio to another up to twice per year. This allowed rebalancing is how you can achieve the correct risk posture.
Advantages & Disadvantages of Using a 529 Plan
The advantages of using the 529 as a college investing plan are clear. First, there’s the tax-advantaged nature of it, likely saving you tens of thousands of dollars. Another benefit is the aforementioned ease of investing using a low-maintenance, age-based investing accounts. Most states offer them.
Other advantages include the high maximum contribution limit (ranging by state, from a low of $235K to a high of $529K), the reasonable financial aid treatment, and, of course, the flexibility.
If your child doesn’t end up using their 529 plan, you can transfer it to another relative. If you don’t like your state’s 529 offering, you can open an account in a different state. You can even use your 529 plan to pay for primary education at a private school or a religious school.
But the 529 plan isn’t perfect. There are disadvantages too.
For example, the prepaid 529 plan involves a considerable up-front cost—in the realm of $100,000 over four years. That’s a lot of money. Also, your proactive saving today ends up affecting your child’s financial aid package in the future. It feels a bit like a punishment for being responsible. That ain’t right!
Of course, a 529 plan is not a normal investing account. If you don’t use the money for educational purposes, you will face a penalty. And if you want to hand-pick your 529 investments? Well, you can’t do that. Similar to many 401(k) programs, your state’s 529 program probably only offers a few different fund choices.
529 Plan FAQ
Here are some of the most common questions about 529 education savings plans. And I even provide answers!
How do I open a 529 plan?
Virtually all states now have online portals that allow you to open 529 plans from the comfort of your home. A few online forms and email messages is all it takes.
Can I contribute to someone else’s 529?
You sure can! If you have a niece or nephew or grandchild or simply a friend, you can make a third-party contribution to their 529 plan. You don’t have to be their parent, their relative, or the person who opened the account.
Investing in someone else’s knowledge is a terrific gift.
Does a 529 plan affect financial aid?
Short answer: yes, but it’s better than how many other assets affect financial aid.
Longer answer: yes, having a 529 plan will likely reduce the amount of financial aid a student receives. The first $10,000 in a 529 plan is not part of the Expected Family Contribution (EFC) equation. It’s not “counted against you.” After that $10,000, remaining 529 plan funds are counted in the EFC equation, but cap at 5.46% of the parental assets (many other assets are capped higher, e.g. at 20%).
Similarly, 529 plan distributions are not included in the “base year income” calculations in the FAFSA application. This is another benefit in terms of financial aid.
Finally, 529 plan funds owned by non-parents (e.g. grandparents) are not part of the FAFSA EFC equation. This is great! The downside occurs when the non-parent actually withdraws the funds on behalf of the student. At that time, 50% of those funds count as “student income,” thus lowering the student’s eligibility for aid.
Are there contribution limits?
Kinda sorta. It’s a little complicated.
There is no official annual contribution limit into a 529 plan. But, you should know that 529 contributions are considered “completed gifts” in federal tax law, and that those gifts are capped at $15,000 per year in 2020 and 2021.
After $15,000 of contributions in one year, the remainder must be reported to the IRS against the taxpayer’s (not the student’s) lifetime estate and gift tax exemption.
Additionally, each state has the option of limiting the total 529 plan balances for a particular beneficiary. My state (NY) caps this limit at $520,000. That’s easily high enough to pay for 4 years of college at current prices.
Another state-based limit involves how much income tax savings a contributor can claim per year. In New York, for example, only the first $5,000 (or $10,000 if a married couple) are eligible for income tax savings.
Can I use my state’s 529 plan in another state? Do I need to create 529 plans in multiple states?
Yes, you can use your state’s 529 plan in another state. And mostly likely no, you do not need to create 529 plans in multiple states.
First, I recommend scrolling up to the savings program vs. prepaid program description. Savings programs are universal and transferrable. My 529 savings plan could pay for tuition in any other state, and even some other countries.
But prepaid tuition accounts typically have limitations in how they transfer. Prepaid accounts typically apply in full to in-state, state-sponsored schools. They might not apply in full to out-of-state and/or private schools.
