When you’re investing money for your family’s future, it’s important to find good returns while also diversifying to reduce risk. While placing all of your money into a single asset can produce great returns during good times, it can also cause huge losses when the market turns south. One good indicator for when you should be more cautious is when unsophisticated people get more interested in the market. See Rise of the “Know-Nothings” for more info.
Here are three great ways to diversify your family’s investments and reduce your financial risk.
Pay Off Your Family House
Although most people don’t think of their homes as investments, your house is one of the most valuable assets you’re ever likely to own and one of the safest investments. Building equity in your home by paying it off quickly is a great way to invest safely. Home values generally go up along with inflation and sometimes when demand is high. And even if the value “on paper” goes down that doesn’t make it less livable. So you only need to worry about falling real estate prices during unusual times like the late 2000s and only then if you need to sell. If you stay put your house is still your house. Once it is paid off, your expenses are minimal i.e. maintenance and taxes. So assuming that your house is worth $250,000 it would typically rent for between $1,500 and $2,500 per month. So paying off your home is like a guaranteed income of $1,500 plus it is saving you loads of interest in the long run.
Putting money into paying your mortgage off allows you to both build your equity in the property and reduce your debts simultaneously. Best of all, paying off your mortgage will free up more of your income to put toward other investments, allowing you to build your wealth more quickly once your home is fully paid for. The major disadvantage of paying off your home is that the money isn’t “liquid” meaning that you can’t access it easily in an emergency. If this is a worry you can sign up for a “Home Equity Line of Credit” or HELOC this works pretty much like a checkbook and costs nothing in interest unless you actually tap into your equity (by writing a check against it).
Keep Some Money “Liquid”
At the opposite end of the spectrum from real estate (as far as liquidity goes) is a checking account. You should try to keep one month’s expenses in a checking account and then 3 to 6 months’ expenses in an emergency fund either in a savings account or money market fund. Basically, the more likely you are to need the money the more liquid it must be.
Put Some Money Into Broad Market Funds
Longer-term savings can be invested in stocks and bonds. One of the best ways to diversify your portfolio is to put at least some of your money into funds such as Vanguard’s total market ETF that track large sections of the American stock market. These funds hold assets across industries and sectors, making them resilient to fluctuations in individual areas of the economy. While these funds will still lose value during recessions and downturns, their overall trajectory will remain positive as long as the American stock market continues to grow.
Get Into Gold and Cryptocurrencies
During severe downturns and highly inflationary periods, it can pay to have some assets that aren’t tied to the stock market or the broader economy. Historically, gold has been the store of value favored by investors for this purpose. More recently, digital currencies like Bitcoin have emerged as modern solutions to the problem of storing value. If you decide to buy Bitcoin or gold as hedges against bad times, be aware that they will likely fluctuate during good times. These assets will go up and down as investors buy and sell them, and bitcoin and other cryptocurrencies are some of the most volatile and risky investments, so it should be considered more of a “speculation” than an investment. Speculations should only be made with money you can afford to lose.
Needless to say, there are as many diversification strategies as there are investors. While there are many different ways to diversify your portfolio, these three are among the safest and most time-tested ways to protect yourself against future financial risks.
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