Generic advice for the individual investor
Eric Franklin
Sep 25, 2019
Today, I’d like to write a little bit about how we think about the investment journey of an individual investor with some guidance about when they should think about different types of investing.
First, a disclaimer: We violate this guidance all the time, but it’s still how a starting point for honing in on individual client strategies. Your mileage may vary.
Second, some helpful context: This post talks about our high-level approach to investing and assumes that you have already rid yourself of non-mortgage consumer debt and have 3-6 months of emergency expenses sitting in a readily accessible savings account separate from where you manage your monthly bill payments.
So let’s step out the front-door on our journey…
1. Indexing. We believe that the majority of most people’s initial investing should be broadly indexed in a portfolio of ETFs or index funds. The important concepts to learn here are understanding how broad markets move, the importance of asset allocation, and rebalancing. I’d say a good rule of thumb you should follow before moving into any other investment type, is somewhere between 1-2x your annual income. In other words, if you make $100k/year, you should save up somewhere between $100-200k prior to branching out.
NOTE: You don’t ever need to proceed beyond this step. You can be quite successful with life goals using ONLY this kind of investing. By being disciplined and buying in over broad enough time periods, you will invariably beat most active investors.
2. Individual stocks and bonds. We love this step and it’s frankly where we, the founding principals of Prospero Wealth, have spent most of our shared history. While not for everyone, investing here is more fun, fueled by the companies you read about in the news each day. This is where you can see 10% or 20% moves in individual positions, with regularity. I plan to do more deep-dive posts on the ways we think about strategy in this space, and why we think our edge is patience and low-turnover, but that’s for another day.
Before moving on to any other investment types from here, you should probably have 4-6x your annual income broadly diversified in investments AND likely meet the definition of an accredited investor, as more exotic investments can be illiquid and require a more sophisticated understanding of sizing and timing.
NOTE: Most people will probably never go past this step, and that’s fine. Just as with indexing, you can beat most investors through discipline—largely patience and asset allocation. We can help!
3. Derivatives and short positions. Here we introduce the time element into investing and we start selling things we don’t yet own or writing contracts to buy or sell companies at a certain price on a certain date (and ideally getting paid for it). This type of investing requires that the investor be more diligent in their research and monitoring. We favor more conservative derivative positions by writing calls or selling puts on stocks we generally want to own. Done right, short positions can damp volatility during downturns, smoothing out the bumpy equities ride. Derivatives done well, can juice your returns or pay you while you wait to get the price you want on a company you love.
You definitely don’t ever have to use these strategies, but they become a reasonable place to pursue once you have that 4-6x income level we talked about in #2.
4. Alternatives. This will definitely require a dedicated post in the future to deep-dive on the opportunities in this space, but suffice it to say, these investments here can be illiquid and/or highly volatile. In this space, you’re looking to access private vehicles like startup investing (Pre-IPO companies), real estate, debt, hedge funds, etc. People here are generally looking for higher growth opportunities and/or assets that can more broadly diversify their holdings to things outside of public markets. This is an exciting space with lots of new entrants thanks to new regulations approving access by individual investors. At Prospero Wealth, we work with a custodian that can help us hold and value these assets in our client accounts. It’s an exciting space with very different return profiles. When you look at large endowments, you find that they hold a large percentage of their assets in private holdings like this. Now, as an individual investor, you can too.
If you like posts like these, follow us on Twitter or sign up for our newsletter. There’s more with this came from!
Today, I’d like to write a little bit about how we think about the investment journey of an individual investor with some guidance about when they should think about different types of investing.
First, a disclaimer: We violate this guidance all the time, but it’s still how a starting point for honing in on individual client strategies. Your mileage may vary.
Second, some helpful context: This post talks about our high-level approach to investing and assumes that you have already rid yourself of non-mortgage consumer debt and have 3-6 months of emergency expenses sitting in a readily accessible savings account separate from where you manage your monthly bill payments.
So let’s step out the front-door on our journey…
1. Indexing. We believe that the majority of most people’s initial investing should be broadly indexed in a portfolio of ETFs or index funds. The important concepts to learn here are understanding how broad markets move, the importance of asset allocation, and rebalancing. I’d say a good rule of thumb you should follow before moving into any other investment type, is somewhere between 1-2x your annual income. In other words, if you make $100k/year, you should save up somewhere between $100-200k prior to branching out.
NOTE: You don’t ever need to proceed beyond this step. You can be quite successful with life goals using ONLY this kind of investing. By being disciplined and buying in over broad enough time periods, you will invariably beat most active investors.
2. Individual stocks and bonds. We love this step and it’s frankly where we, the founding principals of Prospero Wealth, have spent most of our shared history. While not for everyone, investing here is more fun, fueled by the companies you read about in the news each day. This is where you can see 10% or 20% moves in individual positions, with regularity. I plan to do more deep-dive posts on the ways we think about strategy in this space, and why we think our edge is patience and low-turnover, but that’s for another day.
Before moving on to any other investment types from here, you should probably have 4-6x your annual income broadly diversified in investments AND likely meet the definition of an accredited investor, as more exotic investments can be illiquid and require a more sophisticated understanding of sizing and timing.
NOTE: Most people will probably never go past this step, and that’s fine. Just as with indexing, you can beat most investors through discipline—largely patience and asset allocation. We can help!
3. Derivatives and short positions. Here we introduce the time element into investing and we start selling things we don’t yet own or writing contracts to buy or sell companies at a certain price on a certain date (and ideally getting paid for it). This type of investing requires that the investor be more diligent in their research and monitoring. We favor more conservative derivative positions by writing calls or selling puts on stocks we generally want to own. Done right, short positions can damp volatility during downturns, smoothing out the bumpy equities ride. Derivatives done well, can juice your returns or pay you while you wait to get the price you want on a company you love.
