How to Survive in the Jungle of Money: Part Four Money Series
Asset allocation is the most important investment decision of your lifetime, more important than any single investment you’re going to make in property, stocks or just about anything else.
Anybody can become wealthy; asset allocation is how you stay wealthy!
Asset allocation is more than diversification. It means dividing up your money into different classes or types of investments and in specific proportions that you decide in advance. This is in accordance with you:
- Goals or needs
- Risk tolerance
- Stage in life
- Access to liquidity
Wow that is a mouthful, isn’t it?
Why is asset allocation so crucial to your investment plan and how you start making it work for you today?
Tony Robbin’s compares this to lining up at the supermarket; “How many times have you picked what looks like the fastest line at the grocery store, but it turns out to be the slowest? Or how often you switch to the fast lane in a traffic jam and watch the cars in the slow lane whiz past you? You think you’re getting there faster, and then find out you were wrong. The same thing can happen with your investments”. Except that when you make mistakes with your nest egg, if it’s too big a mistake, it’s all over. It can mean losing your business or home.
Asset allocation is the one key principle that can set you apart from 99% of investors. And guess what? It won’t cost you anything.
Diversification is the only free lunch because spreading your money across different investments decreases your risk, increases your upside returns over time, and doesn’t cost you anything!
We have all heard the old adage “don’t put all your eggs in one basket”. Well, asset allocation protects you from making that financial mistake. It sounds like such a basic rule, but how many people do you know who violate it.
Why do you asset allocate?
The simple core investment lesson is that what goes up will come down!! Everything goes through a cycle. Understand and own and remember this.
In your lifetime it is almost certain that whatever you’re going to put your money in, there will come a day when you will lose 50% to 70%. That means any investment you pick is going to lose half to two thirds or more of its value. And don’t most people typically favour one type of investment because they feel they know more about that area or because its currently providing a hot return?
Some people tend to put all their money in residential property, commercial property, stocks or commodities. If you don’t diversify enough you stand to lose your shirt.
Are you listening??? To put it into plain English...no matter how well you plan, there will be a day of reckoning for EVERY type of asset. So diversify or die. But if you diversify well, you will win!!
I can’t say it enough: good people often fail because they do the right thing at the wrong time. So the question is: If we’re all going to be wrong some of the time, where do we put our money? That’s where asset allocation comes in.
It’s the right mix at the right time that brings you victory.
ASSET allocation offers you a philosophy of investing to help you decide where to put your wealth and excess cash flow and in what proportions. The key to asset allocation is you must ensure you allocate your asset not on $ value or cash balance but on risk.
I allocate all my wealth into 4 buckets….I call it the “Bucket Principle”.
The four buckets are:
- Low fixed returns
- Line of Credit
- Residential Property
- Land Banking
- Tech Stocks
- Start Up Companies
- BUSINESS = no. 1 asset
- Buy, renovate & sell properties
- Buy, build & sell houses
- Share Trading
- Currency Trading
- Commodity Trading
- Options Trading
- Commercial Properties
- Boarding Houses
- Student Accommodation
- Lending Money
- Holiday Homes
- Toy Cars
So how much goes in each bucket? What %? Well, it depends. On what? On the following:
1. Your goals and needs
- How much you have today
- How much access you have to cash flow from your business and other sources
2. Risk tolerance
- (Everything is fine and people say they accept risk until they lose money)
3. Stage in life
- How much time you have to grow your investments
4. Your Access to liquidity
- How much risk you can afford to take in the stage of your life
Remember, you’re not diversifying just to protect yourself. You want to enhance your results to find the ideal blend of investments that will make you thrive, not just survive!
SECURITY BUCKET: Low risk investments and certainty in your life. This bucket is the slow but steady contender. This is where you keep that part of your wealth that you can’t afford to lose and also where you keep what I call ‘powder dry’ for opportunities as and when they arise.
These include things like physical cash. Your home goes in here too? WHY? Because it is a sacred sanctuary. The ultimate goal is to pay your home off and have it as your back stop. What I like to do is have a LOC against the house that can be used as back up money/powder dry, or use a portion or the lot (depending on what other cash reserves you have), to invest in your other buckets.
GROWTH BUCKET: This is the 10 year + bucket. You are investing in growth assets. Examples include residential rental properties, land banking, equities, commodities, collectibles, currencies etc. If you are investing in this bucket with a shorter view or timeframe then you are speculating.
This bucket does not give you a lot, if any, cash flow. This is why allocation across the buckets is crucial and in line with how much cash flow is coming from your cash flow bucket and your business.
CASH FLOW BUCKET: This is my favourite bucket. Everything for me is about cash flow. Without cash flow you are dead…in your business and your life. Cash flow is your lifeblood.
This includes your business or other business interests, commercial properties, buying and flipping residential and commercial properties, developing properties, share trading (not exciting and highly do not recommend) and lending against property deeds etc.
