How to Ensure You Don’t Earn 5% on Investments

The answer is simple: use a Financial Advisor as your sole source of investment income. Their fees can eliminate 25% or more of your profits if you are not careful.   As I have have studied this more and more, and studied people who are actively making money from investments, I see one common thread: their eggs are in multiple baskets, and they are personally active in their investments.  

Caveat 1: I am a slow learner;  I have to be hit with something multiple times to sink in.  This blog has forced me to be introspective and helped to accelerate evolution.

Caveat 2:  I also believe in ‘eating your own dogfood’, which is a technical term for using your own work product, not just spouting BS.    As I write this blogs, I feel an obligation to understand  the things I talk about, and do this by actually using them.  So these topics will evolve and be reposted as more information comes in.  

Caveat 3: My plan may not work for you.  The first step is always to Think!!

The focus here is the money that the government had already taxed, and you have in your savings, investment account, buried in the back yard, etc.   

I hope there is a nugget or two in here that can help in your search for higher returns.  Most of these options here allow you to dabble at very small amounts, around $1000 or less, to get a feel.  That is always how I start, and as I become comfortable, I may or may not choose to increase.    All investment has risk; in the case of a recession, market bubble burst,  real estate tragedy,  etc all bets are off and these returns will not be there.  

*Roboadvisor.   A roboadvisor is an on line investment account that typically targets smaller investors and boasts very low fees.   I have held one for a few years called Fidelity Go.  I adjust the risk a little every now and then, and it generally follows the SnP based on how heavily I am into stocks. Its easy to manage, move money, and check performance.  I can do things at my leisure any evening or weekend, and have them start working the next business day.  I have proven over time that my performance is equivalent or better than my FA, and the fees range between .35% and .4%.  Thats is $600 per $100K invested per year savings over my standard account.   I have also recently opened an account with Betterment.  Multiple sources indicate this is the gold standard in roboadvisor, for both low fees and good service.   I will update as I learn more.  These funds will go as the market goes, so expect no better or worse.   My personal target is 4% gain after all fees.

*Peer to Peer Lending.  This is a way to use your money as a source of unsecured loans.   Most people are using these loans to consolidate debt or to pay medical expenses.  I have an account with Lendingclub, and with over $40B of history, I find it delivers as it states.   You select loans based on grade, A thru E, and can set up auto invest based on those grades.    Grades determine risk and risk determines interest rate.  Interest rates range from 8% up to 28%, but the key here is effective interest rates. Those are actual returns after defaults, or charge offs as they call them.   That rate is targeted at 5% for all grades of loans.  In my first year, the return is high, over 8%, but all data indicates this will settle around 5% after charge offs.  This is because most loans are 1-2 year terms.    I auto invest, so each payments generate new loans, each of which is only a $25 position, so my risk is mitigated by having hundreds of loans.  The website has lots of fun analytics, history, and information so its also very informative.   This fund has been through major economic downturns and upturns and can model those results.   My personal target is to net over 5% on my funds. 

*REIT.   This is real estate investment trust; I have recently started to use Fundraise, which is a low entry point crowdfunding site.  These funds have typically outperformed the market, and enjoy an advantaged tax structure.  This fund does not target single owner homes, but larger complexes, so you are tied to the market.  I like it because I can enter at much lower amounts than going out and buying a property on my own.  I am new to the platform but its history since inception is over 8% return.  This fund has not been through a real estate bubble burst and does not model those results effectively, and also the funds are determined to be illiquid, meaning you should plan to leave them over long periods of time.  My personal target is to net 6% on my funds.

*Commercial Real Estate.   Circumstances dictated (lets just say divorce) that I own a piece of commercial real estate, with 11 rental units.  After taking over the property, I became intimately aware of all expenses, improvements needed and rent values.   I put the building on the market after a couple years, which forced me again to review profit and loss, understand caprate,  and develop a deeper understanding of the current rental market.  I keep all the books, do the vast share of maintenance, and write all the leases; your skill set here needs to cover the spectrum from Quickbooks to fixing a broken window.  Anything you can’t do becomes quite costly.   My biggest expense is a property manager who collects rent and deals with day to day issues, which I have to keep in place because I am not present about 50% of the time due to travel.  My income, due to the nature of my renters, is tied to disposable income that will be at risk in a major recession.  After going through all this, my investment is currently returning around 6% net. 

*High Interest Savings and CDs.   This is further down on my list, and I do not have an account here, so I am NOT eating my own dogfood just yet,  but for many this is a large part of their portfolio.  The online platform that appears to be very good, and one of the OGs on this blog currently uses, is Ally.  You can get savings rates over 2.5%, and CD’s over 3% currently.  Its a great place to keep cash where you need quick access.    I would expect to earn 2.75% net from this if I were invested here.  

These passive investments require more work than one would think, and amount to a part time job.    If you can do that and maintain your focus on your passions, its a great situation!    

I have always wondered why the old guy at the hardware store was always so happy.  I get it now.  He realizes life is really pretty simple; you just need money for the basics, and funds for those things to keep you moving!