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The 10% Rule for Investing – How to Invest Your Mad Money

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The following is a guest post from Hank Coleman who writes about his personal finance blog, Money Q&A.

Index funds are boring. Money market funds and certificates of deposit make me want to pull my hair out from boredom too. There is no denying that these investments are typically the bread and butter of your retirement investment portfolio, and rightfully so. And, of course, most financial planners and experts praise market mirroring investments such as index funds for their extremely low fees and the difficultly active mutual fund managers have trying to beat the overall stock market for the long-term. But, the question remains. Should your entire nest egg be in these types of investments? Of course it shouldn’t. Like the saying goes, “All work and no play makes Timmy a dull boy.”

Where should you invest your mad money?

Where should you invest your mad money?

You need some spice in your investing just like you need it in life. You need some excitement mixed in with your ordinary investments. If you just wanted to mirror the overall stock market, you could just have a robot or a computer program invest for you. But, what is the fun in that? Having excitement and the chance of really scoring a huge win is one of the reasons that we all keep investing whether we admit that to ourselves or not. To a certain degree, we all think that we can come up with that one great idea in our lives and hit a home run as an investor. But, you do not want to invest a huge portion of your nest egg on your gambles. You still need to be able to recover in case your investment doesn’t pan out. And that is where “Mad Money” comes into play.

Let’s swing for the fences just a little, not with your entire life’s savings. Many financial experts recommend investing only 10% or less in investments that you are passionate about, have a gut feeling about, or investment ideas think that you could really knock out of the park. Here are three ideas to light your fire and passion for investing again, potential investments that you can hit home runs with.

Investing In Peer-To-Peer Lending

Have you ever been approached by a friend who has a great investment idea or an idea for a new business? Now there is a way for you to become the bank, so to speak, and lend money to people directly who have a great idea, want to start a business, need help funding their wedding or sending their kids to college, want to consolidate credit card bills into a lower interest rate, or need money for a host of other reasons. Peer-to-peer lending services such as Lending Club or Prosper allow you to invest in loans directly to other people skipping the bank. The average returns on peer-to-peer lending loans are often 10% or more.

Investing In Gold

Investors have had a love hate relationship with gold over the years. You typically either are a gold bug who loves it or someone who utterly hates the investment. But, there is actually room for both in the market and for precious metals in your portfolio. I’m not advocating purchasing gold off of late night television infomercials or storing bullion bars under your bed, but precious metals in general provide investors with great diversification. Instead of owning just gold bars, you can invest in the entire gold sector including miners, processing companies, options, and actual gold through the ETF, SPDR Gold Trust (Ticker Symbol: GLD) which is up over 20% year-to-date. There are also so many other great precious metals besides gold that you can invest in such as copper, silver, and the like. There are several great mutual funds that hold a wide range of those metals like the USAA Precious Metals Fund (USAGX), up fourfold in the past 10 years.

Investing In Real Estate Investment Trusts

I have always wanted to be a real estate mogul like Donald Trump or maybe even like one of those guys you see on television that are flipping houses left and right. The only problem is that I can’t hit a nail straight to save my life, and I barely had enough for a down payment for my own home let alone an investment property. But, there is still a way that you can invest in real estate without all of the pressure of finding tenants, leasing buildings, running construction crews, and the like. Real estate investment trusts (REIT) are similar to mutual funds and allow you to invest in shares. There is a REIT for every type of real estate from rental properties, apartment complexes, commercial properties, shopping malls, and everything in between. Another great benefit of REITs is their dividends. They are required by law to distribute 90% of their taxable income to investors each year in the form of dividends, and with most averaging a 5% yield or more, REITs are an attractive option for investors.

Should these types of investments comprise the majority of your retirement portfolio? Of course not! But, there is no harm in using a small portion of your portfolio, no more than 10%, to invest in things that get your blood pumping. We should all strive to find investments that we are excited to own. What type of great investments gets you excited and your blood pumping?

Hank Coleman is a finance writer who has written extensively for many financial websites and publications in addition to his own blog, Money Q&A. Hank holds a Master’s Degree in Finance and is currently studying to take the Certified Financial Planner exam later this year.

Photo credit: Tulane Public Relations


Published or updated February 10, 2012.
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{ 6 comments… read them below or add one }

1 Dollar D @ The Dollar Disciple

Personally, I use Lending Club for my investment “fun money”. I don’t have a lot in it but I love the concept and it’s cool that you can do it for as little as $25 (less if you buy an existing note off the market).

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2 Hank

I think Lending Club is a great place for your mad money investing too. I’m a big fan of investments with low minimums to start. You can also find a lot of mutual funds that waive their minimums if you agree to invest every month automatically. And, DRIPs are a great way to dollar cost average into an individual stock.

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3 Hank

Thanks for loaning me your readers today, Ryan. I hope everyone liked the article.

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4 Ryan

Thanks for sharing, Hank! These are all great tips. I’ve used a little bit of Mad Money for investing, but not nearly 10% of my portfolio. I bought a couple individual stocks, and I dabbled in Peer to Peer lending. In all cases it was money that I could afford to take a risk with. And so far, I have come out ahead in all my mad money investments, so no complaints! (but the majority of my retirement portfolio is in index and mutual funds).

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5 Hank

I love to use DRIPs when I dabble in individual stocks too. I forgot to mention that. It is not the only way I buy individual stocks, but it is my preferred method if I am planning on holding them for a long time.

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6 Anel Kitts

A lot of people think they can simply own a basket of stocks and forget about them. They embrace the idea of “buy and hold,” the investing strategy championed, which says that any losses incurred in the short term eventually will be made up in the future.

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