You definitely don’t ever have to use these strategies, but they become a reasonable place to pursue once you have that 4-6x income level we talked about in #2.
4. Alternatives. This will definitely require a dedicated post in the future to deep-dive on the opportunities in this space, but suffice it to say, these investments here can be illiquid and/or highly volatile. In this space, you’re looking to access private vehicles like startup investing (Pre-IPO companies), real estate, debt, hedge funds, etc. People here are generally looking for higher growth opportunities and/or assets that can more broadly diversify their holdings to things outside of public markets. This is an exciting space with lots of new entrants thanks to new regulations approving access by individual investors. At Prospero Wealth, we work with a custodian that can help us hold and value these assets in our client accounts. It’s an exciting space with very different return profiles. When you look at large endowments, you find that they hold a large percentage of their assets in private holdings like this. Now, as an individual investor, you can too.
If you like posts like these, follow us on Twitter or sign up for our newsletter. There’s more with this came from!
Today, I’d like to write a little bit about how we think about the investment journey of an individual investor with some guidance about when they should think about different types of investing.
First, a disclaimer: We violate this guidance all the time, but it’s still how a starting point for honing in on individual client strategies. Your mileage may vary.
Second, some helpful context: This post talks about our high-level approach to investing and assumes that you have already rid yourself of non-mortgage consumer debt and have 3-6 months of emergency expenses sitting in a readily accessible savings account separate from where you manage your monthly bill payments.
So let’s step out the front-door on our journey…
1. Indexing. We believe that the majority of most people’s initial investing should be broadly indexed in a portfolio of ETFs or index funds. The important concepts to learn here are understanding how broad markets move, the importance of asset allocation, and rebalancing. I’d say a good rule of thumb you should follow before moving into any other investment type, is somewhere between 1-2x your annual income. In other words, if you make $100k/year, you should save up somewhere between $100-200k prior to branching out.
NOTE: You don’t ever need to proceed beyond this step. You can be quite successful with life goals using ONLY this kind of investing. By being disciplined and buying in over broad enough time periods, you will invariably beat most active investors.
2. Individual stocks and bonds. We love this step and it’s frankly where we, the founding principals of Prospero Wealth, have spent most of our shared history. While not for everyone, investing here is more fun, fueled by the companies you read about in the news each day. This is where you can see 10% or 20% moves in individual positions, with regularity. I plan to do more deep-dive posts on the ways we think about strategy in this space, and why we think our edge is patience and low-turnover, but that’s for another day.
Before moving on to any other investment types from here, you should probably have 4-6x your annual income broadly diversified in investments AND likely meet the definition of an accredited investor, as more exotic investments can be illiquid and require a more sophisticated understanding of sizing and timing.
NOTE: Most people will probably never go past this step, and that’s fine. Just as with indexing, you can beat most investors through discipline—largely patience and asset allocation. We can help!
3. Derivatives and short positions. Here we introduce the time element into investing and we start selling things we don’t yet own or writing contracts to buy or sell companies at a certain price on a certain date (and ideally getting paid for it). This type of investing requires that the investor be more diligent in their research and monitoring. We favor more conservative derivative positions by writing calls or selling puts on stocks we generally want to own. Done right, short positions can damp volatility during downturns, smoothing out the bumpy equities ride. Derivatives done well, can juice your returns or pay you while you wait to get the price you want on a company you love.
You definitely don’t ever have to use these strategies, but they become a reasonable place to pursue once you have that 4-6x income level we talked about in #2.
4. Alternatives. This will definitely require a dedicated post in the future to deep-dive on the opportunities in this space, but suffice it to say, these investments here can be illiquid and/or highly volatile. In this space, you’re looking to access private vehicles like startup investing (Pre-IPO companies), real estate, debt, hedge funds, etc. People here are generally looking for higher growth opportunities and/or assets that can more broadly diversify their holdings to things outside of public markets. This is an exciting space with lots of new entrants thanks to new regulations approving access by individual investors. At Prospero Wealth, we work with a custodian that can help us hold and value these assets in our client accounts. It’s an exciting space with very different return profiles. When you look at large endowments, you find that they hold a large percentage of their assets in private holdings like this. Now, as an individual investor, you can too.
If you like posts like these, follow us on Twitter or sign up for our newsletter. There’s more with this came from!
7724 35th Ave NE #15170
Seattle, WA 98115-9955
(971) 716-1991
hello@prosperowealth.com
Prospero Wealth, LLC (“PW”) is a registered investment advisor offering advisory services in the States of Washington, Oregon, and California and in other jurisdictions where exempted. We are conditionally registered in Texas.
© Prospero Wealth 2024. All rights reserved.
7724 35th Ave NE #15170
Seattle, WA 98115-9955
(971) 716-1991
hello@prosperowealth.com
Prospero Wealth, LLC (“PW”) is a registered investment advisor offering advisory services in the States of Washington, Oregon, and California and in other jurisdictions where exempted. We are conditionally registered in Texas.
© Prospero Wealth 2024. All rights reserved.
7724 35th Ave NE #15170
Seattle, WA 98115-9955
(971) 716-1991
hello@prosperowealth.com
Prospero Wealth, LLC (“PW”) is a registered investment advisor offering advisory services in the states of Washington, Oregon, California, and in other jurisdictions where exempted.
© Prospero Wealth 2024. All rights reserved.