To me wealth is cashflow…not having 3 million, 5 million or 50 million in the bank. It is what cash flow you have recurring to live life, reinvest and give. CASHFLOW. CASHFLOW. CASHFLOW. I said it earlier in this Money Series, I break everything down to a monthly amount. The assets I love best are cash flow producing WITH GROWTH...love it!!
LIFESTYLE BUCKET: As the title says, this bucket relates to things that enhance your lifestyle. This does not mean they can’t be an investment as well. If you are smart you can turn lifestyle investments into growth investments; eg. holiday homes, farms. You also need to have enjoyment in life from what you are actually doing.
So, now what? Who the hell is going to help me with asset allocation? Well the answer is simple…you are.
What! I hear you say? Well you are. You are reading this to get more information to be able to make better informed decisions.
Are you an active investor who likes to take their finger off their business to invest as it fulfils a rush, a sense of control, and belief you can do it better? Are you an investor who has massive leverage because they are resourceful? Or are you someone who is going to get a fiduciary on your side to help you?
What is a fiduciary? Someone that gets paid for financial advice and by law must remove any potential conflict of interest and put the clients needs above their own. In other words they charge you a fee for the service they provide rather than getting a commission from a related partner, associate, or dealer group.
If you want a great fiduciary then contact me and I’ll give you their details. This is game changing. Life changing. Me personally…I am an active investor. I have leverage and am very resourceful. This is by ensuring that my investing does not impact my role in my business. It has taken years to get to this point, to get the balance, but that is what happens when you persevere.
Remember the whole point of writing this series is to help my business clients (either a business operator v business owner) work out how much they have in assets and liabilities, how much they have to invest now and how much they have in excess cash flow to allocate to investing in their buckets. Investments that are automated so they don’t have to think about it, knowing the diversification into assets will protect and help them create wealth in any market conditions.
So now you get asset allocation and understand that you need to diversity, diversify. But there is more. You not only have to diversify between your security, growth, cash flow and lifestyle buckets…you need to diversify across securities, across asset classes, across markets and across time. This way you get a true portfolio for all seasons!!!
This is where you need to make some decisions about your asset allocation and % and how you will do this. Either get the help from me and come and see me or get the help of a fiduciary financial planner. You need someone to have as a sounding board and help you see what you can’t see.
TIMING IS EVERYTHING!
Robbins says, ‘the best comics know when to deliver a punch line and the smartest investors know just when to enter the market - except for when they don’t. Even the best of the best fail to hit every beat every single time. For a comedian a mistake in timing results in an embarrassing, deathly silence in the house... But if you’re an investor a mistake in timing can destroy your nest egg”. So we need a solution…
You have already learned that asset allocation and diversifying across asset classes and diversifying across markets is crucial. The third key is diversity across time.
This is called ‘dollar-cost averaging’. This is how you execute the asset allocation. It seems counter intuitive, and you might feel like you are going to be making less money using it. The goal is to take the emotion out of investing because emotion is what so often destroys investing success; either it is greed or fear.
On top of this you need to keep rebalancing your portfolio. You have to take a look at your buckets and make sure your asset allocations are still in the right ratio as different assets go up and down at different times. When they are up you need to rebalance across the portfolio. Billionaires do this and maybe you should!! It should be a constant evaluation but not an obsessive evaluation… perhaps once a year?
So just to recap 3 important points from Part Four of the Money Series:
- Asset allocation is everything!! You want to diversity between your 4 buckets. You want to diversify across asset classes, markets and time.
- You don’t want to hesitate to get in the market trying to have the perfect timing…instead use dollar cost averaging. That volatility can be your friend, providing opportunities to buy investments cheaply when the market is down. This technique will increase your portfolios value when the market comes back up.
- Use rebalancing to maximise your returns and minimise losses.
Yes, I know it’s a lot of information to take in, but hopefully you are getting closer to understanding the principles of what to do to protect your wealth and thrive in good and bad times.
If there is a crisis… AND THERE WILL BE….you should not panic. Another word for crisis is opportunity. You want to be cool and calm and collected and pounce as you have access to funds or debt out of your security bucket. Remember what goes up will come down and then it will go back up. Whether it does over 1, 2, 3 or 10 years…it will!
The way you stay cool, calm and collected is asset allocation! That is why it is the most important investment decision you can make.
Find parts 1-6 of the Money Series here:
- PART 1: WELCOME TO THE JUNGLE
- PART 2: WALK OR RUN THROUGH THE JUNGLE
- PART 3: EAT LIKE A LION IN THE JUNGLE OR MONEY
- PART 4: HOW TO SURVIVE IN THE JUNGLE OF MONEY
- PART 5: THERE IS ALWAYS A TRAP IN THE JUNGLE OF MONEY
- PART 6: THE SECRET OF TRUE WEALTH
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