This time last year, we provided you with an investment “battle plan” for 2017.
More specifically, we showed you a simple way to set up your portfolio so you could generate consistent profits in the private markets.
The thing is, over the past year we’ve expanded our research coverage:
Now, in addition to covering investments in private equity, we also cover opportunities in the highly lucrative crypto-currency markets.
Which is why, today, we’ll be showing you how to upgrade your battle plan for 2018.
This battle plan will help you maximize your profits — and minimize your risk — in all the asset classes we cover here at Crowdability.
Traditional vs. Modern Asset Allocation
For years, Financial Advisors recommended that investors start with a 60/40 allocation to Stocks/Bonds. That means you’d invest 60% of your portfolio into stocks and 40% into bonds…
Then, as you got older, they recommended shifting to a 20/80 allocation.
The logic was pretty straightforward:
When you’re young, you can afford to take greater risks in order to grow your nest egg — that’s why you’d put 60% of your capital into growth assets like stocks.
But as you got older and your goal shifted to preserving your capital, that ratio shifted to favor more stable assets like bonds.
But nowadays, most “modern” asset allocations include not just Stocks and Bonds, but “Alternatives” like Private Equity as well.
You see, investments like Private Equity and other alternatives tend to move in different directions than the stock market — they can “zig” when the market “zags.” This diversification can help dampen the effects of market turbulence and keep your portfolio more even-keeled.
Not only that, but these alternative assets also tend to produce higher returns…
For example, according to a recent 20-year study from Cambridge Associates, early-stage private equity investments produced an average annual return of 55% per year.
So again, by employing a modern asset allocation strategy — one where you invest in stocks, bonds, as well as alternative assets — not only will you minimize your risk, but you’ll also increase your reward.
Creating Your Personal Asset Allocation Plan
Now let’s look at a few examples of different asset allocation strategies:
For someone in their 30s with a total portfolio of $100,000 (not including their home, and not including about six months of “just in case” money in cash), here’s what their asset allocation plan might look like:
- 70% Stocks (for growth) = $70,000
- 10% Bonds and Real Estate (for income) = $10,000
- 20% Alternative Investments (for diversification and higher potential returns) = $20,000
For someone in their mid-to-late 50s who’s starting to think about retirement, they might move more of their portfolio into income-producing assets:
- 60% Stocks (for growth) = $60,000
- 25% Bonds and Real Estate (for income) = $25,000
- 15% Alternative Investments (for diversification and higher potential returns) = $15,000
And someone who’s already retired might move even more of their portfolio into income-producing assets, and to be conservative, they might hold some cash, too:
- 20% Stocks (for growth) = $20,000
- 60% Bonds and Real Estate (for income) = $60,000
- 10% Alternative Investments (for diversification and higher potential returns) = $10,000
- 10% Cash = $10,000
Everyone’s financial situation is different, so these asset allocation plans are just examples…
The plan you decide on will be dependent on such factors as your need for income and your comfort with risk.
The Most Important Part of Your Plan
When it comes to the “traditional” part of our asset allocation strategy — specifically, for the stocks and bonds portion of the portfolio — we like to keep things simple and follow Warren Buffett’s advice:
Buffett advises individual investors to put their money into low-cost stock and bond index funds. This is an easy way to gain broad exposure to each asset class and save a great deal of money on fees and commissions.
However, for your alternative investments (e.g., private equity, crypto-currencies, etc.), you don’t have the option to invest in a fund.
You see, these investments are relatively new, so funds don’t exist for them yet.
So in these markets, you’ll need to make individual investments.
In last year’s “battle plan,” we showed how to come up with the specific dollar amounts you’d invest into the private equity portion of your portfolio. You can review that strategy here »
But as I mentioned earlier, now that we’re expanding our asset coverage to include other alternatives, we’ll need to modify this formula slightly…
Your “Alternative Growth Investments”
To start, you need to figure out how much you’d like to invest into alternatives overall.
In order to do that, we recommend following the guidelines we outlined earlier for the three hypothetical asset allocation strategies:
If you’re thirty to forty years from retirement, you could afford to invest up to 20% of your portfolio into alternative investments. And if you’re already retired, that number might drop to 10%.
Since private equity investments generally require a longer holding period than crypto-currencies, and because these investments are illiquid — meaning you can’t sell them and get your money back whenever you’d like— we recommend allocating more to crypto-currencies than to private equity.
In fact, we recommend an allocation to crytpos that’s double that of private equity.
Let’s say you have a $100,000 portfolio and decide to put 20% of it ($20,000) into alternative growth investments. In that case, you’d put two-thirds — roughly, $13,000 — into crypto-currencies, and the remaining $7,000 into private equity.
But in order to protect yourself properly, you’ll still need to diversify those allocations across a number of different investments.
You see, these alternative investments carry relatively higher risk than traditional investments like stocks. So you need to be careful here.
For private equity, we recommend building a portfolio of at least twenty investments — and ideally far more. Meaning, if your private equity allocation is $7,000, your goal should be to invest roughly $350 into each of twenty investments.
And for crypto-currencies, we’re recommending that investors build a portfolio of at least 10 different cryptos. Meaning, if your crypto allocation is $13,000, your goal should be to invest $1,300 into each one.
How Much You Could Earn
Those may sound like small dollar amounts, but here’s the thing…
Given the outsized returns that a successful alternative investment can deliver, you can make a great deal of money even from a small investment.
For example, according to multiple studies, the average return of a profitable early-stage investment is roughly 260%. And oftentimes, these investments can return far more.
For example, Facebook’s first investor made 2,000 times his money when the company went public.
And looking at the crypto sector, our most profitable investment in 2017 has returned roughly 1,770% this year...
That’s enough to turn a $1,300 investment into more than $23,000 in less than 12 months.
So if you’re interested in maximizing your returns — and minimizing your risk — before you kick off the new year, spend a little time fleshing out your 2018 battle plan!