Saturday, September 20, 2008

Buckets ? Your Way To Wealth

Self managed superannuation, share trading, derivatives, all topics once spoken by only the financial elite are now common subjects at dinner parties and Friday night drinks. Learning how to manage and build your own investment portfolio is quickly becoming one of the most popular topics on everyone?s lips.

This interest in financial planning has been fueled by a rapidly aging population who have realized that their lifestyles will be substantially compromised if they do not become much more financially literate and responsible.

In addition, the introduction of the Internet, financial seminars and software have all empowered the Arm Chair Investor to manage their own money. However, many of these home based investors have had little or even no formal training in funds management. Now, while it is not a pre-requisite to have a degree in order to profit from various investments, it is imperative that investors understand the basics, have a clearly defined investment strategy, realistic goals and appropriate asset diversification.

Now while we all have clear financial goals ? to make more money ? many do not appreciate the importance of sound asset allocation, or diversification. Many people have made the mistake of putting all their capital into only one investment. Diversification is critical to the success of any long term investment strategy. But, by diversifying, you must balance your investments based on risk and reward. Putting all of your money in the bank may be very secure, however, your overall return will suffer. Conversely, using all of your money to trade in options may produce very high returns, but the risk is very high that you could lose the lot. Therefore you must allocate your assets to suit your personal level of risk tolerance.

Investment Buckets

What are Investment Buckets? Well, at Platinum Pursuits, we like to make investing fun and easy. So when we looked at the topic of Asset Allocation, we likened it to buckets.

In order to protect your money, maximize your investment returns and ensure that you always have sufficient capital to meet your lifestyle, you must properly allocate your funds.

To do this, we think of using buckets. We have two buckets to consider, the Safety Bucket and the Growth Bucket.

Safety Bucket

The safety bucket is like a safety net. This is where we put our safe, secure investments and assets, such as our house, term deposits, insurances, etc. The safety bucket will not produce a good return, but then, that is not its purpose. It is there to ensure that we can always meet our financial commitments and that we never risk our most important assets, such as our house.

Depending on our age, risk tolerance and desired returns, the amount of capital you allocate to your safety bucket will vary, however, you should look to investing between 10%-30% of your capital. If you are nearing retirement, or financial independence, you may choose to increase that proportion, but when still acquiring assets, it?s best to keep the safety bucket as small as possible, whilst still achieving its purpose.

Growth Bucket

The Growth Bucket, by virtue of its name, is obviously where we want to allocate our high return investments. Assets such as investment properties, shares, derivatives, etc. Now, to achieve a high return in your growth bucket, you must be prepared to make a loss. Even the world?s most outstanding investors have lost money many times. However, by properly allocating their funds, they have been able to come back from those losses to continue building their portfolios.

Within the growth bucket, you should consider segmenting the bucket into Short Term Momentum investments, such as short term stock, option and CFD trades, and Long Term Growth investments, such as blue chip shares, covered calls and investment properties.

The point is that you develop your plan and stick to it. Again the choice is yours. Most successful investors adopt a 40-60 rule, in that they allow for 40% of the growth bucket to momentum trades and 60% to long term.


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