Is it possible to build a portfolio that will build and secure your wealth while still generating sizeable returns, in any financial climate?
I think so.
I hate hate hate the “D” word – Diversification. When it comes to getting rich, I think portfolio diversification is one of the biggest lies sold to the masses. Diversification is a strategy for the already rich!
And that’s what this post is about – how to construct a portfolio that will keep your wealth secure while continuing to grow it regardless of the market conditions at the time. This is not for people looking to build wealth, as diversification actually lowers returns over time.
Everyone always picks on Jeff Bezos. Well since 2006 Amazon returned an average of 558% return each year. A lot better than a “diversified portfolio” of 500 stocks that averages 8% a year.
Cash is the backbone of any portfolio
“Cash is king” – this is investing 101. You should always carry enough cash to cover 2 things – potential opportunities to invest in and emergencies. Being stuck without cash can be a disaster. You have to use debt financing, which is expensive, and sends your net worth in the opposite direction of what you intend.
How much cash to hold is another question entirely. Some people recommend a 3-month buffer, others a 12- or 24-month “emergency fund”. As for your non-emergency cash – anywhere from 0-50% of your portfolio or more can be appropriate. For myself, I try to keep it at around 20%. This is sizeable enough to take advantage of just about any investment opportunity I may want, but also not so much that I feel like I’m barely making anything on my investments.
When I am a little light on cash, it’s time to sell some winners (or losers, if I have any) to rebalance. Otherwise, if I’m too heavy into cash, I start hunting for my next opportunity.
Stocks for appreciation and yield
Rather than owning a broad-market index, I prefer to pick and choose specific stocks of companies I believe will do well for years to come. Not only do stocks increase in value, but they can also provide 2 streams of income. More on that in another post.
Most people are afraid to pick individual stocks and “get it wrong”. This definitely happens a lot but generally owning strong companies for the long term will outperform the market. Easier said than done, but I’ve managed to do okay so far. Right now stocks make up about 50% of my portfolio.
Precious Metals provide portfolio security
Hardly anyone owns gold and silver, the two “monetary metals”. Yet they are the ultimate hedges against inflation and have been the best investments at various times throughout history. I believe this is another one of those times, and so do some of the best-educated investors of our time. Mike Maloney wrote the best “Guide to Investing in Gold and Silver“, which is actually the book that got me interested in investing and personal finance to begin with!
With gold and silver, a little bit goes a long way. You should really aim for less than 10% of your portfolio in metals, unless you are going through currency collapse and hyperinflation, at which point you should probably have it closer to 90%. In the event of a currency collapse, that 10% may turn into 90% without you having to do anything, which is exactly what gold and silver are for.
Real Estate as the biggest wealth generator
Rental income, tax benefits, price appreciation – what’s not to love? Real estate is hands-down one of two things that the ultra-successful use to get rich (the other being owning their own business). There are so many benefits to owning real estate, that while you’re trying to get rich it’s one of the most surefire ways to climb the later. But as a wealth preservation mechanism, real estate is almost without peer. Being able to generate tax-advantaged income through renting is what sets real estate apart – the yields are often far higher than with other assets.
10-20% of your money into real estate can set you up with a recurring source of revenue that nobody can take away from you!
With the advent of Cryptocurrency an entire generation of millionaires has been minted out of virtually nothing (ha!) Digital currencies and blockchain technology are among the most popularized alternative assets, but other things like mineral and oil rights are available as well.
These types of investments are generally the most volatile and risky, but can also be the most rewarding. They can add depth to your portfolio with assets that aren’t correlated like stocks, bonds, and currency tend to be. For myself, I keep between 10 and 20% of my portfolio allocated to alternative assets. Watching your money 10x in less than a year is a hell of a drug!
Putting it all together
So what does this all look like? Below is a simple example portfolio, and happens to be approximately where my money is currently invested as of the writing of this (August 2021):
So there you have it! A great portfolio allocation to keep and grow your wealth through any market conditions. Disagree? Let me know about it – I’d love to hear your thoughts!