[Editor's Note: I knew that my WCI Network partner Passive Income, MD was eventually going to send me this post for republication. It's a bit of a con post to a post I wrote a while back. I'm a big fan of a top-down portfolio design approach–i.e. choose an asset allocation and then choose investments to fulfill it. That's super easy with index funds and not that much harder with real estate investments. PIMD prefers a bottom-up approach, where you choose good investments first without worrying so much about the asset allocation. Today you get to be the judge on an area where we obviously disagree.]
A while back, I was reading through the White Coat Investor’s blog, as I do often, and I came across this post. In it, he warns against becoming what he calls an “investment collector.”
He likens this collecting of investments to someone who buys things at a flea market or garage sale and places them on a shelf to be admired. Eventually, he warns, you’ll have a “hodgepodge” of investments with no strategy or overall plan.
Well, I do a review of my portfolio every so often. I do it more frequently now that I have this blog and end up talking about it quite often. Upon my most recent evaluation, I realized that I have what might be called a jumble of investments.
I was concerned. Had I become the investment collector that he warned about?
Becoming an Investment Collector
To give you an idea, here is a quick flyover list of my current investments:
Stocks
- Broadly Diversified Index Funds (Total Stock Market, Bond Funds, International Funds)
- Individual Stocks (Tech – FAANG, Blue-Collar)
- Money Market Account
Real Estate
- Single-Family Rental Properties
- Multifamily Properties (Apartments)
- Crowdfunded Debt Deals
- Crowdfunded Equity Deals
- Private REITs
- Syndications – Student Housing
- Syndications – Multifamily
- Syndications – Retail
- Real Estate Equity Funds (MLG Capital)
- Real Estate Debt Funds
Angel Investing
- Fashion
- Technology
- Real Estate Tech
- App/Games
- Website (Blog)
- Website (Science, Innovation, & Entertainment)
Other
- Italian Restaurant
- Rare Paper Money
- Cryptocurrency
When it’s laid out like that, it looks like a wide assortment (and that’s because it is). So have I become what the White Coat Investor says to avoid?
There’s a Strategy Here
Well, I may have all sorts of investments all over the place, but I do have a strategy. I did think about my investor statement and plan–especially after taking the Fire Your Financial Advisor course.
Without getting too far into the weeds, my overall plan is to create as many solid streams of income as manageably possible, each producing cash at different points in time. Most of the cash I want is immediate, meaning that if I invest in something, it produces monthly cash flow starting next month or quarter. All of this must be on a consistent basis. I want positive cash flow, even if it takes a year or two to become consistent.
A smaller part of my portfolio is made up of investments that will continue to grow over time and will be there for me later. But I consider these investments a bonus. My expectation is that I won’t ever need this, but I still do it for the sake of diversification.
I also look for investments that are tax-efficient, using tax deduction and deferral strategies. Real estate is one way because of the many tax benefits. One method I have yet to utilize though is by investing in opportunity zones. I’ll let you know when I do.
Finally, I don’t like to keep cash. The idea of it eroding due to inflation bothers me. I feel like it should be put to work. I still work hard as a physician (although not as much as I used to) and I want to make those hours as valuable as possible. If I made “x” amount on a shift, then I want to take those funds and create more capital with it. That’s not going to happen with it sitting in cash. In fact, crazy as it sounds, I don’t even have an emergency fund.
Investing in Education
My problem is that I have an insatiable curiosity when it comes to most investments. If there’s a potential, for cash flow in particular, and there’s diversification in terms of strategy, then I’m interested.
I also feel the best way to learn is by doing. Sure, I will read up on it and educate myself before taking the leap, but I don’t dwell on it for years. Ultimately, I fear the consequences of inaction. I don’t want to be in the same place five to ten years from now.
Jumping right into an investment gets easier over time. The first few leaps, like the first $5,000 I put in a crowdfunded deal, are scary. But in some ways, it was less scary than the $50,000 investment I made in a real estate fund last year. I’ve learned so much since then.
I invested and I made money and I got an education at the same time.
Don’t you wish we could all say the same thing about our medical education? I realize I could’ve lost those funds, but I was prepared to do that for the sake of the education.
I also don’t put myself in a position to get crushed by any one investment. I diversify like crazy. Again, some might say I diversify too much. But it helps me sleep at night, and I enjoy it.
At the end of the day, I think everyone’s trying to get to a very similar place, at least those that read this blog. They’re looking for a life of financial freedom, which means being able to choose how and with whom to spend your time.
That freedom doesn’t come right away. Unfortunately, it comes with some trial and error. But I don’t advocate blindly picking one without knowing much about it and crossing your fingers, hoping for good things to happen. You need a baseline level of education, but you should immerse yourself in it as much as possible to speed up that education.
Find mentors and take courses.
Learn by doing.
All that’s left is to make it happen.