What if my kid is Lebron James and doesn’t go to college? Can I get my money back?
It’s a great question. And the answer is yes, there are multiple ways to recoup your money if the beneficiary doesn’t end up using it for education savings.
First, you can avoid all penalties by changing the beneficiary of the funds. You can switch to another qualifying family member. Instead of paying for Lebron’s college, you can switch those funds to his siblings, to a future grandchild, or even to yourself (if you wanted to go back to school).
What if you just want you money back? The contributions that you initially made come back to you tax-free and penalty-free. After all, you already paid taxes on those. Any earnings you’ve made on those contributions are subject to normal income tax, and then a 10% federal penalty tax.
The 10% penalty is waived in certain situations, such as the beneficiary receiving a tax-free scholarship or attending a U.S. military academy.
And remember those state income tax breaks we discussed earlier? Those tax breaks might get recaptured (oh no!) if you end up taking non-qualified distributions from your 529 plan.
Long story short: try to the keep the funds in a 529 plan, especially is someone in your family might benefit from them someday. Otherwise, you’ll pay some taxes and penalties.
It’s time to don my robe and give a speech. Keep on learning, you readers, for:
An investment in knowledge pays the best interest
Oh snap! Yes, that is how the blog got its name. Giving others the gift of education is a wonderful thing, and 529 plans are one way the U.S. government allows you to do so.
If you enjoyed this article and want to read more, Iâd suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.
This articleâjust like every otherâis supported by readers like you.
This page may include affiliate links. Please see theÂ disclosure pageÂ for more information. A common misbelief is that one must be rich to invest. Itâs easy to invest with little money in a variety of assets and save for your goals. More platforms let you âmicro investâ and purchase small amounts of expensive assets.Â Even if…
The post 13 Easy Ways to Invest with Little Money appeared first on Debt Discipline.
13 Easy Ways to Invest with Little Money was first posted on December 3, 2020 at 12:00 pm.
©2019 "Debt Discipline". Use of this feed is for personal non-commercial use only. If you are not reading this article in your feed reader, then the site is guilty of copyright infringement. Please contact me at email@example.com
Personal Capital is a client-centric robo-advisor offering investment and wealth management services. The company distinguishes itself from the competition by combining automation with personal service. With over 2.7 million users, Personal Capital currently holds $16…
The post Personal Capital Review for 2021 appeared first on Crediful.
If you’re one of those investors with very little time to research and invest in individual stocks, it might be a good idea to look into investing in mutual funds.
Whether your goal is to save money for retirement, or for a down payment to buy a house, mutual funds are low-cost and effective way to invest your money.
|*TOP CIT BANK PROMOTIONS*|
|CIT Bank Money Market||1.00% APY||Review|
|CIT Bank Savings Builder||0.95% APY||Review|
|CIT Bank CDs||0.75% APY 1 Year CD Term||Review|
|CIT Bank No Penalty CD||0.75% APY||Review|
What is a mutual fund?
A mutual fund is an investment vehicle in which investors, like you ad me, pool their money together. They use the money to invest in securities such as stocks and bonds. A professional manages the funds.
In addition, mutual funds are cost efficient. They offer diversification to your portfolio. They have low minimum investment requirements.
These factors make mutual funds among the best investment vehicles to use. If you’re a beginner investor, you should consider investing in mutual funds or index funds.
Investing in the stock market in general, can be intimidating. If you are just starting out and don’t feel confident in your investing knowledge, you may value the advice of a financial advisor.
Types of mutual funds
There are different types of mutual funds. They are stock funds, bond funds, and money market funds.
Which funds you choose depends on your risk tolerance. While mutual funds in general are less risky than investing in individual stocks, some funds are riskier than others.
However, you can choose a combination of these three types of funds to diversify your portfolio.
- Stock funds: a stock fund is a fund that invests heavily in stocks. However, that does not mean stock funds do not have other securities, i.e., bonds. It’s just that the majority of the money invested is in stocks.
