The human brain has a habit of making simple things more complicated than they need to be, and there is perhaps nowhere that’s more true than in the field of personal finance.
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It doesn’t help that most people have to educate themselves when it comes to budgeting, saving and investing. Add to that the truly dizzying array of account types and asset classes that are competing for your investing dollar, and it’s no wonder that so many people find financial planning confusing and intimidating.
It doesn’t have to be that difficult, though. In fact, it’s entirely possible to secure your financial future by investing in just a handful of asset classes — while still ensuring that you are adequately diversified. GOBankingRates spoke with financial advisors about three assets you can invest in to be set for life.
Index Funds
While it’s common knowledge that stocks historically have provided some of the highest returns out of any asset class, it’s important to understand that not every stock is going to be a winner. In fact, the high returns that stocks offer have consistently been driven by a small percentage of big winners — and those winners are extremely hard to pick, especially for non-professionals.
The good news is that you don’t have to pick individual stocks. You can get exposure to a broad selection of stocks by investing in index funds instead.
“For the vast majority of investors, the KISS mantra — keep it simple, stupid — should guide their investment philosophy,” said Dr. Robert Johnson, professor of finance at Creighton University’s Heider College of Business. “The idea behind index investing is ‘if you can’t beat ’em, join ’em.’ Investors simply can’t afford to make oversized bets on individual securities. And, often that is what happens to beginning investors who buy the stock of the company they work for or the stock of a product they like.”
Index funds attempt to replicate the makeup of a stock index like the Dow Jones Industrial Average of S&P 500, allowing retail investors to essentially own a small fraction of many different stocks. Even better, because an index replication strategy is largely passive, index funds typically have extremely low fees, meaning less of your returns get eaten away to pay for portfolio management.
Dividend Stocks
While the capital gains offered by an index fund are a fantastic base for your total investment portfolio, it’s also a good idea to invest in assets that provide passive income. For that, investors should look to dividend stocks. Owning the stock of companies that pay monthly or quarterly dividends means you’ll have a source of regular income that you don’t even have to think about.
“Investing is the ultimate game of patience, and dividend-paying stocks can truly allow you to make money while you sleep,” said Taylor Kovar, CFP and CEO of Kovar Wealth Management. “Companies like Procter & Gamble or Johnson & Johnson, with a solid history of paying dividends for decades, are examples of such assets. With their consistent and growing dividends, they can provide a steady stream of passive income.”
A great place to find this type of dividend stock is the list of so-called dividend aristocrats, companies that have increased their dividends annually for at least 25 years.
However, if you aren’t comfortable picking individual dividend stocks — and many investors shouldn’t be — you can look for exchange-traded funds (ETFs) with dividend themes, which will allow you to diversify your capital across a number of dividend stocks.
Rental Properties
While not quite as passive as a dividend stock, real estate also offers the potential for a steady income stream. Because real estate returns are not directly affected by the stock market, property offers additional diversification and should reduce the overall volatility of your portfolio.
Steve Davis, the CEO of Total Wealth Academy, is a huge advocate of investing in real estate by way of rental properties. Davis said real estate wealth accounts for 90% of the millionaires in America.
The reason he likes real estate as an asset class is that it makes money in four ways: equity capture, principal pay down, cash flow and appreciation.
“This allows you to make money in both the up and down markets, unlike any other investment,” Davis said. “For example, when I find a distressed property that is worth $300,000, and I buy it for $180,000 due to its poor condition, I can put $40,000 into repairs and lease it for about $400 a month net profit. This is after principal, interest, taxes, insurance, maintenance and vacancy.”
Distressed properties often make the best investments because there tends to be a gap between the cost of repairs and the market price of a move-in ready home. But, if you don’t want to deal with the hassle of renovations, it’s not the only way to invest in real estate. Buying a home in good condition and renting it out can still be a great investment.
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