Should I change my portfolio from balanced to aggressive? Here is my 4 Basket Strategy!

Yesterday I was talking to my father in law about investing, and he was amazed that I had a balanced portfolio at my age.  He is 73 years old and even though we both invest in index funds, he is heavily invested in stocks.  His portfolio is 95% stocks and 5% bonds.

We had a constructive debate defending our positions:

My argument was that with the current president, there are so many unknowns that I just couldn’t trust the market.  Therefore I changed my portfolio from an 80 stocks/20 bonds to a more conservative 60 stocks/40 bonds.  I also did it because I didn’t want to risk losing my nest egg by putting all my eggs in 1 basket.

His argument was that he wanted to gain as much as possible, and grow it as much as he could when the economy was doing well.  He accepted the fact that if the market tanked he wouldn’t touch his portfolio. His safety net is that he has a pension that he collects, as well as the social security.  These 2 are enough for him to cover all of his expenses. He now has to take out the required minimum distribution from his 401k, but he doesn’t really need this income.

So this got me thinking, am I being too conservative with my investments and should I get more aggressive?

After doing some research and forensic work on my portfolio, I realized I had too much cash on hand and was playing it too safe so I decided that maybe I should give it a try and invest more money in equity.

Here is my strategy: I shall call it the 4 Basket Strategy!  

I would like to be able to rely on 4 streams of income to minimize my risk and be ready for any scenario that life might throw at me.

Here are my 4 Baskets:

  1. Cash/Emergency Reserve: I have heard from a lot of people in the personal finance field, that a 6 month cash reserve is a good milestone to reach, so that you can cover your expenses for 6 months in case you lose your job.  With my job being so unpredictable I put aside 2 years worth of emergency fund aside.  I love the security that it gives me as I always have a full year of expenses paid for, and it gives me a year to replenish it. I know some people might think that is too much money to have in a liquid account, but the peace of mind is worth a lot to me.  The security of not having to worry about my day-to-day expenses is wonderful!
  2. Rental Income: Our 2 rental properties are doing really well and we are cash flow positive on both properties. This is a great way to generate a passive income, as we don’t really do much work on them because we have 2 property managers who handle the rentals and maintenance.  This income covers most of our monthly expenses and our goal is to increase it to where it covers all of our expenses.  We use this basket to replenish our cash reserve each year.
  3. Vanguard Portfolio:  I have a SEP IRA that I max out every year.  I have actually started doing a Roth Conversion this year, which was actually easier than I thought through Vanguard.  My CPA helped me out with paying the least amount of taxes on the converted money.  I also max out a regular Roth IRA each year and these are the 2 retirement accounts that we have.  We have a huge amount of money invested in a taxable mix of index funds.  This is where I had a 60/40 ratio of stocks versus bonds, but I have since changed that to a more aggressive approach of 90/10.  Our goal each year is being able to save at least $24K into our Vanguard accounts, and through our frugal living we have been able to save $100K in the last couple of years. So far so good!  I almost forgot to mention that in case of emergency I could tap into my taxable investments, and according to the 4% rule this basket would cover more than half of my expenses.
  4. Work Income from my company: I am self employed and able to work the hours I choose.  The beauty of my job is that I am location independent and can work from anywhere in the world as long as I have access to wifi and internet.  Though it is a very high pressure job, I love the excitement of it and it brings me an income that I can either use for my cash reserve or invest in my Vanguard portfolio. I also expense a lot of my bills through the company which is an added bonus of being self employed.  This basket is large enough to cover baskets 1 and 3.

This is how I developed the courage to become more aggressive with my 3rd basket, as it is a basket that I am not planning on touching for a long time while reinvesting the dividends to keep it growing.

I am still contemplating on how I could develop a 5th basket.  I keep telling my wife that I have a few hours a day I could dedicate to another way of creating an additional passive income basket.  Ideally I would like to find a way to monetize Frugal Safari as I am very passionate about personal finance, and would love to be able to generate income while pursuing this passion of mine.

I look forward to going to Fincon 17 to meet like minded folks and who knows, maybe I will learn how to monetize my site and create my 5th basket!

Stay tuned guys!

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