A few years ago, I was approached by a Merrill Lynch stock broker who said, “Keith, you should invest in the stock market, it has always gone up over the last 100 years”. He then showed me a litany of charts that proved his assertion. My initial thought was, if the stock market always increases why not be a part of that? I wanted to diversify my portfolio anyway so I wrote him a check to start the investment process.
A year later, I returned to my financial advisers Merrill Lynch office. By this time, he had lost over $4,000 of my original investment. The truth is that the market index always rises, and not the market. The market index rises because the index only includes winners. In investment terms, this is called survivor-bias.
A primary residence should be the base investment for every family.
Daryl Guppy of CNBC says, “When losers are dropped and winners added, it’s no wonder that the market (index) always rises. Even blue chip stocks can be cut out from the list if they fail to perform.” The Dow is made up of 30 stocks commonly referred to as the “Dow 30”.
A 100 years ago the Dow was made up of 12 stocks such as: American Cotton Oil, Chicago Gas, Distilling & Cattle Feeding, National Lead, United States Rubber, American Sugar, US Leather and American Tobacco. All these companies are now non-existent except for General Electric.
GE is the only remaining independent company with diversified assets around the world. It was removed from the Dow twice around the turn of the 20th century, and was reinstated both times.
In the mid 2000’s Eastman Kodak was virtually going out of business and International Paper was on the decline. So it was replaced on the Dow by Pfizer, Verizon. Similarly , Alcoa, Bank Of America and Hewlett-Packard were recently replaced by Goldman Sachs, Nike and Visa after disappointing 5 year spans. In March 2015, AT&T was replaced by Apple.
the act or strategy of adding more investments to one’s portfolio to hedge against the investments already in it. Ideally, this reduces the risk inherent in any one investment, and increases the possibility of making a profit, or at least avoiding a loss. – Diversification
Diversification in Real Estate
Nationally, the primary residence represented the largest asset category on the household balance sheet. At $20.7 Trillion, the primary residence accounted for almost one-third (30 percent) of all assets held by households in 2010 and 42 percent of the median home owner’s wealth. The primary residence is also a widely-held asset. Currently, greater share of households (63 percent owned a primary residence than held a retirement account (50 percent) or stocks and bonds (16 percent).
Traditional and ROTH IRA’s
A self-directed retirement account, unlike a regular retirement account, is one in which the owner of the account (or someone appointed by the owner) makes all the investment choices and decisions for the account. While many brokerage firms and banks offer self-directed accounts, our resource partners offer ones in which the client wants to make investments in private, non-publicly traded investments (commonly referred to as “alternative” investments) such as:
- Purchasing real estate (a single-family residence, commercial office building, residential rental building)
- Purchasing a privately-held business
- Purchase a franchise
- Secured notes (the IRA can make private loans to persons who a
Retirement accounts through which the self-directed investments can be made include;
- IRAs (both traditional and Roth)
- SEP IRAs
- Solo 401(k)s.
Under a 1031 exchange you “sell” (the sale is actually an exchange of property owned for other property – it is not a cash sale) property used in a trade or business or held for investment in exchange for other property that is used in trade or business or for investment. If done correctly, you can sell certain property and defer paying any capital gain tax on the property.
This can be very beneficial if you want to acquire additional properties. For example, if you sold your existing property in a regular sale, you would owe capital gains tax and the amount remaining to acquire another property would be reduced (by the amount of the tax paid). In a successful 1031 exchange you have the full value of the property sold to be used as payment for the property to be acquired.