Who’s ready to talk asset allocation!? This is going to be a fun one, because it’s going to challenge you to think a little differently than you’ve been hard wired for up until now.
When you think Asset Allocation, what comes to mind?
According to Investopedia, asset allocation is:
Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.
Alright, so said another way, it’s where you’re putting your stuff to work to achieve your long term goals.
This is a good definition, but it is incomplete. By the end of this post, we will complete the definition and give some examples of how financial independence seekers like us can optimize our asset allocation.
Let’s look at some common asset allocations
As you all may know, I am a recovering active stock picker. I’ve read of all kinds of active and passive investment strategies. They range from the overly complex, to the dangerously simple.
Here are 4 common asset allocations:
Each slice of the pie is a different asset class, including
- Stocks (Large, small, foreign, domestic)
- Bonds (government, corporate, long term, short term)
- Real estate (property, commodities, REITS)
It seems like a pretty exhaustive list, so what could possibly be missing?
For early retirees, your TIME is your most valuable asset to allocate
You may think it’s tongue in cheek, but it’s 100% true that as we pursue financial independence, we need to be much more mindful of how we allocate our TIME than any other asset class.
And I am speaking from experience here.
I have spent the past 5+ years consuming content on how to achieve financial independence, learning about the stock market, and playing on the internet.
And while these efforts have certainly not been in vain ( I have learned so much and have some amazing blogger heros out there!), I have not had the greatest return on my time investment.
Let me explain.
You see, much of the learning I committed to was about how to trade stocks better…
…How to trade high-risk derivatives like stock options or oil futures…
Every one of these activities requires an incredible amount of time to learn about, and even more to actually implement and manage over time.
Maximizing your time’s ROI
We all want a big ROI, right? Let me tell you from my opinion, spending all your time picking stocks is NOT a good ROI.
You add stress to your life. You feel anxiety worrying how the stock market will react to a company’s earnings announcement.
You fret over things that you have ultimately ZERO control over.
And your reward for all this effort?
An almost negligible likelihood that you will beat the stock market over time (once taxes, fees, and slippage costs are taken into account).
And even then, “beating the stock market” is just a pure return vs return comparison. When you start to value your time, your chances of “winning,” become even more fleeting.
Where can you find a better ROI on your time?
Starting a blog in 2018 is one of the best time investments you can make. It makes you a better investor, wiser person, and potentially brings in a respectable side income.
You don’t have to risk your life saving’s to open up a warehouse and stock inventory. You can get started with less than $100 and an old laptop.
The key is to pick a side hustle that compliments your skills, your passions, and your available time.
It’s going to require some grit and patience in the beginning, but with enough patience, you will be able to enjoy higher annual returns than the stock market could ever hope to achieve.
This blog is currently brand new and doesn’t make me enough to buy coffee yet, but I know that with consistent effort and by being honestly helpful to you, it will find a way to generate income over time.
Perfect your allocation over time
If you decide to start your side hustle, it’s important to treat it like a brand new venture. Don’t bet the farm on it – continue putting your savings into the markets.
Initially, you’re going to want to sink more of your time allocation into your business, and your money allocation into the markets.
This allows you to:
- Validate your business idea without the stress of having a huge amount of money tied up in it
- Ensure that you are truly passionate about the project and will be able to see it through for the long term
- That others see merit in your idea before you sink investment into it.
With a small amount of strategy and an incredible work ethic, your fledgling hustle will be able to show a profit after a few months. And over time, you’ll be able to start sinking more of your money (and not just your time) into the hustle:
Notice that your time investment will never decrease. Part of this strategy is to keep yourself so busy with your new business that you don’t even have the TIME to tinker with your stock portfolio.
You know the phrase, “Idle hands are the devil’s plaything?”
Well that doubly applies here. By maintaining an aggressive asset allocation as you save for retirement, you will see some crazy market swings along the way.
But when your side business is exciting and a little all-consuming, you’ll be less likely to even check your Personal Capital dashboard on a daily basis, whereas I was checking it almost hourly when my whole focus was on picking the next hot stock.
And as your business grows and you have more control over its future direction, you’ll be able to find great ways to invest more money into it to either increase your profits, or decrease the amount of time you spend on it. Now your financial asset allocation will see a similar shift:
Your side hustle will become a huge part of your portfolio. There will be the cashflow aspect of it, but depending on your goals, the business itself can become a sellable asset itself, where all the hours of time you invested up front into it could be preparing you for a payday if you choose to walk away from it all.
But before you do that…
What your new asset allocation means for retirement…
I can hear the “early retirement police” sirens approaching. I’m talking about work. There is no avoiding it.
Starting a business, whether it be a blog, an etsy shop, a woodworking shop – it’s all work.
But that is part of my master plan.
If you’re anything like me, you’re a bit of an achiever. You are obviously working hard and have a solid mindset if you are diligently saving and thinking towards the future.
I am including all this work now as a hedge for the future.
You see, I think there is a day of reckoning coming for many early retirees who will lose their identity as soon as they quit their job.
And I count myself among them.
For the last 7 years, I have gained much of my esteem and self-actualization through the external gratitude of my career.
The raises, pats on the back, challenging problems that only I could solve… that stuff can quickly go to your head!
And when you are in the zone living it every day, you can forget how much that means to you.
The unspoken reason for starting a side hustle during your working years is to provide a source of external gratification even after you throw your alarm clock out the window.
There is going to be a detox period once we quit the 9 to 5, and having something to occupy that void in our heads will be most welcome.
Over time, you may decide that it’s no longer necessary and that you are ready to truly stop working for good. At that point, you’ll certainly be able to shut it all down or sell it off and enjoy a full blown retirement.
But until that moment, it’s best to plan your asset allocation (time and money) accordingly!