Example Portfolios: How to Allocate Your Money

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At this point in the class, you know a lot about different investment vehicles and about how to assess risk and reward when it comes to allocating your money.

But you may still have some questions and to make things even easier to understand, let's look at some example scenarios. Here are different ways in which someone could allocate money and we'll look at pros and cons of each one.

As always, the most important thing is to clearly think about what you want to do with your money, how you want to allocate it, and how much risk you want to take on.

Then design a strategy because you understand why you are making these deliberate decisions. We are increasing your personal power in this lesson here. 

Personal Runway vs. Investments

One question that you'll almost certainly have in the early stages of wealth building is this: should you build your personal runway first and only start investing once you have that done? Or should you build an investment portfolio in parallel with your personal runway?

Let's say that the gap between your income and expenses every month is $500. Meaning you have $500 to allocate towards your Personal Runway and investments every month.

Let's look at the 3 different approaches to see how you will be allocating this $500 every month.

100/0 Approach

  • You have a target runway number and you're going to put all extra money into your Personal Runway account until that number is reached.
  • The goal is to get to your target runway number as quickly as possible, so you allocate all of your "gap" money to it. In our example, this means putting $500 into your personal runway.
  • Once your traget number is reached, you can flip this around and allocate 100% of your "gap" money into investments.

90/10 Approach

  • In this strategy, you allocate 90% of your gap money to your personal runway and 10% to investments.
  • In our example, with $500 available, you'd put $450 into your personal runway and invest $50.
  • This is a good approach to build your personal runway up quickly, but already dabble in investments a bit, so you gain some experience and can hit the ground running, once there's more money available to allocate.

50/50 Approach

  • As you can guess, with this approach, you split your available cash 50/50 between your personal runway account and investments.
  • In our example, out of $500 available, you'd put $250 towards your runway and $250 into investments.

Once you reach your target number for your personal runway, you face a similar question: should you go all in on investments? Or should you keep allocating some of your cash to increase your savings further?

If you're wondering which approach is "the best", the answer is: nobody knows. In retrospect, you could tell that one or the other would have been more advantageous, but looking forward, you can't know. During a period of growth in assets, going 50/50 will turn out to have been the better option. But if you allocate a lot to investments and there's a downturn in asset prices, you'll probably wish you just would have put everything in your runway instead...

Portfolio Examples

Once you start allocating money to investments, there are more questions. Which assets should you invest into? How much should you allocate to savings, how much to low risk investments, how much to higher risk investments?

As always, there is no "right" answer, but we can look at a few examples to learn how to make better decisions.

Early Stage Portfolio

Brief: In an early stage portfolio, majority of your money will be held in cash (this is your personal runway) with some small percentages allocated for investments. This is simply part of the early stage, because even with 80% in cash, your runway will still be short.

Purpose: build your personal runway.

Risk Tolerance: low

Downside: your cash is subject to inflation and will lose its value slowly year over year.

Risk Averse Portfolio

Brief: keep a lot of cash and allocate some money to "safe" investments like diversified investment funds.

Purpose: have cash at hand and try to grow your portfolio value without exposure to large price movements.

Risk Tolerance: low

Downside: wealth will grow slowly and perhaps not keep up with inflation at times. When larger than expected price movements happen despite the investments being "safe", you might panic and make bad decisions.

Growth Focused Portfolio

Brief: cash for your personal runway, everything else allocated to growth assets like stocks, real estate, crypto. This only makes sense once your net worth is at least 2x your personal runway.

Purpose: put your money to work and try to catch the upside of growth assets.

Risk Tolerance: medium-high

Downside: the value of this kind of portfolio will move a lot. You have to be able to stomach large gains and losses without freaking out.

High Income Portfolio

Brief: proportionally small runway, large allocations to medium and high risk growth assets. Small portion allocated to "moonshot" investments. This can make sense if you have a high income.

Purpose: with a high income, you're already well off, so you can take on more risk. Goal is to have your investments make a real difference, rather than just grow slowly.

Risk Tolerance: high

Downside: if your investment thesis is wrong, losses from high risk assets could wipe out gains from lower risk assets.

"I have a gambling problem" Portfolio

Brief: little to no personal runway, large allocations to concentrated bets and moonshots (individual stocks, options, meme coins).

Purpose: Lambo-or-Ramen approach. If it works, you're a legend and overnight millionaire (but it probably won't work).

Risk Tolerance: stupid

Downside: you will probably lose everything. Because so much is on the line, price swings will lead to even more irrational behavior and get you totally wrecked.

Now, you can think through your own scenarios and figure out what you're comfortable with.

The key point here is to make a deliberate choice about how you allocate your money. The mistake lots of new investors make is that there is no strategy behind their actions. When someone throws a bunch of cash into a meme stock because it's hot on TikTok right now, they are basically building that "I have a gambling problem" portfolio, but they don't even realize it.

So, as long as you understand what you're doing and you're doing it on purpose, you're ahead of the curve already.

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