Most potential aspiring investors are often faced with one question, how to invest XYZ amount of money to maximize returns while minimizing risk. To answer that question here is a 5-step framework that should help most people evaluate their investment models/strategies. This is just a teaching session and not investment advice. Please speak to a personal finance professional to help you make specific decisions about your investments.
1. Balance risk and returns
You can’t maximize returns while minimizing risk. Life doesn’t work that way. It’s “high risk, high returns” – stock, seed stage investment, cryptocurrency, day trading, etc. or “Low risk, low returns” – bond, money market, CDs, treasury bills, etc.
2. Diversify
Luckily, you don’t have to choose “high risk, high returns” or “low risk, low returns”. Instead, you can diversify your investment to incorporate elements of both strategies through an investment portfolio. A portfolio balances your risk and rewards. Don’t ever put all your savings in any investment instrument. Diversification is the only way to play the investment game. Don’t ever buy a single stock; a mutual or index fund diversifies your risk. Always diversify.
3. Create your portfolio
Split your investment funds into 3 buckets:
- Long-term aggressive bucket (LAB): Money you won’t need in 5 -10 years (retirement planning).
- Medium term balanced bucket (MBB) in 1 – 5 years.
- Short-term liquidity bucket (SLB) within a year.
Assign instruments to the 3 buckets:
- LAB: Stock mutual funds, index funds, real estate, cryptocurrencies.
- MBB: Treasury bills, money market mutual funds, bonds, CDs.
- SLB: Fixed deposits.
Assign percentages to each bucket. Older investors need to be more conservative than younger ones. For example:
- 60 years old
- LAB – 40%
- MBB – 40%
- SLB – 15%
- 45 years old
- LAB – 40%
- MBB – 40%
- SLB – 15%
- 25 years old
- LAB – 65%
- MBB – 25%
- SLB – 15%
4. Stick to your principles
When a sweet investment deal comes along:
- Place it in one of the buckets.
- Review your percentages.
- Decide how much you can put into it without messing with your portfolio percentages.
Don’t ever put all your savings in any investment.
5. Start today
If you have $500, create a portfolio and invest accordingly. Don’t just keep your money in a savings account, always invest a portion of your savings. But remember, not to invest more than 50% of your savings in a single instrument.
