34) How To Allocate Your Money for Maximum Returns & Minimum Risk?

by Adam Khoo

I am sure you have heard of the term 'don't put all your eggs in
one basket.' Even though you are going to learn how to achieve
minimum risk & maximum returns in each basket, it is still wise to
allocate your funds into different instruments with different
targeted holding periods. In times of emergency when you need the
cash, you can be sure that all your funds are not stuck in one place.

Now, here is an important disclaimer. In most financial textbooks,
they advise diversifying your funds into many different investment
vehicles like bonds, stocks, mutual funds, money markets
instruments as well as spreading your money across numerous
different sectors and different countries to diversify your risks.

To an average investor who has low financial competence and needs
the wide diversification to lower risk, this makes sense. However,
while this kind of broad diversification guarantees low risk, it
also guarantees low returns of 5%-8%.

I personally do not follow this strategy. Warren Buffett advises
that 'broad diversification is used by people to protect themselves
against their own ignorance.' If you know what you are doing (high
financial intelligence), you should concentrate your portfolio into
equities (stocks & mutual funds) as they achieve the highest
return.

And you can achieve low risk not by simply spreading your money
around, but by your competence of knowing which funds and stocks to
pick.

So, the strategy I am going to share with you would be deemed
highly risky by the general financial advisors and bankers. Again,
it's because most investors lack the competence to do otherwise.
However, with the strategies and knowledge you are gaining in this
book, you will prove to yourself that it is actually low risk, high
return strategy.

Knowing how to allocate the money you save is the single most
important decision that will lead to your financial goals. You
should take your monthly savings of 15-20% and allocate it to four
money baskets. These are the security basket, growth basket, high
growth basket and the luxury basket. Let me explain each of these.

1. Security Basket (Target Return of 1.5%-4.5%pa)
This first basket is as the name implies, for your security. The
funds in this basket grow just enough to keep pace with inflation.
However, they are there in case of emergencies. If you suddenly
lose your job, experience a salary cut or suffer a setback in your
business, you know that you will have access to these funds anytime
to see you through.

This basket should include cash, fixed deposits/certificates of
deposits, personal housing, insurance & capital guaranteed funds.

2. Growth Basket 1 (Target Return of 8.51%-20%pa)
This is the basket where you build your net worth & positive cash
flow assets that will lead you to financial fre-edom.
This basket is where you put your money into index funds, Exchange
Traded Funds (ETFs) and mutual funds.

You should also divide your funds between the US market and Asian
markets. Although mentioned earlier that Asian equities have
disadvantages, we cannot deny the huge growth opportunities that
Asia offers (especially India and China).

3. Growth Basket 2 (15%-25%)
This is the basket where you ACCELERATE the building of your net
worth & positive cash flow assets that will lead you to financial
fre-edom. Once again, you should not have to touch this money for
five to ten years to let the power of compounding work its magic.

This basket is where you put your money into a winning portfolio of
ten to twelve company stocks. And again, you should hold some Asian
stocks as well as US stocks.

4. Luxury Basket (0%)
Your luxury basket is where you save up to indulge in your dream
assets. This is money that you can afford to spend on things that
are fun like:

Upgrading to a dream house, luxury cars, jewelry, boats and other
luxuries. Again remember from the chapter on 'How the rich manage
their cash flow' that the money to be used for luxuries should not
come from your primary source of income, but from the passive
income generated from your positive cash flow assets.

>>> Learn more on how maximize your return here...

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