Have you heard people talk about balancing risk when they invest?
Sometimes, people try to get rich quickly by putting all their money in one place. But that's usually a bad idea!
For most of us, spreading our money around in different investments is smarter. This is called diversification.
But how do you know if you're doing it right? I've learned from my mistakes and want to help you make good choices with your money.
Tailoring Your Investments to Your Life Stage
Your ideal investment mix depends heavily on where you are in your life and career. Financial Samurai presented a great way on how to approach this:
- Conventional Model: This is ideal if you're nearing retirement or already there. This safer, more traditional approach usually involves a higher allocation to bonds and stable, predictable assets.
- New Life Model: This model suits those in the middle of their careers or eyeing an early retirement. If you are into that, you could allocate more aggressively to higher-risk assets such as stocks, crypto and alts, and real estate, shifting gradually to safer assets as retirement approaches.
- Financial Samurai Model: This one is for the go-getters willing to take bigger risks early in their careers, with a significant portion of their portfolio in assets they're familiar with, usually with higher risk incurred.
Baseline For Your Allocation
First, determine which of the three personas above are closer to your beliefs.
Then, use the KPIs below as a baseline, but don't take them for granted. There is a great resource at the end of this release:
Conventional Model:
- Age Group: 50 and above
- Net Worth: Ideal for those with over $1 million
- Objective: Minimize risk and preserve capital as retirement approaches. Focus more on bonds and stable assets since you've reached an excellent net worth level that is not worth losing.
New Life Model:
- Age Group: 30s to early 50s
- Net Worth: Best for those with $500,000 to $1 million
- Objective: Achieve growth with a gradual shift towards security as retirement nears. Balance between risky assets and risk-free, and be more conservative as years go by.
Financial Samurai Model:
- Age Group: 20s to early 30s
- Net Worth: Starting from $100,000
- Objective: Maximize potential returns for those with a longer time horizon and higher risk tolerance. If you have the age and resources to take risks (which means you have a certain stability), take them. They might pay off if you do it right; you still have many years to make up for it if they don't.
My Insight: Embracing Opportunities When They Align With Your Goals
Everyone's investment goals are personal.
Each decision should reflect your financial goals, how much risk you're comfortable taking, and your current financial obligations.
Sometimes, it might be worth focusing on a particular opportunity—if it feels right and fits within your larger financial plan.
It's simple: if you have a gut feeling that an investment or business might pay off, do it.
Do not go all in; it is not prudent and hardly ever makes sense.
Even the most relevant investors of this generation (and the ones before) didn't go all in.
Jeff Bezos, Warren Buffett, Sam Walton, and Elon Musk, all focused on their main businesses reinvested in them, but still allocated some portion of their wealth into other assets, dividing it as their wealth grew.
Times Where I Didn't Diversify and Took More Risk
In 2011, I started to invest in distressed, non-performing 2nd mortgages from the 2000’s subprime era.
At first, I started with a purchase under 100k, and six months later, I recovered my total purchase price.
I was sold, stopped buying real estate, and went in on underwater 2nd mortgages.
Most would think it's the riskiest bet ever, but once you know how to underwrite the risk and ultimately buy at the right price, that risk is minimized.
Over the next decade, my partner and I would buy millions of distressed mortgages in the USA and Puerto Rico from banks and funds.
This was a concentrated bet with the biggest payoff to date.
Once you have an investment that proves your thesis and conviction it is best to double down or go all in.
What You Should Do In Your Portfolio
While diversification is critical to managing risk, being open to concentrated investments in areas you believe in can be rewarding.
Every investment decision should balance potential risks against expected returns, keeping your overall financial health in mind.
This gives you a clearer view of approaching your investment strategy.
Remember, making informed choices that preserve and enhance your financial well-being is the goal.
