Strategic Asset Allocation: How Much Money Should You Put In Any One Investment?
Like I told you in the last eLetter, I was stepping up my commitment to get you more and more useful wealth tools.
This week I wanted to talk about your investing. It will apply to anyone who has ever asked themselves how much money should they invest in any one investment.
I hope you enjoy it!
Strategic Asset Allocation: How Much Money Should You Put In Any One Investment?
One question I get over and over again is how much money should a person put in any one investment. To really answer that question one of the key factors is something called "Strategic Asset Allocation", which is a discipline of investing your entire net worth strategically versus investment by investment.
Strategic Asset Allocation is something that says you need to look at your entire net worth, and intelligently plan out exactly what percentage you want of your net worth in what risk categories.
Most people when presented with an opportunity to invest in two investments compare the returns of those two investments. But this can be misleading. It's impossible to accurately compare returns across risk categories because you are not comparing apples to apples.
A much smarter way to sort through investment opportunities is to first strategically decide how you want to apportion your entire net worth across your Risk SpectrumTM.
Here's an interesting thing--everyone has their own Risk Spectrum. That's because what is risky for one person my not be as risky for another. There are many factors that influence risk from experience level with that particular wealth vehicle to specialized knowledge to financial situation.
My current strategic asset allocation plan is to hold 25 percent of my wealth in low risk investments, 50 percent in stable cash flow producing investments, and 25 percent in medium risk forced appreciation/upside investments.
What do you want your asset allocation to look like? You must factor in your current wealth stage and level, your age, your financial goals, and your current asset base.
The next time you are presented with several investment opportunities the first question you should ask is how do they fit into your personal strategic asset allocation plans? Then and only then should you evaluate the deals that fit your investment needs to assess the risks and potential rewards of these deals.
That's the first part, to strategically plan out what percentage of your net worth you want to invest over what risk categories.
The second part is to decide what limits you'll place on investing on any one investment. This is where a very important concept called "Compression of Capital" comes into play.
Compression of Capital says that every investment has a certain fixed cost of time, focus, effort, and money that is there regardless of how much or how little you invest. There is a cost to analyze the opportunity, to do your due diligence, to set up the funding arrangements, to oversee your investment interest over time, and eventually a cost to sell your investment.
Most wealth builders never think about these costs so they over-diversify. They feel that to keep safe they should spread their investment capital across a broad cross section of deals. But this increases these fixed costs (financial and otherwise) to a point that they don't make sense.
Instead, wealthy people have learned that they need their financial moves to be big enough that they have the power for the returns to more than outweigh the costs. So rather than investing your $100,000 that you've allocated for medium risk forced appreciation deals in 25 different investments, you might instead invest in that money across 3 or 4 choices.
While it's important to make sure not to spread yourself too thin (so that you lose the power of your investment focus and have too much of your resources eaten up by the extra costs associated -- financial and non-financial -- of too broad an investment front) it is also important not to concentrate too narrowly. What's the right blend? I wish there was a one size fits all formula. There isn't. Here is the criteria that I personally use:
If I am a passive investor in a deal then the MAXIMUM of my net worth that I will put into the deal is 5 percent of my net worth.
If I am a passive investor in a deal but I have some meaningful participation with the decision makers (a seat on the board, etc) then I'll put in up to 10 percent of my net worth (MAXIMUM).
If it is my own deal, I'll put in up to 25 percent of my net worth in any one deal.
Now the above is my criteria. Yours might be different, in fact, it almost certainly will.
Notice though the key distinctions I've made between the various degrees of control of an investment. The lower my personal control, the less of my money I am willing to risk. The only exception to these are conservative investment options that have virtually no risk to my capital (government bonds, money market accounts, etc.)
(There is a lot more about this topic that I will put into an online workshop for the Maui Mastermind Online membership site. I'll have it up by the middle of next week.)
That's it for this email. Have a great weekend!
My best to you,
David
P.S. For those of you who signed up for your free trial membership to Maui MastermindTM Online last time, thank you. What are the rest of you waiting for! Go ahead and take me up on this free 30-day trial offer. If you don't like it you can cancel and you'll never pay a dime. Plus you'll get to keep the $495 downloadable wealth course that new members like you get as a free gift just for trying it out! Start your free 30-day trial membership right now!
