LOUISE FAIRSAVE: The money triangle
The money triangle is a model which is helpful in determining a personal investment strategy. Just remember that each person is unique in their approach to risks and so their personal investment strategy is one that best suits them.
One’s investment strategy tends to vary with the stage in life as well. Consider Colonel Saunders who invested in a very speculative project in developing the Kentucky Fried Chicken company late in life and succeeded grandly; yet, that is not a highly recommended strategy. Typically, at that stage in life we would normally be trying to protect what we already have rather than grasping at such a fortune.
The money triangle consists of three main sections. The top portion of the triangle holds the most aggressive investments. This is where you invest only as much money as you can afford to lose. Examples of such high-risk investments are futures, options, art, speculative stocks, and speculative projects.
The middle portion of the triangle includes “inflation fighters”. These investments provide returns in excess of the prevailing inflation rate. Examples of such moderate risk investments are mutual funds/unit trusts, corporate bonds, growth stock, rental real estate, pension funds, blue chip stocks, treasury bonds/notes, insurance policies, and corporate debentures.
The bottom third includes safe and stable investments. Examples of such low-risk investments are cash, savings accounts, cash value of insurance policies, government savings bonds, bank deposits, fixed deposits, government development bonds, public utility stock, and treasury bills investment choices in each tier of the money triangle vary per individual.
In the first instance, let us consider a 20-to-30-year-old person’s generic investment plan: people in this age group should focus on acquiring a liquidity hedge, establishing insurance coverage and the beginnings of a pension fund. At this stage of their lives, they can also afford to be aggressive in acquiring growth stock with a reasonable proportion of their portfolio.
In the money triangle, their investment profile may be 45 per cent in the top section, 35 per cent in the middle and 20 per cent in the bottom. The emphasis will be in building a solid financial foundation to support family or career plans. In addition, with an adequate liquidity hedge in place, the 20-io-30-year-old age range is the best time for being the most aggressive in the high-risk portion of the money triangle.
This is the phase to build up your financial ground floor. That strong foundation must be built first before significant high risk can be taken. Given that solid financial infrastructure, it is the best time to take your most daring chances with a tolerable portion of your investment portfolio.
If fortune smiles on you, that is good for you and your family. With early success, you can look forward to a financially secure future for you and your family. Alternately, should you fail, it is early enough in your life. You will have reasonable opportunity to plan carefully to recover lost ground before retirement. There is still time for financial catch-up.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.