As a wealth advisory, one of the questions we get asked is: “What should I invest in? Stocks? Bonds? Money Market funds? Real Estate? Crypto? That annuity that I heard about on the radio?”
We suggest beginning with a “when?” question. When do you need to access and use the funds?
This question is a crucial one, because the answer is personal and based on your own distinct values and goals. (To begin or revisit the process of identifying your values and goals, check out our letter on designing your wealth garden). Your values and goals inform when you will need certain funds and consequently, how to invest them.
Imagine your investments fall into one of three buckets: Reserve, Life, and Legacy.
Your “reserve” bucket is where we put any money that you will need in the next 1 to 5 years. This includes money for living expenses, your emergency cushion, and any large planned purchases such as a car or home down payment. Your “reserve” bucket may include investments in cash and high yield savings accounts, and possibly other short-term investments such as short-term bonds. The size of your reserve bucket will be highly individualized, considering factors such as whether you are still working; if your income is steady or unpredictable; and whether you have other income sources like a pension, social security or rental income.
Your “Life” bucket includes money that you plan to use over the course of your lifetime, but not in the next 5 years. Examples may include saving for your child’s college fund, retirement, or buying a second home. This longer timeline allows for investments that may go up and down more in value, but in the long term may yield a higher return. This bucket typically includes many of the investments that you may hear about more frequently, like stocks and bonds – whether those be in individual securities or funds – to even disability and long-term care insurance.
These types of investments generally are the most fruitful when you create a well thought out long-term strategy that aligns with your core values and goals. This is because over time, markets will shift and there may be moments when you want to pull your money out and hide it under your mattress out of fear. What will help you resist that impulse is if you know that you created your plan with a clear head and that your buckets are aligned with what really matters to you. This is why starting with robust wealth planning is a critical part of a successful investment strategy.
Your “legacy” bucket is for “sharing the wealth.” This may be money that you’d like to pass down to your children and grandchildren, or that you’d like to give to an organization that is meaningful to you. Due to the long-term nature of this bucket, these investments can be oriented to the very long term. In other words, they can rise and fall much more than investments in the other buckets because the funds aren’t needed anytime soon. This bucket could include a portfolio of mostly stocks, concentrated positions, private equity, or even private real estate.
Once you feel clear on your vision for wealth, you can dive into what the options are for investing. How do you know how much to put in each bucket? Create a financial plan. At Created, we’re passionate about working with our clients to create wealth plans and investment buckets that align with what they care about.
In good wealth,
Your partners at Created