- Bond funds: if you don’t want your portfolio to fluctuate in value as stocks do, then you should consider bond funds.
- Money market funds: money market funds are funds that you invest in if you tend to tap into your investment in the short term.
- Sector funds. As the name suggests, sector funds are funds that invests in one particular sector or industry. For example, a fund that invests only in the health care industry is a sector fund. These mutual funds lack diversification. Therefore, you should avoid them or use them in conjunction to another mutual fund.
- Index funds. Index funds seek to track the performance of a particular index, such as the Standard & Poorâs 500 index of 500 large U.S. company stocks or the CRSP US Small Cap Index. When you invest in the Vanguard S&P 500 Index fund, youâre essentially buying a piece of the 500 largest publicly traded US companies. Index funds donât jump around. They stay invested in the market.
- Income funds: These funds focus invest primarily in corporate bonds. They also invest in some high-dividend stocks.
- Balance funds: The portfolio of these funds have a mixed of stocks and bonds. Those funds enjoy capital growth and income dividend.
Related Article: 3 Ways to Protect Your Portfolio from the Volatile Stock Market
The advantages of mutual funds
Diversification. You’ve probably heard the popular saying “don’t put all of your eggs in one basket.” Well, it applies to mutual funds. Mutual funds invest in stocks or bonds from dozens of companies in several industries.
Thus, your risk is spread. If a stock of a company is not doing well, a stock from another company can balance it out. While most funds are diversified, some are not.
For example, sector funds which invest in a specific industry such as real estate can be risky if that industry is not doing well.
|Get Matched With 3 Fiduciary Financial Advisors|
|Investing in the stock market can be intimidating and overwhelming. We recommend speaking with a financial advisor. The SmartAssetâs free matching tool will pair you with up to 3 financial advisors in your area.
Hereâs how it works:
1. Answer these few easy questions about your current financial situation
2. In just under one minute, the tool will match you with up to three financial advisors based on your need.
3. Review the financial advisors profiles, interview them either by phone or in person, and choose the one that suits yourâ needs.
Get Started Now>>>
Mutual funds are professionally managed. These fund managers are well educated and experienced. Their job is to analyze data, research companies and find the best investments for the fund.
Thus, investing in mutual funds can be a huge time saver for those who have very little time and those who lack expertise in the matter.
Cost Efficiency. The operating expenses and the cost that you pay to sell or buy a fund are cheaper than trading in individual securities on your own. For example, the best Vanguard mutual funds have operating expenses as low as 0.04%. So by keeping expenses low, these funds can help boost your returns.
Low or Reasonable Minimum Investment. The majority of mutual funds, Vanguard mutual funds, for example, have a reasonable minimum requirement. Some funds even have a minimum of $1,000 and provide a monthly investment plan where you can start with as little as $50 a month.
Related Article: 7 Secrets Smart Professionals Use to Choose Financial Advisors
The disadvantage of mutual funds.
While there are several benefits to investing in mutual funds, there are some disadvantages as well.
Active Fund Management. Mutual funds are actively managed. That means fund mangers are always on the look out for the best securities to purchase. That also means they can easily make mistakes.
Cost/expenses. While cost and expenses of investing in individual stocks are significantly higher than mutual funds, cost of a mutual fund can nonetheless be significant.
High cost can have a negative effect on your investment return. These fees are deducted from your mutual fundâs balance every year. Other fees can apply as well. So always find a company with a low cost.
How you make money with mutual funds.
You make money with mutual funds the same way you would with individual stocks: dividend, capital gain and appreciation.
Dividend: Dividends are cash distributions from a company to its shareholders. Some companies offer dividends; others do not. And those who do pay out dividends are not obligated to do so. And the amount of dividends can vary from year to year.
As a mutual fund investor, you may receive dividend income on a regular basis.
Mutual funds offer dividend reinvestment plans. This means that instead of receiving a cash payment, you can reinvest your dividend income into buying more shares in the fund.
