The Flip-Flop Asset Allocation Method
Do you put all of your money into some safe CD's to earn
interest, or buy a biotech index fund to grab the next big move
in genomic cancer drugs; or something in between? The world of
investment options and strategies grows every year, so I'll
provide a simple tactic to boost your returns over the course of
your investing career.
The flip-flop method refers to taking the income from an
income-producing investment and flipping that profit into a
speculative investment. Then, take the profit from that
speculative investment and flop the profit back into another
income-producing investment. By doing this back and forth you
are capturing both ends of the investment spectrum to increase
your portfolio in a quicker and safer manner than either one
individually.
Always start with a relatively safe income investment first.
This way, if your first speculative investment is a 100% loss,
you'll still have the income from your income-producing
investment to recover and try again. And, you'll hopefully have
the added education that you will have learned from the
speculative loss. (Starting with a solid income-generating base
can also give you the confidence to reach for a more speculative
trade.) Once you are able to complete a speculative profit, put
the money into a brand-new income-producing investment. This
way, each speculative gain will diversify your portfolio into a
wider range of income-producing investments.
Once that you have created a stable base of investment income,
you should start ratcheting up the interest rate that you are
willing to accept for new income investments. For example, you
may have started out with a 3-year bank certificate of deposit
but now you need to get a higher yield, perhaps by buying an
income-generating mutual fund. There are funds of preferred
stocks, loan portfolios, and exchange-traded real estate
investment trusts. Moving even higher in yield may require some
online searching to find people trying to sell their second
mortgages, annuities, pension payments, etc. There are websites
where people list financial assets like these for sale. If you
aren't comfortable with your level of expertise for buying
mortgages yet, you can start with only $100 with loan-broker
websites such as prosper.com.
So you've got some income flowing and are itching to find a
speculative deal to step up your investing level. Let's start as
small as possible: How about buying things at garage sales and
selling them for more money on ebay? I found an ad for several
hundred dollars of new printer cartridges for sale in a local
classified ad. They were worth much more by selling them on
ebay, even after shipping costs. I recommend you focus on your
greatest interest (music, motorcycles, watches, or whatever) and
find a market where to buy at low prices. And then add some
value (refinish, update, add a bonus), and find a market to sell
to the most frenzied fans. Bigger chunks of money are made on
more expensive items, but you carry more risk if you don't keep
up to date with the market. Such as cars, boats, planes, homes,
jewelry - objects that have a consistent and measurable
marketplace to buy and sell them. For speculation with financial
instruments, you need to go to the futures market to get the
largest moves, and the most leverage. To keep from losing your
home at the first "Locked-Limit" move against your position,
options must be a part of each of your trades: either buy
options alone, hedge a futures contract with an option, or use
an option spread. When you've accrued bigger dollars to play
with, you can speculate with land, commercial buildings, and
businesses.
In spite of the specific examples that I have provided, you need
to find areas that interest you the most for investment vehicles
for both income-producing investments and purely speculative
deals. Remember to always start with an income-investment first,
and then start flipping and flopping your profits between the
income-investments and the speculative-investments. This type of
asset allocation rebalancing will certainly add greater returns
to your portfolio.