Personal Finance Learning Guide

<aside> 🗒️ In this section: We discuss different investment portfolio strategies worth considering and our take on what may be best for you.

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What is a Portfolio Strategy?

An investment portfolio represents the full set of investments you currently own. A portfolio strategy decides how you allocate your $$ (e.g. which assets do you own and how much of each). Strategy is largely influenced by how much risk you want to take (higher risk = higher profit but also higher risk to lose $$).

General 🔑s

<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/6d43e6eb-0be1-4f36-b232-466144c15c1a/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/6d43e6eb-0be1-4f36-b232-466144c15c1a/Favicon-simplify.png" width="40px" /> There is no "right" strategy. Everyone has different expertise as well as different risk profiles. Pick the best strategy for you. Listen to one of our faves Morgan Housel on why personal finance is more "personal" than "finance".

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<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/94ca070d-7b8d-4da1-9350-f74e6bee32ad/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/94ca070d-7b8d-4da1-9350-f74e6bee32ad/Favicon-simplify.png" width="40px" /> Your strategy may change over time, but don't change it often.

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<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/f292e9c4-a66c-4ae3-a122-1b30b059df8d/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/f292e9c4-a66c-4ae3-a122-1b30b059df8d/Favicon-simplify.png" width="40px" /> Diversification (choosing different types of assets vs. selecting a few) is important to manage risk. For example, investing in many different assets helps protect yourself if something bad happens to one of your assets.

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Common Strategies

"Risk Off" (No Risk)

This strategy involves investing all of your savings in low-risk, low-return assets, including savings accounts and government treasuries (bonds) which typically yield 1-2% annual return.

"Passive" (Low→Medium Risk)

This strategy involves not spending active time in selecting specific assets and betting on broader categories. Common strategies include 1) investing in popular ETFs such as $SPY (S&P 500) or large, well-known companies such as Apple, 2) using apps like Wealthfront/Betterment that auto-select the best funds for you, and 3) investing in real estate by owning the home you live in. The benefit of this approach is less stress and steady gains that will compound over time. In fact, the F.I.R.E movement (financial independence, retire early) advocates for this strategy.

"Barbell" (Medium→High Risk)

The barbell strategy is to bet on no or low-risk (savings accounts or ETFs) and high-risk assets (such as specific stocks or crypto) simultaneously, without betting on medium risk assets. This strategy has been shown to produce high profits when risky bets pay off, but does require more attention to manage your portfolio. It's advisable to only allocate the % of your portfolio you are OK losing to high-risk assets.

When to Re-Consider Strategy

There are several events that could cause you to re-consider strategies. Here are a few examples:

1. Interest Rates are lowered (or below ~3-4%) - Because interest rate directly impacts the return on government bonds (e.g. US Treasuries), its advisable to invest less in "No Risk" assets and more in medium → high risk assets when this happens. Loans are also based on interest rate, so this is also a good time to invest in real estate or start a business.
2. Interest rates are raised (or above ~3-4%) - When this happens, its advisable to do the opposite of #1 (invest more in no or low risk assets).
3. Opportunity Knocks - You can't control when opportunity knocks (you hear of a new company or real estate property not many people know about, your friend is starting a company and needs investment, etc). When it does, consider using your allocation of your "high-risk" investments towards these.