How To Allocate Your Money for Maximum Returns & Minimum Risk
50036
Finance > Wealth Building
Oct 16, 2007
ayrhaven
How To Allocate Your Money for Maximum Returns & Minimum Risk
So with all these money multiplication strategies, where should you put your hard earned savings? How should you allocate your funds to generate maximum gains yet minimize your risks? I am sure you have heard of the term 'don't put all your eggs in one basket.' Even though you are going to learn how to achieve minimum risk & maximum returns in each basket, it is still wise to allocate your funds into different instruments with different targeted holding periods. In times of emergency when you need the cash, you can be sure that all your funds are not stuck in one place. Now, here is an important disclaimer. In most financial textbooks, they advise diversifying your funds into many different investment vehicles like bonds, stocks, mutual funds, money markets instruments as well as spreading your money across numerous different sectors and different countries to diversify your risks. To an average investor who has low financial competence and needs the wide diversification to lower risk, this makes sense. However, while this kind of broad diversification guarantees low risk, it also guarantees low returns of 5%-8%. I personally do not follow this strategy. Warren Buffett advises that 'broad diversification is used by people to protect themselves against their own ignorance.' If you know what you are doing (high financial intelligence), you should concentrate your portfolio into equities (stocks & mutual funds) as they achieve the highest return. And you can achieve low risk not by simply spreading your money around, but by your competence of knowing which funds and stocks to pick. So, the strategy I am going to share with you would be deemed highly risky by the general financial advisors and bankers. Again, it's because most investors lack the competence to do otherwise. However, with the strategies and knowledge you are gaining in this book, you will prove to yourself that it is actually low risk, high return strategy. Knowing how to allocate the money you save is the single most important decision that will lead to your financial goals. You should take your monthly savings of 15-20% and allocate it to four money baskets. These are the security basket, growth basket, high growth basket and the luxury basket. Let me explain each of these. 1. Security Basket (Target Return of 1.5%-4.5%pa) This first basket is as the name implies, for your security. The funds in this basket grow just enough to keep pace with inflation. However, they are there in case of emergencies. If you suddenly lose your job, experience a salary cut or suffer a setback in your business, you know that you will have access to these funds anytime to see you through. This basket should include cash, fixed deposits/certificates of deposits, personal housing, insurance & capital guaranteed funds. 2. Growth Basket 1 (Target Return of 8.51%-20%pa) This is the basket where you build your net worth & positive cash flow assets that will lead you to financial freedom. This basket is where you put your money into index funds, Exchange Traded Funds (ETFs) and mutual funds. You should also divide your funds between the US market and Asian markets. Although mentioned earlier that Asian equities have disadvantages, we cannot deny the huge growth opportunities that Asia offers (especially India and China). 3. Growth Basket 2 (15%-25%) This is the basket where you ACCELERATE the building of your net worth & positive cash flow assets that will lead you to financial freedom. Once again, you should not have to touch this money for five to ten years to let the power of compounding work its magic. This basket is where you put your money into a winning portfolio of ten to twelve company stocks. And again, you should hold some Asian stocks as well as US stocks. 4. Luxury Basket (0%) Your luxury basket is where you save up to indulge in your dream assets. This is money that you can afford to spend on things that are fun like: Upgrading to a dream house, luxury cars, jewelry, boats and other luxuries. Again remember from the chapter on 'How the rich manage their cash flow' that the money to be used for luxuries should not come from your primary source of income, but from the passive income generated from your positive cash flow assets.
Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26. Discover his million dollar secrets and claim your FREE bonus report 'Get Out Of The Rat Race Now' at Secrets Of Self-Made Millionaires.
send email to ayrhaven
Write a Review
Add to My Favorite
Refer it to Friend
Report Article
Other links owned by this user
I am sure that no matter where you are in your career, you desire to create more income for yourself. For most people, only two options come to mind. Either they work much harder in their job and hope their boss notices their efforts and gives them a rais
Category:
Like it or not, our beliefs play a big role in determining the quality of our lives.