Capital gain distribution: in addition to receiving dividend income from the fund, you make money with mutual funds when you make a profit by selling a stock. This is called “capital gain.”
Capital gain occurs when the fund manager sells stocks for more he bought them for. The resulting profits can be paid out to the fund’s shareholders. Just as dividend income, you have the choice to reinvest your gains in the fund.
Appreciation: If stocks in your fund have appreciated in value, the price per share of the fund will increase as well. So whether you hold your shares for a short term or long term, you stand to make a profit when the shares rise.
Best mutual funds.
Now that you know mutual funds make excellent investments, finding the best mutual funds can be overwhelming.
Vanguard mutual funds.
Vanguard mutual funds are the best out there, because they are relatively cheaper; they are of high quality; a professional manage them; and their operating expenses are relative low.
Here is a list of the best Vanguard mutual funds that you should invest in:
- Vanguard Total Stock Market Index Funds
- Vanguard 500 Index (VFIAX)
- Total International Stock index Fund
- Vanguard Health Care Investor
Vanguard Total Stock Market Fund
If you’re looking for a diversified mutual fund, this Vanguard mutual fund is for you. The Vanguard’s VTSAX provides exposure to the entire U.S. stock market which includes stocks from large, medium and small U.S companies.
The top companies include Microsoft, Apple, Amazon. In addition, the expenses are relatively (0.04%). It has a minimum initial investment of $3,000, making it one of the best vanguard stock funds out there.
Vanguard S&P 500 (VFIAX)
The Vanguard 500 Index fund may be appropriate for you if you prefer a mutual fund that focuses on U.S. equities. This fund tracks the performance of the S&P 500, which means it holds about 500 of the largest U.S. stocks.
The largest U.S. companies included in this fund are Facebook, Alphabet/Google, Apple, and Amazon. This index fund has an expense ration of 0.04% and a reasonable minimum initial investment of $3,000.
Vanguard Total International Stock Market
You should consider the Vanguard International Stock Market fund of you prefer a mutual fund that invests in foreign stocks.
This international stock fund exposes its shareholders to over 6,000 non-U.S. stocks from several countries in both developed markets and emerging markets. The minimum investment is also $3,000 with an expense ratio of 0.11%.
Vanguard Health Care Investor
Sector funds are not usually a good idea, because the lack diversification. Sector funds are funds that invest in a specific industry like real estate or health care. However, if you want a fund to complement your portfolio, the Vanguard Health Care Investor is a good choice.
This Vanguard mutual fund offers investors exposure to U.S. and foreign equities focusing in the health care industry. The expense ration is a little bit higher, 0.34%. However, the minimum initial investment is $3,000, making it one of the cheapest Vanguard mutual funds.
Mutual funds are great options for beginner investors or investors who have little time to research and invest in individual stocks. When you buy into these low cost investments, you’re essentially buying shares from companies.
Your money are pooled together with those of other investors. If you intend to invest in low cost investment funds, you must know which ones are the best. When it comes to saving money on fees and getting a good return on your investment, Vanguard mutual funds are among the best funds out there.
They provide professional management, diversity, low cost, income and price appreciation.
What’s Next: 5 Mistakes People Make When Hiring A Financial Advisor
Speak with the Right Financial Advisor
- If you have questions beyond knowing which of the best Vanguard mutual funds to invest, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
- Find one who meets your needs with SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
|*TOP CIT BANK PROMOTIONS*|
|CIT Bank Money Market||1.00% APY||Review|
|CIT Bank Savings Builder||0.95% APY||Review|
|CIT Bank CDs||0.75% APY 1 Year CD Term||Review|
|CIT Bank No Penalty CD||0.75% APY||Review|
The post What Are Mutual Funds? Understanding The Basics appeared first on GrowthRapidly.
If you’ve never considered real estate investing because you don’t want to own rental properties or be a landlord, you may want to look at these options.
The post 4 Easy Ways To Get Started With Real Estate Investing appeared first on Bible Money Matters and was written by Marc. Copyright Â© Bible Money Matters – please visit biblemoneymatters.com for more great content.
