Investment Styles and Considerations

(Disclaimer: I’m not an investment professional, I hold no degrees associated with anything related to finance, and this post should not be taken as financial advice in any way.)

I’ve written quite a bit about investment and income diversification.  And in studying all of these various forms of investments and passive income generators, I find it to be very interesting to listen to and learn from the investment zealots of various investment strategies.  And in doing so, I think you can break out any investment strategy and portfolio by 3 factors.  Understanding where you stand with these 3 factors will help you decide how you want to position your capital.

  1. Risk tolerance
  2. Expected Return
  3. Active vs. Passive investing

Risk Tolerance

There are several factors that drive one’s risk tolerance.  First, personality.  There are those that are naturally risk tolerant when it comes to their money. Consider these people the financial equivalent of base jumpers and adventure seekers.  These people are risk tolerant regardless of other considerations. It’s not good or bad to be so naturally risk tolerant or averse, just recognize where you are on the tolerance spectrum.

Secondly, you may be risk tolerant because you have high income potential.  For example, perhaps you’re personality is risk averse, but you are a well respected individual in a field that pays far more than you need.  In this case, you may find yourself willing to invest in higher risk opportunities because you have the financial safety net of a reliable high-paying job.  On the other hand, if you are approaching an early retirement then you might be driven to be less tolerant of risk.

Finally, you may be risk tolerant if you have enough money saved that you can afford to lose it (the rich get richer).  For example, if you have $10M in the bank and only need $40K/year to live, you can invest in highly risky investments knowing that while you could lose millions in less than a year, you will make more money over the long run.  If you’re in this position, it’s best to save the high risk investments for money you can afford to lose.

In my case, I am naturally tolerant of risk and I have a substantial savings relative to annual needs, thus allowing me to be risk tolerant.  On the other hand, I am also planning to retire early and enter a “draw down period”, which means I do need stability in my portfolio.  While I know I can always make more money if I need it, I am far more comfortable having a predictable portfolio that gives me confidence I will never need to return to paid employment.

I’m getting a lot of emails these days questioning why I’ve chosen to invest in a more aggressive variation of the permanent portfolio.  The reason lies above — but that’s my situation.  Your’s is likely different, so you should first consider your own risk tolerance.

Return Expectation

Return expectation is driven by two factors.

The first consideration is how much money you have vs. how much you need.  As an example, a real estate investor with no cash reserves will use leverage and sweat equity to achieve a very high ROI.  In fact, many work off “zero cash down” investments, meaning an infinite return on capital (but a very low ROI on time). Conversely, someone with $1M in the bank may choose a combination of dividend paying stocks and bonds that pay out $40K/year, more than enough for most to live on.

The other factor is greed.  Some people are greedy, there’s no arguing this.  It’s important to be honest with yourself and be aware of where you are on the greed spectrum.  For those towards the greedy end of the spectrum, they may be desparate to get a high return and end up speculating or chasing yield.  Alternatively, those who don’t have a strong desire for a high return will lean towards a more conservative approach.

In my case, I don’t need a high return, but seeing a 15% return opportunity is sometimes tempting. Being aware of where I am on the greed scale helps me balance these two conflicting views, and appeasing both by varying my investments. This is why I am using the conservative and stable Permanent Portfolio, but also making some modifications to appease some of my occasional greedy temptations.  Compare this to a strict diet, but one that allows one day each week to enjoy your favorite fattening meals.  Whatever works for you…

Active vs. Passive

All things being equal, passive income is generally better than active income. But all things aren’t equal, so you need to consider a few factors when deciding how active or passive you want your investments to be:

1. How passive is it?

I’ll pick on one “passive income” strategy…  With the growth of the internet came internet marketing, and with that came the concept of passive income by way of internet marketing. The idea:  build a website with some paid advertising or affiliate links, add SEO (search engine optimization) and sit back and collect the money.  But here’s the truth: it’s not as passive as your internet marketing friends like to say it is (perhaps they are selling you something?).

My Android app experiment is similar, it’s good income and I’m enjoying it, but it’s not truly passive because the sales will fade over time.  Alternatively, my dividend portfolio is truly passive.

2. Time vs. Capital Availability

The amount of time you have to invest in your “passive income” is important.  This is because most passive incomes are not 100% passive (see above).  For example, I have a “passive income” by investing in dividend paying stocks and bonds.  This is 99.9% passive, I literally spend less than an hour per year on it, and collect thousands.  This is because I have plenty of capital to invest.

I also have money invested in real estate, where I’m working with a partner to buy and rehab houses.  For this, I spend far more time.  It’s mostly passive since my partner does the work while I finance the job, but I do need to keep an eye on the deal and my partner’s progress.  If I had more time and less capital, I would likely take her out of the equation and do her job of managing the sub-contractors and working with real-estate agents…  Since I don’t have that time, I choose a more “passive” route, with lower ROI.

3. Desire To Be Involved

Some people can’t sit back and enjoy watching their money do all the work for them.  I’m one of these people, I fully recognize that when I retire in a year and a half, I will still find myself making some active incomes because I can’t sit still.  While I plan on being able to live on only my dividends, rental payments, and other 99% passive incomes – I will find myself doing some activities that pay an income.  Others, I’m sure, would love nothing more than to never “earn” a dollar again trading time for money.


I would recommend to anyone who has not created a deliberate investment strategy that they sit down and consider each factor listed above.  Write it down – commit to a strategy and have a reason for it. Once you’ve analyzed these key paremeters: risk tolerance, required return, and passivity, you can decide how you want to invest your money.  For those that have plenty of capital, want low risk and zero activity – perhaps dividend investing is the answer.  For those with little capital, but willing to risk what they have and work as hard as necessary – perhaps high-leveraged real estate investing is your path.  There are millions of potential portfolios and strategies available to you, and using the factors above will help you deliberately choose a strategy appropriate for you.

In my case, I have mid-to-high risk tolerance, a low required return, and desire 80-90% passivity (with the ability to be 100% passive if I change my mind).  Because of this, I choose to pursue a diversified income stream that meets my financial needs but also satisfies my personal desires and inklings of greed.  Because of this, I’ve created a solid foundation of dividend income based on stable stock and bond yields.

On the other hand, since I do desire some higher returns and do have a current income that can afford additional risk, I’ve decided to complement my portfolio with investments in private money lending and real estate.  This satisfies my desired role of some active investing, and also my occasional inklings of greed.

And since I do foresee a time in the near future where I retire and have additional time to explore other fun activities, I’ve been investing my time in more active areas such as web development and mobile app development.  These are not entirely passive, but I also recognize I won’t be sitting on my butt all day in retirement.  After all, I enjoy learning these other skills.

So… as you consider you portfolio and income strategy (which I hope is more than: work hard, max your 401K in index funds, and retire at 65) I recommend you at least consider the factors in this article.

In the end, it’s your money and your life.  It’s up to you to maximize both.

6 Responses to Investment Styles and Considerations

  1. Neo says:

    I prefer a mix of active and passive income, but I am definitely aiming to increase my passive income through interest and dividends. Also working on a few small angel investments that are higher risk but could be high income potential in the future.

    My general view is that volatility is buy signal…

  2. Penny says:

    Great article! I’ve bookmarked it so I can refer back when I start working on my investing plan in a few months.

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