Simple principles for personal investment strategy
How/where/what should I do with my money? This is a complicated problem to say the least and it gets harder each year as the speed of change in the world increases and the options available to us grow exponentially. In this noisy environment, I find it helpful to follow a few simple principles when it comes to personal investing. These are strongly informed by Ashvin B. Chhabra’s The Aspirational Investor which I recommend you read. Like now. Hopefully they can help you too :)
The Framework. All your investment/saving should aim to accomplish three things in this order: provide security, maintain living standards through your lifetime, and create chances for life-changing wealth.
1.Providing security- This one comes first and is the simplest. You’ve heard it before referred to as a “rainy day” or “emergency” fund and comprised of a few months basic living expenses. That is pretty much it. Specifically, this should look like:
- 6–12 months living expenses
- Highly liquid, no market exposure (translation: basic savings account)
The main goal of this is to provide the necessary feeling of security and safety so that you can do #2 well. If you have this type of cash on hand, it allows you to weather market downturns with more confidence by increasing your risk tolerance. In the event of an emergency (such as extended unemployment), this also prevents you from being forced to liquidate assets you do have in the market possibly at a bad time and at a loss. This feeling of security is more valuable than the downside of this money not keeping up with inflation.
2.Maintain living standards through your lifetime- This can be your pension plan (lol, what’s that?) or 401k or Vanguard Fund or Roth or a bunch of other things. This is the incremental savings over the course of your lifetime. The simple goal of this is for you to maintain your standards of living after you leave the workforce. This is also the most complicated one and raises the most questions (to name one, choosing from the list above). I wrote more of deep-dive on this in another post with some opinions on the pros and cons of different types of personal portfolio management, but the important things are:
- Savings set at a pace that meets your goals of desired retirement age and retirement income. If you don’t know, use one of the thousands of free retirement calculators
- Highly diversified market exposure to stay ahead of inflation (translation: index tracking funds)
- Lowest possible management fees
This one will need to be readjusted many times throughout your life based on your circumstances (having kids, new jobs, retirement planning, etc.) The most important thing you can optimize for here is time. The longer you are doing this the better off you will be. In a perfect world, if the overall market averaged 5% annual growth for the time period you were saving, your returns would match this. You should not be trying to beat the market here (too much risk) or hedge to hard (not enough risk).
3.Creating chances for life-changing wealth- Disclaimer: Don’t do #3 until you have finished #1 and are on track for #2. This is the exciting one with all the risk and potential reward, the hopes and dreams, the leveling up and gold plated yachts. This type of investment can take the most forms depending on the person and their interests. It’s also the type of investment that the average person never gets to make because it is incredibly hard to do #1 and #2 these days. This looks like:
- High risk and high reward investment
- Chance for outsized returns (think 3–5x on your money instead of 3–5%)
- Because you are doing this, you DO NOT use the money in #1 and #2 for this. Ever.
That’s it. It seems simple but this is your chance to substantially increase your wealth and that doesn’t come without an equal amount of risk. Does this include blackjack, buying lottery tickets, and giving money to Nigerian princes? No. Being risky =/= being stupid. However this does include investing in early stage business ventures, concentrated stock bets, high-risk derivatives (like options), crypto, or even starting your own business! There is a chance that you lose all your #3 money, but that’s why you have #1 and #2 right?
I hope this is helpful. It has been to me. Good luck!
Disclaimer: These views are my own. Just me. Solo thoughts.