Warren Buffetâs #1 rule of investing is ânever lose money!â Weâre all trying to figure out how to get the highest return with the lowest acceptable risk, but âonce in a lifetimeâ risks in the financial markets seem to regularly present themselves these days.
Iâve been investing in the markets for over 16 years, 5 of those as a professional trader. I came out of college in the middle of the dot-com bust and was lucky to get my first job as a banker. I traded through the financial crisis and Great Recession, and Iâm now trying to navigate through this pandemic induced depression-esque market. Like many of you, Iâm struggling with what to do.
Since my trading days, Iâve become much better at not losing money, and I want to share a little of how I do that by employing a barbell investing strategy. To some, this may seem ultra-conservative, but I believe it actually takes out a great deal of risk and allows me to be very aggressive when the time is right.
What the heck is a barbell strategy?
The vast majority of financial advisors will talk to you about asset allocation that roughly mimics a normal bell curve like the one below. This strategy calls for setting aside enough cash to weather a storm, spreading your money out amongst asset classes (typically 60/40 stocks to bonds), and maybe a small allocation to very high risk asset classes, and some cash. If you were to graph this with risk on the X axis it might look something like this:
A barbell strategy on the other hand basically involves investing on the ends of the risk curve and avoiding the middle, and looks something like the below graphic. What this means is that I keep a lot of cash on hand, very little stocks, bonds and traditional market assets, and then allocate a much smaller percentage of my liquid assets to alternative investments with a higher risk profile such as high yield bond speculation, derivatives, private equity, venture capital and cryptocurrency.
A barbell strategy can easily be applied within asset classes as well, say, holding 80% blue chip dividend stocks with great balance sheets and 20% small cap growth stocks. Or, the same allocation of treasuries to junk bonds in a bond portfolio.
Why avoid the middle?
One of my favorite thought leaders on the subject of risk is Nassim Taleb, who authored Fooled By Randomness, The Black Swan, and Antifragile. Taleb is a mathematician, risk expert and former hedge fund manager, who rose to prominence during the financial crisis of 2008 because he predicted it. Taleb argues for a barbell investing strategy because he believes over-engineering of the global financial markets, leverage and how interconnected all the banks are makes the system less robust and more fragile. Thus, smaller shocks to the system get exacerbated more frequently. These risks are essentially âhiddenâ. there are hidden risks in the middle (stocks and bonds) that do not get accounted for in modern financial risk models.
Mortgage Backed Securities Risk
A great example is how every single one of the major US housing default models used to package Mortgage Backed Securities, did not include the ability for home prices to go even the slightest bit negative. When home prices went the slightest bit negative, the entire thinly capitalized mortgage system seized up and cascaded to every interconnected financial market. This was a major risk that was not accounted for by a simple tweak to a model.
Basically, a historically safe asset class (homes) was transformed into a very risky weapon of mass destruction via financial engineering.
Stock Buyback Risk
Another example that we are seeing play out now is corporate stock buybacks. Low interest rates have incentivized CEO of companies to issue debt to buy back shares to boost stock prices. While this behavior has increased stock prices in the short term, corporations are left without the free cash needed to weather rough times such as the global shutdown of business due to the COVID 19 pandemic.
Many of these companies have been buying their own shares right into the highs, and now suspending buybacks when prices are low. This obviously violates rule number one of investing – buy low and sell high.
Whatâs important to understand for this article, is that issuing cheap debt to buy back shares has dramatically altered the risk profile of stocks (hidden risk) to the point that thousands of public companies might cease to exist without federal bailout assistance.
How I use a barbell strategy
The purpose of a barbell strategy is to avoid hidden risks and take more control over investment strategy by staying very safe (cash) and taking high risks that are understandable with a smaller portion of the portfolio. Theoretically, you can achieve a decent blended return and limit your exposure to black swan type events.
