A few weeks ago, I wrote about the Investment Hierarchy and the level or returns you may receive with certain types of investments. If you haven't read about the investment hierarchy, do it now before continuing. This is really multi-part discussion where the investment hierarchy sets up the concept for what I'm about to explain with investment stacking.
Today, I want to discuss the concept of investment stacking. Before we get started, you need should know that I'm not some investment genius. I'm not a CPA (Certified Public Account), CFP (Certified Financial Planner), or any of the others. I've got a mechanical engineering degree, and I've had a successful career as a digital business professional. I've served as a VP, CIO and COO for a $100+ million company. Since I was little, I've always enjoyed learning new things, building and making things, organizing and leading people.
When it comes to money and investing, I was broke at 25 and a millionaire at age 40. My next financial goal and milestone is to reach $10 million in net worth. Once my six kids graduate from high school and college, it'll become a lot easier to hit my goal. :)
I made my first investments at age 25 when I began investing in mutual funds and individual tech stocks such Intel, Cyrix, AMD, Iomega and a few others. I'm currently invested in a venture capital opportunity, crypto currencies, gold and silver, and some real estate.
Well, that's enough about me. Let's move on to something more interesting.
Can I ask you a question? Do you have a financial plan? Do you have an investing plan? I find the majority of the people I speak with don't really have a plan. It most cases, they learned something or listened to something someone told them about money and investing then they got started investing. That isn't a plan. It doesn't have direction, and it doesn't have a goal or destination. It's like being on a journey, but you really don't know where you're going, and you could end up anywhere.
Now, if you've been listening to some of the most widespread financial teaching on the market today, your financial plan may include getting on a budget, getting out of debt, and investing 15% in your 401k or mutual fund. It might even include saving for college and paying off your house early. Does that sound familiar?
But I have to ask, where's your investment plan in that? Saving 15% in retirement is a very limited and limiting investment plan. There is so much more you can be doing IF you take the time to get money smart and learning more about money. That's Millioniare Key #3, Get Money Smart.
So let me introduce you to some investing concepts I've been thinking through and applying in my own life...Investment Stacking.
Investment Stacking 101
At the most basic level, investment stacking is starting with lower risk/lower reward investments to build your financial foundation and moving some of your investment dollars into higher risk/higher reward investments as you get money smart. By adopting this type of investment strategy, a relatively new and inexperienced investor can build a foundation out of lower growth investments that will still be in place if a personal or financial meltdown occurs in the persons life.
Safer investments like mutual funds experience traditionally less volatility and risk than individual stocks. An individual stock in a company can experience huge swings and even go to a zero value depending on the company's fortunes. By contrast, a mutual fund diversifies risk by spreading it across hundreds of companies. A company that goes bust inside a mutual fund will generally only lower the value of the fund negligibly. However, mutual funds are still subject to huge swings due to national and global economic climate.
Mutual funds are the standard investments inside a 401k or IRA, making them practically identical in returns. However, the 401k and IRA include tax benefits that make them a superior investment vehicle for retirement. Hence the reason 401k/IRA come before mutual funds in your investment stacking model. The tax breaks.
Once you get past the 401k/IRA and mutual funds, it's time for additional investing. Individual stocks present an opportunity for superior growth over the 401k and IRA. They also present more risk in that you could lose all of your money or you could pick an under performing stock. However, you could pick a big winner like Google, YouTube, Apple, or any number of others. At the individual stock level, it's best to build your own portfolio of sorts. You can mimic a mutual fund by selecting your own investments. The idea here is to select 20-30 stocks you believe will become high performers. The trick is you don't need to be right every time. Surprised? Let me explain.
Let's say you have $10,000 to invest.
Select 10 stocks.
Do your research. Look at leadership, financial situation, products, market opportunity, etc.
Split your $10,000 up with $1,000 in each investment. Now you've spread the risk of losing your $10,000 across 10 companies.
What to expect
1-5 of your companies may under perform the index fund model
1-4 of your companies may meet the index fund performance
1-2 of your companies may substantially outperform the index fund/mutual fund model
The 1-2 investments that substantially outperform the market that deliver your growth in returns.
As an experiment, I recently asked my wife to select several stocks she would have invested in had she been investing in the market. My wife never looks at the stock market. She knows nothing about the stock market or investing. She's as green as it comes in the investment world even after being married to me for 20 years. It's just not her thing. Here's what she picked.
Apple
Pepsi
Honda
Oakley
Puma Sports Wear
Nike
Kraft Heinz Company
Proctor and Gamble
Levi's
Iomega
How did she pick her stocks? She picked them based on the things she uses in her everyday life. It's a very narrow way of selecting stocks, but it's a great starting point for anyone. Usually the things we use everyday successful companies run by good leaders. However, you still need to do your research before finalizing your picks and making your investments.
In the concept of investment stacking, we're trying to go from cash, primary home, and mutual funds investing into higher levels of investing as we seek out higher return investments and diversification. Company stocks are the next logical step after 401k/IRA/Mutual funds because of the accessibility. My son recently bought his first share of stock for $400. You can get started in the stock market with relatively little money.
Another option would be real estate. While purchasing real estate like a house, townhome, or condo is a cash heavy investment, you could get started in a REIT with relatively little up front cash. This also give you an option for "investment stacking."
Stay tuned for Part 2: Reviewing My Wife's stock choices
In part 2, I'll take a deeper look at my wife's investment selections. We'll take look back over the last 20 years to see how well she would have done with her $10,000. We're going to break down the stock performance beginning in 2000 and look at 5 year increments all the way through 2020.