This week I wanted to talk about your investing. It will apply to anyone who has ever asked themselves how much money should they invest in any one investment.
I hope you enjoy it!
Strategic Asset Allocation: How Much Money Should You Put In Any One Investment?
One question I get over and over again is how much money should a person put in any one investment. To really answer that question one of the key factors is something called "Strategic Asset Allocation", which is a discipline of investing your entire net worth strategically versus investment by investment.
Strategic Asset Allocation is something that says you need to look at your entire net worth, and intelligently plan out exactly what percentage you want of your net worth in what risk categories.
Most people when presented with an opportunity to invest in two investments compare the returns of those two investments. But this can be misleading. It's impossible to accurately compare returns across risk categories because you are not comparing apples to apples.
A much smarter way to sort through investment opportunities is to first strategically decide how you want to apportion your entire net worth across your Risk SpectrumTM.
Here's an interesting thing--everyone has their own Risk Spectrum. That's because what is risky for one person my not be as risky for another. There are many factors that influence risk from experience level with that particular wealth vehicle to specialized knowledge to financial situation.
My current strategic asset allocation plan is to hold 25 percent of my wealth in low risk investments, 50 percent in stable cash flow producing investments, and 25 percent in medium risk forced appreciation/upside investments.
What do you want your asset allocation to look like? You must factor in your current wealth stage and level, your age, your financial goals, and your current asset base.
The next time you are presented with several investment opportunities the first question you should ask is how do they fit into your personal strategic asset allocation plans? Then and only then should you evaluate the deals that fit your investment needs to assess the risks and potential rewards of these deals.
That's the first part, to strategically plan out what percentage of your net worth you want to invest over what risk categories.
The second part is to decide what limits you'll place on investing on any one investment. This is where a very important concept called "Compression of Capital" comes into play.
Compression of Capital says that every investment has a certain fixed cost of time, focus, effort, and money that is there regardless of how much or how little you invest. There is a cost to analyze the opportunity, to do your due diligence, to set up the funding arrangements, to oversee your investment interest over time, and eventually a cost to sell your investment.
Most wealth builders never think about these costs so they over-diversify. They feel that to keep safe they should spread their investment capital across a broad cross section of deals. But this increases these fixed costs (financial and otherwise) to a point that they don't make sense.
Instead, wealthy people have learned that they need their financial moves to be big enough that they have the power for the returns to more than outweigh the costs. So rather than investing your $100,000 that you've allocated for medium risk forced appreciation deals in 25 different investments, you might instead invest in that money across 3 or 4 choices.
While it's important to make sure not to spread yourself too thin (so that you lose the power of your investment focus and have too much of your resources eaten up by the extra costs associated -- financial and non-financial -- of too broad an investment front) it is also important not to concentrate too narrowly. What's the right blend? I wish there was a one size fits all formula. There isn't. Here is the criteria that I personally use:
If I am a passive investor in a deal then the MAXIMUM of my net worth that I will put into the deal is 5 percent of my net worth.
If I am a passive investor in a deal but I have some meaningful participation with the decision makers (a seat on the board, etc) then I'll put in up to 10 percent of my net worth (MAXIMUM).
If it is my own deal, I'll put in up to 25 percent of my net worth in any one deal.
Now the above is my criteria. Yours might be different, in fact, it almost certainly will.
Notice though the key distinctions I've made between the various degrees of control of an investment. The lower my personal control, the less of my money I am willing to risk. The only exception to these are conservative investment options that have virtually no risk to my capital (government bonds, money market accounts, etc.)
(There is a lot more about this topic that I will put into an online workshop for the Maui Mastermind Online membership site. I'll have it up by the middle of next week.)
That's it for this email. Have a great weekend!
My best to you,
David
P.S. For those of you who signed up for your free trial membership to Maui MastermindTM Online last time, thank you. What are the rest of you waiting for! Go ahead and take me up on this free 30-day trial offer. If you don't like it you can cancel and you'll never pay a dime. Plus you'll get to keep the $495 downloadable wealth course that new members like you get as a free gift just for trying it out! Start your free 30-day trial membership right now!
posted by David Finkel at 1:10 PM
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