#1. âCash is kingâ, not âcash is trashâ
Ray Dalio, the billionaire hedge fund manager (who I actually respect and admire) proclaimed âcash is trashâ in a CNBC video, advocating for a global stock and bond portfolio. That interview pretty much marked the top of the bull market as global stock markets have melted down. He has a good point that I wonât go into here, but for the average person (i.e. not a billionaire hedge fund founder) cash is actually king.
Yes, interest rates are terrible for cash savers. However, cash is a low cost form of insurance against everyday setbacks. Paying for a $400 emergency with cash instead of getting a personal loan or worse, has value.
But let’s talk about investing. Cash has options value. In finance, an options contract has an implicit value because it is a right, not an obligation. You have the option to do A or to do B. Having a good cushion of cash sitting in the bank allows you many options to invest when the time and opportunity are right without selling other assets (stocks, your home) to free up the cash.
The flexibility that comes with this option value is a key piece of information missed by most people. I have close to 80% of my liquid assets in cash. So, I was able to avoid the recent stock market downturn, and now I can pounce on good investing opportunities at great prices.
By the way, do you know how much cash on hand Buffettâs Birkshire Hathaway keeps on its books?
Many people think insurance is a waste of money, but as Talib points out in his book, Antifragile, insurance is an asset that will actually perform better for you in volatile times. Insurance is essential and has a high payoff for you at the precise time risk increases. Having adequate amounts of homeowners insurance, car insurance, umbrella coverage, and life insurance are key to avoiding adverse situations where you have to spend a huge sum of money unexpectedly.
I also use key man insurance in my businesses along with general and professional liability coverage.
#3. Low exposure to stocks and bonds
Contrary to the advice of most money management professionals, I keep very little relative exposure to traditional stocks and bonds. I have retirement accounts that contain these instruments that are passive.
If you look at my actual liquid asset allocation vs what a top fintech money manager says I should target, you can see how their advice (green bars) is the exact opposite of my strategy.
My exposure to stocks and bonds are in the form of low cost ETFs in my tax advantaged retirement accounts. Because my duration is long on this money (meaning I wonât need it for 30+ years) I am ok with the exposure, and I believe the tax compounding over time makes up for the additional risks.
#4. 10-15% exposure to pure-play risk
A pure play risk is generally an investment that carries a high expectation of failure, but a massive payoff if it works. The best example is a startup/venture capital type investment. The best estimates are that 75-80% of new businesses will fail – thatâs the base case. But the expected return on an investment that does well is not 6% per year. Itâs more like 4-100 TIMES your investment.
Because the risk is so high in these investments, there generally arenât a lot of hidden risks – I basically have a good idea of my expected loss going in. I donât believe that is the case for most generally accepted financial investments as the last several financial crises have shown us.
So what does this look like? I seek out pure play exposures that are not tied to the stock market. I invest in startups and back local entrepreneurs like restaurants. I also maintain a decent size cryptocurrency position that I began accumulating in 2014. I plan to hold this investment until crypto is a proven winner, or âgoes to 0â because the magnitude of the payoff is enormous if the bitcoin experiment works.
#5. The remaining 5-10% I invest in myself
I use this money to increase my skills, and leverage what I am good at to make me and my companies more marketable. This process has compounded my earning power over time and allowed me to re-invest in my businesses, or in other non-correlated passive income sources.
Is a barbell strategy for you?
A barbell strategyâs main purpose for an astute risk manager is to remove the probability of large blowup events from seemingly âsafeâ investments. A barbell isnât for everyone, but one of the main benefits Iâve seen from it is psychological – I know with certainty, that no single event will impact my familyâs financial security. That allows me to take more risks with a smaller amount of capital and be better connected to the companies, opportunities, and people that I invest in.
What are your thoughts? Are you worried about risk, and could a barbell strategy help?
The post How I Use A Barbell Investing Strategy To Avoid Financial Ruin appeared first on Good Financial CentsÂ®.
What is Origin? How does crowdfunding work? Is crowdfunding for real estate safe? How does crowdfunding for real estate investment work.
The post Origin Investments Review appeared first on The Dough Roller.