Where do I invest my money? (Part 1 – What is my investment strategy?)

This will be a 4 part series of articles and this is the first part.

“Hey I have $10,000 – Should I invest in Bitcoin? Tesla stock?? Tell me the next hot stock tip! My uncle told me about this new internet company I can buy stock in – should I buy their stock?” I have heard all of these statements and many versions of these and I wince inwardly when I hear them. Not because I have something against investing in Bitcoin or Tesla. But I often wonder if these people have asked some fundamental questions before they decide to pursue that hot stock tip. My first question is, do you have an investment strategy? If you do and the investment aligns to that, great. 

When someone asks me, “where do I invest my money?”, irrespective of whether you want to invest $100 or $1M, the very first thing I want to make sure is whether it aligns well to their investment strategy before jumping into the nuts and bolts of identifying areas to invest. But wait – investment strategy? That sounds complicated – right? 

Let me explain. At the heart of it, a basic investment strategy involves 3 basic things – asset allocation, asset location and your personal investment philosophy. I will explain those briefly today but wont go into too much detail in this article – each of those topics warrant their own article which I will hope to cover in the future. As always, I am going to provide you a framework on how to think about this – I will not suggest or recommend where you have to invest. You need to consult with your financial advisor on that. This article is meant to only be a starting point to have a more educated conversation with your financial advisor. But before that, let’s ground ourselves on the basic asset classes. Below are the different broad asset classes:

1. Stocks / Mutual Funds / ETFs (Exchange Traded Funds) 
2. Bonds 
3. Cash and currencies (including cryptocurrency – I know some folks will see cryptos esp Bitcoin as a separate asset class but for now, lets keep this simple)
4. Real Estate 
5. REITs (Real Estate Investment Trusts)
6. Commodities including gold 

Asset allocation 

The very first question to answer before you decide to make any investments is to understand what your asset allocation strategy is. An asset allocation strategy simply says how much of my assets do I want divided between the above asset classes.This is because your best shot at making optimal returns is to be diversified in your investments per modern portfolio theory.  Well, how do I figure out my asset allocation? It fundamentally comes down to your risk tolerance. A portfolio weighted heavily in stocks for eg is going to involve more risk but depending on your time horizon, this may be perfectly Ok. If you have a longer time horizon, you are in a position to take more risk and vice versa. A financial advisor can walk you through this but there are a lot of tools online as well to help with figuring this out. There are sub-asset classes to the above asset classes and ultimately the rubber meets the road by understanding the sub-asset classes and the risk vs return on each of those. 

Asset location

Asset location talks about the tax efficiency of your investments. Let me first say this – don’t ever let the tax efficiency of an investment make you decide on whether to invest in an asset. It should be the other way around – asset location (tax efficiency) should follow the high level asset allocation strategy. To make the point with a more extreme example – there is no point in making a plan to invest in a 401K when your asset allocation strategy may say you want to be invested 100% in real estate!  Having said that, it’s good to know the tax efficiencies of your investments. Asset location basically makes you ask what portion of your assets should be located in tax-free, tax-deferred and/or taxable investments. This is particularly important for retirement planning. You will need to consult with a financial advisor to make sure you are well optimized for this. 

Investment philosophy or principles

The last part of an investment ‘strategy’ is not really in my mind a strategy but more of a set of investment philosophies or principles. There is no correct philosophy but these tend to be more personal preferences. Below are my personal investment philosophies I have developed over time based on what I have learnt from others. Again, I am not advocating these principles, but want to highlight them so you can possibly use these as a template for developing your own set of principles:

1. Buy and hold – In all our investments, I am a buy and hold investor. I strongly believe time in the market is more important than timing the market. I call BS on the common refrain – Buy low, sell high! How on earth do I know what is the high or low point? I know a lot of smart people try and predict it but I also know I am not one of them and most of those smart people don’t get it right anyway. So when it comes to stocks and bonds, I simply dollar cost average (meaning, I buy a set $ amount every month irrespective of the price). I will continue doing this as long as I am in the asset building phase. When I move into retirement, I will likely stop buying. I don’t do day trading, flipping houses etc for short term gains. I invest for the long horizon and I don’t go in and out of the market. I buy and hold the investments for a long period of time. 
2. I never buy investments I don’t understand – For me to invest a chunk of money into something, I need to fully understand it. For that reason, for eg. I don’t invest in crypto currencies. Now, in order to understand something better I might invest a token amount like $10 – $100  just to fully understand it. 
3. Diversification – I am a big proponent of diversification and I have made sure our assets are invested across ETFs, Mutual Funds, bonds, cash and Real Estate for most parts. More importantly when it comes to investing in stocks and bonds, I don’t buy specific shares in any company or specific bonds. I believe in investing in broad market index funds only. Obviously through the indices, we own a chunk of a lot of major companies. My recommendation for those who want to dabble in individual stocks is to keep those investments to less than 5% of your overall assets to minimize volatility. When it comes to real estate though, I will admit I am not very diversified and there are some very specific reasons for that. Almost all of our investment real estate is within 10 miles of where we currently live. 
4. Active vs passive investing – I am an active investor and love to get into the details. But there are some distinctions I follow when it comes to investing in the different asset classes:
   1. Stocks and bonds – I talked about how I invest in index funds. I like to actively research the funds, understand the underlying sectors, companies, expense ratios etc. But once I do that, I am actually a passive investor once I own the ETF or Mutual fund. What that means is that I don’t try to beat the market by owning the next best thing but really am very happy and satisfied with earning what the market returns. Historical market returns have averaged around 4% – 6% real returns (inflation-adjusted) which may not sound great. But when that’s compounded over time, it helps us meet our goals. I am not an expert on fundamental and technical analysis of stocks. There are people who do this for a living day in and day out and even a majority of those folks, in the long run have not been able to beat the market. Why on earth would I believe I can? 
   2. Real Estate – So I actually have an opposite philosophy on this compared to stocks and bonds. I am an active real estate investor. I like to find the deals myself, do the analysis and I currently manage the properties myself too. In part 3 of this series, I will talk in more detail about the different ways to invest in real estate. One of my mentors always said this – you can outsource many aspects of real estate investing, but you cannot and should never outsource your thinking and analysis. For that reason, I am not a big fan of crowdsourced real estate investing for eg.  

In conclusion, I would encourage you to define your investment strategy clearly before you move forward with investing any chunk of money. Whenever you get mired into the weeds as you think about where to invest, it will always help you zoom out and revisit your investment strategy. Remember, it’s absolutely OK to refine or change your strategy over time (in fact, I would fully expect that) but just start with something. 

This concludes our first part of this series. In order to dig deeper into the tactics of investing in stocks, bonds, real estate and cash, I encourage you to read the next 3 parts of this series. Thank you for reading and I wish you success in your financial journey. 

Disclaimer:I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.