Diversification is an abstract concept, it can be easy to understand why to diversify, but not how. True diversification requires each set to be completely unrelated (no correlation). In other words, if one effort fails, the negative effects do not harm others. This ideal is generally impossible, as all things are linked to some degree, but it is certainly possible to keep the effects of any one catastrophe to one or two groups.
To start, create a simple cap for each investment group, a number small enough that it wouldn’t ruin your life to lose the entire value. Many will argue based on percentages, but that number fluctuates constantly, and doesn’t account for your psychology. For example, you could put no more than $25k into any set. This is the minimum buy-in for many investments, and plenty high for most of us.
This is largely redundant, but the cost of debt changes relative to this value.
The cost of debt
Revenue from the debt
If you couldn’t buy exactly enough for your needs, nor use all of it, all the time, there should be some revenue from your property.
Deduct costs normally covered by rent. Condo fees, for example.
Taking those values, we can project the cost, or earnings, of the investment.
As shown in the chart above, there is an equilibrium rate that would offer a steady return, no matter how much debt. As the relative return decreases, the cost of debt decreases equivalently. The two other patterns offer radically different reactions. If earning less than equilibrium, it would best to move rapidly through the steep part of the curve. Conversely, if you earn over equilibrium, make only the regular payments, and focus on other opportunities.
The 4% Rule is a quick estimate of a safe withdrawal rate for retirement, given reasonable long term returns. There are many variables which can make this value conservative or aggressive, but it’s a good starting point. It also provides an interesting layer for the Stairway of Spending:
There are many options to support startups and small businesses, with the potential for rewards in the future. Most people are familiar with Kickstarter and Indiegogo, where there are various incentives for different contribution amounts, usually discounted products or merchandise. I have found significant value in some projects, I ended up with a free consumer edition Oculus Rift! However, the money lost to several failures, and my desire for less junk, has led me to other crowd-based systems. Continue reading “Peer to Business Opportunities”→