How Do I Invest My Own Personal Money?

Our topic on this episode of the Ready for Retirement podcast is about the framework behind how I invest my own money.

Questions answered: How do I invest my own money? What are the strategies I’ve learned when it comes to creating an investment portfolio? My goal is to give you a framework as to how I think about money.  

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Key Points

• Financial Framework
  • I like to think about everything in terms of premiums.
    • What’s the extra return I can receive and what’s the risk associated with it?
  • Example:
    • Let’s assume you own a significant amount in cash.
      • There’s no risk today (although very risky long-term). 
    • Let’s assume you own CDs (Certificates of Deposit).
      • There is a premium because there is a time-premium. 
      • A CD will earn you .5% – 1% and this time-premium locks up your money for a certain amount of time, which gives you more of a premium. 
    • Let’s assume you own bonds.
      • In addition to the time-premium, there is interest-rate risk.
        • If you own a bond and interest rates go up, the price of your bond will go down.
        • An investor wants to be compensated for this risk because there is time and interest-rate risk.
    • Let’s assume you own blue-chip companies.
      • There is a premium because of a degree of uncertainty involved with owning it.
    • Let’s assume you own small-companies.
      • There is a higher premium than owning solely blue-chip companies because of the additional uncertainty involved.
    • Let’s assume you own value companies. 
      • Value companies have historically performed better than the market because of the additional risk involved.
• Questions I Ask Myself
  • I don’t just ask myself the risk and return tradeoff involved in an investment, but I ask solely: “What is risk?”
• Standard Deviation
  • Risk is very different to all of us, but when people discuss risk it is generally measured by Standard Deviation.
    • Standard deviation looks at the average return of an investment, and specifically how much does the real return deviate from what you expect the average to be.
      • The greater the standard deviation, the greater the deviation from what you expect that return to be.
• Risk
  • Risk can not be boiled down to a single number.
    • What is risky to you may not be risky to your neighbor. 
    • People tend to look at risk as if it’s a standard formula for everyone, but it’s just not the case.
• My Investments (Passive)
  • *This is not a recommendation, but my perspective on how I invest and the framework I use to determine what makes most sense for my goals. 
  • I don’t own any bonds today.
    • There is a premium and risk involved in owning stocks.
  • How can I mitigate the risk involved with owning stocks?
    • Do you have an emergency fund?
    • Do you have an income source?
    • Can I maintain perspective?
      • If there’s not an understanding of how stocks perform historically, it can often be devastating if you take your money out at the wrong time. 
  • In 30 years from today, I would still be 100% stocks. 
    • I will have enough funds in conservative investments that don’t cause me to have to sell investments when there is a market downturn.
    • How can I get as much return as possible while minimizing risk as much as possible?
      • It’s about perspective.
  • I take advantage of after-tax strategies that will allow my funds to grow tax-free forever.
  • I invest in a globally diversified all-stock portfolio that’s tilted towards companies with higher premiums and higher profitability. 
  • I own individual stocks because it’s fun. 
    • I would never do this with my core portfolio, but I enjoy owning individual stocks. 
• Non-Passive Investments
  • Going back to the “premium” concept, when I’m looking at an investment, I like to review the time and effort involved with doing so.
    • The stock market is truly passive.
  • There are non-passive investments like owning real estate or starting a business and these investments can be extremely profitable, but the question I ask myself is, what’s the premium involved with owning them?
    • Real estate can be a great investment, but what’s the work and time involved with doing so?
      • If you’re hoping to receive a 13% or 14% return each year on your investment and enjoy the duties of being a landlord, real estate may be a great investment. 
      • In other cases, you may find the work involved with managing tenants doesn’t make the additional return worth it.
    • What’s the opportunity cost?
      • Real Estate comes with insurance, property taxes, liquidity, etc. and the extra work involved may not be worth it to certain individuals. 
  • Should you invest in your business?
    • Oftentimes individuals who are seeking more return will turn to real estate because of the additional return that can be achieved. 
      • However, there is sometimes even greater return potential investing in your business.
    • Example:
      • What if you could invest in your business and get 25% return?
        • Investing your time and energy in too many outside investments can cause your great investment to often lag behind.
        • What about the impact investing in your business has from the non-financial perspective? Can you spend more time helping clients?
        • My greatest financial investment is my business and I’m fortunate that I enjoy taking the time and effort needed to grow my business. 
• Third Layer
  • The first layer I outlined are the passive investments.
  • The second layer that I outlined are the non-passive investments.
  • The third layer and most important aspect is you.
• You
  • Can you align your investments with what you care about most?
  • Once you have the financial piece in order, can you create a lifestyle that allows you to use your finances to support that lifestyle?
• Time
  • I view my finances as either 1) spending money or 2) investing money.
    • I view time the same way. Am I spending time or investing my time? 
      • Investing time is quality time with my spouse and what I feel is most important. It’s the return on life.
      • Spending time is more transactional. It’s not building anything, but sometimes it’s simply needed.
    • Example
      • I do not enjoy grocery shopping and I’ll happily pay that cost if it saves me time to allow me to do more of the things I enjoy doing. 
        • These additional hours create a return on life and I view this as an investment. 
  • A sign of a great financial plan is a plan well lived.
    • We are all our greatest asset. 

Timestamps

2:23 – CD v. Bonds

4:57 – What is Risk, really?

9:28 – Perspective Importance

13:21 – Real Estate Benefits

17:46 – Understanding Using Time

18:34 – Investing Capability

21:58 – More Than Money

25:15 – Your Greatest Return

28:31 – Aligning Your Investments With Your Financial Goals

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