How To Design Your Investment Portfolio
How you structure your investment portfolio is one of the most important components of creating financial freedom AND ensuring the stability and sustainability of your freedom.
How you design a well asset allocated and diversified portfolio is
THE INVESTMENT PYRAMID!
The investment pyramid is the juiciest, sexy thing.
Once you understand this, it will transform your life, well your investing life at the very least.
The investment pyramid gives you a framework to structure your asset portfolio, understanding what you should be investing in, what percentage of your investments should be in each asset class and within an asset class, and how to balance the assets you invest between speculative investments and solid “boring is beautiful” investments to stabilise the volatility of your overall portfolio.
That’s what this video is all about. Watch it now.
When people chat with me about their money stuff, inevitably this question comes up…
“Ann, what should I invest in?
Should I invest in this or that?"
And I go,
"I haven't a clue because I don't know what your overall Investment Pyramid looks like. I don't know what other assets you have or what else is going on in your money world."
Don’t make money choices and investment decisions in isolation.
Make these decisions within the context of your overall wealth ecosystem.
Assets give us freedom because assets grow in value and earn income without us having to be involved. Having assets working for us, is the name of the game.
And we need a spread of assets, a mix of different asset classes and diversification in our assets to provide stability and sustainability.
It’s the old adage - “Don’t have all your eggs in one basket.”
When it comes to your wealth, you definitely don’t want all your eggs in one basket and you also don’t only want eggs.
So how do you “design” your asset portfolio to give you the asset allocation and diversification you need?
That’s where the Investment Pyramid comes in, it’s an investment template.
THE INVESTMENT PYRAMID EXPLAINED
The civil engineer in me is a supergeek and knows that a pyramid is the most stable structure in the world. A four or three sided triangular structure is the most solid, stable structure there is. Almost indestructible and you certainly can't push it over.
A nice, wide base with a small tip gives it this great solidity and safety - able to stand the various storms and trials of life - which is what you want from your investment too.
You want this structure in your assets portfolio.
You want this great, solid, stable asset portfolio that you can rely on because it's your financial wellbeing it's supporting.
The aim of your investing is to create a four-sided asset pyramid.
Each side of the pyramid represents one of the four different asset classes.
You want at least three different types of assets (also called asset classes) in your portfolio because each asset class tends to fluctuate in different cycles. This gives you asset allocation and diversity across asset groups, which in turn makes your investing safer and more stable.
The first asset class is Liquid Assets.
These are your stocks and shares also called equity. Equity just means shares in businesses. It can also be referred to as intangible assets or even paper assets.
Investments that fall into this asset category are your index tracker portfolio, shares in companies, unit trusts or mutual funds and also private equity shares.
If you haven’t yet set up your automated index tracker investing, watch this free training to get going >>> Free Savvy Investor Webinar.
The second asset class is Fixed Assets.
Also called tangible assets because these are things you can touch. The biggest asset group in this asset class is real estate also called investment properties.
The third asset class is Low Input Businesses.
I LOVE low input businesses and I hate the word Passive Income Businesses because why would we want to be passive in our life and anyway, there is no such thing.
A Low Input Business is where you are no longer the one exchanging your time for money.
The business uses systems, processes, equipment, and other people’s time to do the value exchange.
This is all about leverage.
This is why it is low input. You do the work and set up once and then the leveraged mechanism, system, process etc keeps delivering the value for you and keeps the money flowing in.
This could be your online business where you sell knowledge and use automated systems to deliver the content and hence the value. The Wealth Chef is an example of this.
It could be a royalty business through photography, music or writing.
It could be an e-commerce business where you are sell stuff over the internet
Also included in this asset class are residual income businesses like multi level marketing and referral programmes and also brick-n-mortar businesses where machines and automation doelivers the value such as vending machines, automated car wash, automated laundry, etc.
The fourth asset class is YOU! You are the most important asset you have hence you are part of this asset pyramid.
Where most people start off their wealth creation life, they are the only asset they have to start off with. To exchange value and earn income. Exchanging your value into the world is fabulous, and it's super important we don’t make active earning a bad thing. The problem comes if you only have you and never get these other asset classes working for you.
When you recognise yourself as an asset you make sure you keep investing in you. You keep expanding your knowledge and skills not only to earn more, but also to know how to create these other assets and look after them so they can support you and earn for you.
Your wealth can only expand at the rate
you expand your ability to manage it.
Your assets and your wealth can only grow in direct proportion to your ability to manage your money. Your ability to earn it, to keep some of it, to invest it, to grow it, and manage it in a way that is sustainable and healthy.
You must ensure that you keep expanding you - your knowledge, your skills, your self worth, your education, your beliefs - all the aspects of you as an asset.
You could have a three-sided pyramid but you absolutely cannot have just you or you and one other asset class.
I see so many entrepreneurs creating their own business, they start earning money and they just keep plowing that money back into the same business.
They use phrases like… “I’m reinvesting in my business, I'm growing my business”.
This is so dangerous. You must take profits out of a business and diversify into other asset classes. If you don’t it is exactly the same as having a job and never investing any of the money you make.
If you only have you earning an income through a job or your own business, you are putting yourself and your financial wellbeing at serious risk.
If that’s all you have – you don’t even have all your eggs in one basket. Hell you don’t even have a basket. You just have a single egg!
You are wandering around with this one egg and hoping that will feed you for life - that is super dangerous.
Your aim is to have at least two asset classes and yourself, growing and expanding.
But it doesn’t end there.
Let’s look at the vertical axis of your Investment Pyramid.
The Investment Pyramid is designed with a nice, broad fat-assed base.
The base of each asset class within your pyramid forms your solid, reliable asset base. This is where you want your boring, consistent, reliable, juicy, safe investments sitting.
In your equity / liquid / intangible asset class this base is made up of your:
- cash safety net,
- loan instruments (bonds and fixed deposits),
- index tracker funds.
Your regular, automated investing and saving gets put onto autopilot and fills up the base of your pyramid and forms the bulk of your wealth.
In your investment property asset class, the base of your pyramid will include:
- REITS ( Real Estate Investment Trusts) and Property ETF’s
- property crowdfunding / fractional ownership investments and
- positive cash flowing directly owned buy to let properties
The vertical axis of the pyramid is about volatility.
As you go up and add investment types higher in the pyramid, so does the volatility of your investment.
I don't like using the word “risk”, because when people hear the word “higher risk investment” they think investing is scary.
Investing isn't risky,
risky is never having assets working for you.
So let’s use the word volatile instead.
If you choose to invest in very volatile, speculative investments, like crypto’s , pot stocks and venture capital and startups, that sit right at the top of the pyramid these should only form a tiny percentage of your investment capital. You must cap your speculative investing to under 10% of the value of your wealth generating net worth.
And… You also only consider them once you have your solid base of index trackers, and broad market real estate investments in place.
Sadly, many people rush to these sorts of investments, looking for the “ONE THING” that will solve their money problems and make them rich.
This lottery mentality of chasing the one big thing, is a guaranteed way to stay poor.
Get your pyramid working for you by selecting which asset classes you will focus on and start building from the bottom up.
Keep expanding you and keep getting assets working for you so you can focus on living your amazing, juicy life.
Big love
Ann
