Learning how to manage and build your own investment portfolio is quickly becoming one of the most popular topics on everyone’s lips. 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.
This interest in financial planning has been fuelled by a rapidly aging population who have realised 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 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.
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, maximise 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.
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 it’s 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.
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