Category:
There are three major steps that master investors take and they are: 1) identify very good businesses, 2) buy them only at a huge discount and 3) wait for the market to realize its true value or overvalue it.
Category:
The first step to take to increase your savings is to start reducing your expenses. So what is the first expense you must reduce and eventually eliminate? It is the interest expense you pay on consumer debt.
Category:
Besides taking steps too increase your value, you must also increase the time you spend creating value to boost your income. If you are self-employed, then you are usually paid by the hour or by the job. So obviously, when you work longer hours and more d
Category:
Let me give you an example of how I lost a potential $4,900 a day when I first started out in the training business by spending too much of my time on the wrong sort of work. Like every small start-up business person, I was a one-man show. Naturally, I ha
Category:
A lot of people asked me, Do you know that all the books you've written have become bestsellers? Did it happen by chance? The answer is no.
Category:
It is not just WHAT we think about that determines how we feel, but also HOW we think about it. Has there been a time when you thought about something you werereally motivated to do, like going shopping?
Category:
Many people have the wrong idea about what being a millionaire is all about. Many also equate instant gratification with happiness. They believe that millionaires live lavish lifestyles and all that self-indulgence brings lasting happiness.
Category:
In fact, when used properly, credit cards are a very powerful wealth-building tool! I use credit cards for every single possible purchase. By using credit cards you get...
Category:
Before you can ever reduce your expenses and increase your savings, you must first know where your money is going to. Many people share the same experience of having no idea where their $5,000 salary went. 'How did I spend so much money?' 'I thought that
Category:
Let me illustrate to you a very well known example of the power of goals. In 1952, there was a research study done on the impact of goal setting on the graduating batch of students at Yale University.
Category:
Well it's time to study the expense column very closely and identify where you can cut your expenses. You will be surprised to know that we can easily do without between 20-30% of our monthly expenses.
Category:
Here's a question most budding writers encounter before writing a book, and that is, Where did you get your ideas from?
Category:
A lot of people think that for them to write a best selling book, they must be an excellent writer. That you must use flowery and complicated language, a level or standard equivalent to that of a degree or PHD holder.
Category:
So with all these money multiplication strategies, where should you put your hard earned savings? How should you allocate your funds to generate maximum gains yet minimize your risks?
Category:
Mention the word 'stocks', and many people have painful experiences to narrate. Stories abound of how people have had their life savings wiped out overnight.
Category:
People always say, What if it is really not my fault? What if the situation is totally out of my hands?
Category:
Let me give you an example to illustrate the power of compounding. Let's say we played a game of golf and we made a friendly bet of 10-cent on the first hole, with the bet doubling on each hole. Would you take on this bet? Now, if you were familiar with t
Category:
Other links at Finance > Wealth Building
Have you ever wondered how much money you would need to start investing? If you?ve ever thought that you did not have enough money to begin with investing, I?ve got some good news for you. My name is Sam Chim and I am the owner of
Category:
Let me give you an example. Let's compare a doctor and Madonna. Now who creates more value? Who creates more value per person? I would say a doctor because a doctor can save your life, a heart specialist.
Category:
If you are looking for a way to compliment your primary source of income, consider creating a stream of residual income. Residual income builders are everywhere these days, thanks to the world wide web...
Category:
Many of us would wish for money, lots of it! Don?t we all want to be rich? It is everybody?s dream. For some people, getting rich is one of life?s ultimate goals. Many make the mistake of using money to define them as a person.
Category:
You have taken the bold step and left your $200 a week job at the fast food joint in your small hometown. You have courageously uprooted and left your hometown to enter big city life. You slide into a job that pays you $3000 a month. What has happened?
Category:
Site Sponsor
Directory Statistics
Articles: 68252
Categories: 501
Yahoo Entertainment