Conclusion
These days, it seems like everyone is waiting for the next crash. I’ve been hearing solid predictions by very knowledgeable people since 2014. But here we are, five years later.
Yes, the stock market is showing more volatility in some ways this year than it has for quite a while, and the real estate market is showing signs of slowing.
But I believe that my hodgepodge of investments are going to be able to manage what comes–all while providing my number one goal of reliable cash flow.
What do you think? Top down or bottom up? Is it a financial “sin” to be an investment collector”? Comment below and weigh in on the poll!
Loading ...
Interesting. You sounded like a wild sponge soaking up every possible investment. Being strategic and meticulous can be stressful but I think u still come out with profits with most solid investments rather than letting cash sit uninvested. Meanwhile I was wondering why u separated the crowdfunding equity deals from the syndicated deals since they are pretty much the same.
It would be interesting to hear what asset allocation a Bottom Up approach has created. It sounds like PIMD’s portfolio is primarily real estate, but just how heavily weighted is it?
A financial dilettante !
Just Sayin’
What I see is an extremely diversified portfolio focused on increasing monthly cashflow. Just as PIMD described.
Since it’s already an area of disagreement, I’d love to see a post comparing PIMD’s approach (multiple cashflow income streams) with traditional retirement funding (earn, save, index funds, draw down). Think about what’s involved in being able to spend $10K monthly during retirement. The traditional approach allows withdrawing 4% (arguably a point lower or higher) to avoid outliving your savings. That’s $3.0M in retirement savings, possibly as much as $4.0M depending on what you believe about the future.
I wouldn’t be surprised to hear PIMD is already earning $10K+ / month after investing far less than $3.0M of your own money – especially if any of the investments were done with royalty financing. You can easily buy a fully managed web application for $300K – $500K that generates $10K in monthly cashflow on it’s own.
Discussing the pro / cons of the two *very* different approaches would make a great article. Cashflow streams are also one of the few ways that non-doctor income folks can achieve a doctor income retirement level.
I’m not sure I see the same disagreement you see. Assets and income are fungible. There’s nothing that keeps me from selling $1M in index funds and buying $3M worth of income producing property with 1/3 down for instance, tax considerations aside. Or putting all $1M down on 1/3 the property and maximizing the cash flow from it. That might increase my yield from 2-3% to perhaps 6-7%. But it wouldn’t necessarily change the total return.
But those who work and work and work and save and save and save and invest and invest and invest until they can live on just the income are essentially saving more than they need to live the rest of their life. The ideal that a mortal person has to pretend they can never spend principal is obviously fallacious if you step back and look at it. Once you get over that mental hurdle, the issue becomes all about total return, not income.
Not sure why people get so fascinated by income. The last thing I need right now is more income. What would I do with it? I’d just pay taxes on it and stuff it back into investments. Far better to avoid paying taxes on it for a while and taking it later, especially at a lower tax rate. At its extreme, imagine an investment that had a yield of 10% a year but decreased in value by 5% every year. If you spent that entire income, after a decade your asset would only be worth half as much and your income would have been cut in half too because you didn’t pay attention to total return and dramatically overspent it.
And yes, I’m quite positive PIMD has more than $10K/month in income based on what he pays me for my share. 🙂
On the flip side, of course, are these folks who think they’re only going to get 2-3% real out of stocks over the next 30 years. If you really believed that, you ought to sell all your stocks and go down the street and buy a bunch of cap rate 4 and 5 properties with the cash.
I think a balanced approach is best. I have low income high return investments and I have high income high return investments. Both are wonderful for their own reasons.
But I still think having an overall asset allocation is wise. This forces you to buy low and sell high. It enforces discipline. It provides diversification. It provides risk control. And it provides a simple yet sophisticated portfolio instead of a hodge podge of individual stocks, a few annuities, a property here and there, a random municipal bond, a few peer to peer loans, and some Bitcoin on a hard drive you can no longer locate.
I think it is somewhat ironic that the guy with “passive income” in his name is by far the most active investor in the bunch.
That is kind of funny. It’s true though.
With such a wide range of investments, there’s that much more need to make sure your spouse and successor executor / trustee know where all the investments are and how to get to them. It’d be a shame to have $3M in Bitcoin but your wife and kids can’t get into your digital wallet. Likewise, the terms of your debt or equity investment in the Italian restaurant need to be formalized and clear to all concerned. You don’t want your 50% silent partner stake to magically disappear upon your demise.
I like the top down approach, if only because a set asset allocation begets ‘robotic’ rebalancing and helps guard against performance-chasing. Plus, at least in this stage of my investing career, I don’t believe in my ability to ‘choose the best investments’. Maybe someday I will, be it justified or overconfidence.
you will not beat the markets
rather silly in my humble opinion
you must have lots of spare time; take up golf
Agree with Tobin. Overly complicated and overly diversified.
Go with simple, index tracking fixed income and equity funds. Set it and forget it.