By, Dr. Tayo Oyedeji
I get hundreds of emails daily asking me how to invest XYZ amount of money to “maximize returns while minimizing risk”. I will try to provide a 5-step framework that should help most people evaluate their investment models/strategies.
Step 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 inv, crypto, day trading etc or “Low risk, low returns” – bond, money market, CDs, treasury bills etc.
Step 2a. Diversify. Luckily, you don’t have to chose “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.
Step 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 inv, crypto, day trading etc
"Low risk, low returns" – bond, money market, CDs, treasury bills etc.
— Dr. Tayo Oyedeji (@tayooye) September 17, 2019
Step 2b. Diversify. 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. Repeat after me…ALWAYS DIVERSIFY.
Step 3a: Create your portfolio. Split your investment funds into 3 buckets: 1. Long-term aggressive bucket (LAB) – Money you won’t need in 5 -10 years (retirement planning) 2. Medium term balanced bucket (MBB) – 1 – 5 years 3. Short-term liquidity bucket (SLB) – within a year
Step 3b: Create your portfolio. Assign instruments to the 3 buckets: 1. LAB – stock mutual funds, index funds, real estate, crypto-currencies. 2. MBB – treasury bills, money market mutual funds, bonds, CDs 3. SLB – fixed deposits
Step 3c: Create your portfolio Assign percentages to each bucket. Older investors need to be more conservative than younger ones. Eg 45yo LAB – 40% MBB – 40% SLB – 15% 25yo LAB – 65% MBB – 25% SLB – 15% 60yo LAB – 20% MBB – 50% SLB – 30% Take some time to understand this.
Step 3c: Create your portfolio. My preferred (43 year old married guy with kids) portfolio is: LAB – 25% MBB – 60% SLB – 15% Yep. I am very financially conservative and I hate losing money.
Step 4: Stick to your principles. When a sweet investment deal comes along: 1. Place it in one of the buckets. 2. Review your percentages. 3. Decide how much you can put into it without messing with your portfolio percentages. Don’t EVER put all your savings in any investment.
Step 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. You may need to google some of these concepts to fully get it. But don’t allow that to stop you.
Global caveat: This is just a teaching session. It is not investment advise. Please speak to a personal finance professional to help you make specific decisions about your investments.
Summary: 1. All investments have some degree of risk. 2. Diversify to balance risk and return. 3. Create a portfolio (multiple investments). 4. Stick to your principles. 5. Start now. PS: Don’t EVER invest more than 50% of your savings in a single instrument.