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Back in 2005, my wife and I visited my brother-in-law and his family in Kentucky.  We were there to attend my nephew’s first birthday celebration.   During our visit, we met my brother-in-law’s neighbor and his wife.  They seemed like the typical army family.  He had a crew cut hair and looked like he always ran marathons, and she was this outstanding wife and mom taking care of their family with three kids.

Anyhow, while we chatted and got to know each other, we found that they had then served 15 years in the military.  He told us that over that period, he was promoted several times because he took on more responsibilities and assignments. Both of them said it was not easy as they had to make a lot of sacrifices, but they thought that serving the country was a part of their lives.  It started with their grandparents.

We also introduced ourselves.  I told them that I worked in NYC, and I love investing!  As soon as I mentioned investing to him, he said:  “We have been saving all of our money.  We have about $30,000 saved.  The problem is, we don’t know how and where to invest our money. Will you help us?”

I told them that their questions were good, but it would require more time to explain.  Unfortunately, we didn’t have enough time to discuss their questions as we had to fly back to New York the following day.

So, I felt a little unhappy about that.  This is the type of family that I want to help.  They sacrifice so much!  They love this country!  They live prudently, and are determined to better their lives.  Yet, they didn’t know how to invest.  In some ways, I failed them.

So what I would like to do now is to redeem myself.  I want to share some ideas with my readers on how and where to invest some excess money.

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Investment Options

Here are some options where one can invest their money with relatively safer risk profile.  Let’s outline some basic assumptions.

• You already have your emergency fund tucked away, anything above the emergency fund should be invested.  Please read my other entry on Importance of and How Much You Should Save.
• At least $30,000 in spare cash
• Checking or Savings account does not produce any return on deposit
• Investing involves risks. You can lose all your money.  The key is managing and minimizing the risk.
• You have done some research on the company, real estate, or other vehicles you are thinking about or at least have asked some people you trust

Note: When I name a particular stock here, I am not necessarily recommending to you to buy it.  My investment profile is different than others.  So, potential investor beware.  I only share these stock names to make a point.  There’s plenty to consider.

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Real Estate. 

There are still homes out there that would sell for $120,000 (Texas, Nevada, Arizona, others).  Now, if you want to invest in real estate, you better to have at least 20% of that purchase amount as down payment.  That will be $24,000.

A good rule of thumb (excluding NYC, California, and other high priced Real Estate areas) when buying a property is 10x Price to Rental ratio.  Anything above 15x is overpriced.  If you can buy a property at 10x ratio, that means your are getting a bargain.Here is a good example.  Let’s say that there is a condo or a house in Texas that sells for $120,000.  The current monthly rental is $1,000 per month.   Then, annually, that is $12,000.  $120,000 divided by $12,000 is 10x.

Assuming that your mortgage payment – principal, insurances, taxes, and other fees and dues – is $801 and your rental income is $1,000, that means you get a cashflow of $199 per month.

So, there you have it.  If you have $24,000 savings.  You get 9.96% return.  Now, that is just the dividend you receive, and this does not include the price appreciation of the real estate property.  Clearly, there will be bearish markets but, again you don’t have to sell the asset as soon as the market crashes.  As long as the property is rented, you are ok.

Note:  Finding an investment property requires work.  Many people think that investing is easy.  Just like everything else in life, you need to work for it.

Here’s a Real Estate Model you can use.

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Stocks.

I like to think of stocks as I own a piece of the companies I invested.  I treat it that way.   I like companies that have good balance sheets, companies that do not have a lot of debt in their books.   I also like to see that they have good products, that they are operated well, and that they are financially sound.

Here’s my general framework for companies.  It’s like finding a date or potential spouse in an analytical way.   See the graphic below.

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The questions associated with the categories:

1. Do these companies have the right products that people need or want to buy? Are they unique/differentiated?
2. Are they research and development (R&D) driven?
3. Are they good marketers?
4. Are they ethical? Is management competent?
5. Are they financially prudent and not prone to excesses?
6.  Am I buying the company at the right price (they may be excellent companies but may be overpriced, you may not get good value)?

As you think through the questions, you will find that it takes time to research for the answers.   You will have to go to the websites of these companies, download their company presentations, financial filings, and other pertinent information (customer feedback, rankings, etc.).

The companies below have met many of these characteristics as I was researching them (these companies do not have to be yours and the price may have moved up already).

Proctor & Gamble.   I like their dividends.  I think it gives about 2.3% in dividends.  As of this writing, the stock is priced at $82 per share.  I like buying the stock when it goes below $78/share.  I am a buy and hold investor as I do have a lot of time to wait for its growth. The company has gone through reorganization recently.  It sold some divisions that were not core to their business.  It is much leaner now, and I feel like it will take advantage of the opportunities around it.

Chevron.  I like this dividend paying stock as well.  I think it is currently giving 4.5%.  The company is A+ rated by S&P and Moodys.  I bought the stock when it was trading at $82 earlier in the year (2016).  The stock now is trading at $107 as it exceeded analysts’ expectations.  The risk with this investment is the potential for a prolonged low oil price.  The company is making cash still, but it also needs those funds for capital investments and dividends.

Lyondell Bassell.  I like this petrochemical company.  It is not A rated by S&P and Moodys, but it is still investment grade.  The company has a strategic advantage vs. other petrochemical companies as its main feedstock is natural gas which is so cheap right now in the US.  I like the management team. They do know where to focus their investments.  I have seen this company trade from $60/share to $105/share and now it is trading at $82/share.  It is correlated with the price of oil.   Again this is volatile, but I like playing volatility.

Amazon.  I like Amazon, but my concern for the longest time for any tech stock is the valuation.  I don’t like the extremely high P/E ratios.   The expectation is that this will keep on growing so big.   But one thing I do like Amazon is that it knows how to deliver products.  It is also unique in the sense that it owns a piece of the American buyers’ minds.  If you someone asks, “where can I buy this product?”, the answer is almost always, “Have you checked on Amazon?”  It is the Walmart of internet retailing.

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Allocation

If you like stocks, you can put $10,000 in each company you like (after your research).   Some pay 2% to 4% dividend income.  On top of this, if you buy them at the right price, you can get a capital appreciation of at least 10%.

Note:  Timing the market is very hard, and I advise that you don’t look at the market daily.  Set the limit purchase in that way you don’t have to be logged on if the price of the security has hit the limit price you set.  This has been a winner for me.