Ok – so today I want to talk about one of the biggest mistakes new investors make. Capital allocation.
New investors seem to have a unique skill of screwing this up. This leads to them not being successful and then declaring that investing doesn’t work. This goes onto discourage other people from investing and changing their lives because of one person who didn’t know how to allocate their funds properly.
There’s 2 purposes to knowing how to allocate capital effectively.
1) It allows your comfort zone to expand with new investment strategy you’re learning slowly and easily.
This is very important. As with anything new, you need to understand that this is NEW to you. Your reactions are slower, your analysis is not 100% yet, you don’t know everything to look out for, you don’t know the perfect time to enter, you don’t know the perfect time to exit, you probably don’t even know what you’re looking at really.
So in this scenario why would you, ever, go and place all of your money on an investment. That would be classed as stupid. It’s like driving a Prius for 3 years then one day be handed a ferrari and instantly trying to drive it at full speed with no training. You’re asking for trouble.
You want to handle the Ferrari at 30, master it. Go to 60, master it. Go to 100, master it. Go to 120, master it. Get it? Slow growth I know but at-least you’ll be ALIVE.
I think one of the main reasons people do this is Greed. They get so excited about the potential return thats been sold by the speaker or “coach” that they don’t even look to master the strategy, they just want the money.
The problem with just wanting the money is, you don’t respect the rules of nature, or the rules of the market in this case. That leads you to doing things you just wouldn’t do normally. Watch out for this.
Anytime this arises where you feel that you’re investing for the money, step away from the computer, go meditate, play golf or smoke a cigar (what I do) and then come back it when the money is no longer a big NEED.
Then remind yourself that this is NEW and you should be cautious.
2) It allows you to make more money in the long term by taking up opportunities that come up after your initial investment.
How many times have you ever placed an investment and then you come back a day later and suddenly there’s a BETTER opportunity in the market?
This really used to annoy me when even I was mis-managing my own capital allocations. It would almost be like the whole market was speculating agains’t ME so that the best deals only came up after I got in! Sound familiar?
When you manage your capital properly to start off with, these opportunities can be deal enhancers.
Think about it, say one of our students secured a 2% cash-flow this month on their Gold & Silver. But because they invested only 50% of their total investment, two days later when the market moved and now the same investment could bring in 3%, they can invest the other 50% and increase their AVERAGE RETURN to 2.5%.
I know it may look small but let’s have a look at the numbers, but thats a 25% INCREASE IN ROI just for waiting 2 days to be fully invested.
That’s what smart investors do.
So the next question you’ve probably got is, so what are the rules for effective capital management.
I’m going to give you the rules I tell my students, these rules will mean that you will not get sucked into an “opportunity” and over-react in the moment. It will allow your comfort zone to grow slowly, it will allow you to learn the strategy behind the money. Most importantly, it will SAVE you THOUSANDS of Dollars.
My Capital Allocation Rules
Rule No 1: Decide how much you want to allocate.
Say a new Gold For Life student is deciding how much they want to invest. This is what I tell them. How much is your portfolio worth? Say they say $500,000. At this point I ask how much of the $500,000 total portfolio they want to invest in Gold & Silver. Say the answer is $100,000 of it. Which is a good 20% allocation of a total portfolio to any one asset class. Then we move onto the next rule.
Rule No 2: Invest 25% of the available investment in the first month and step your investment in monthly.
We know the student has $100,000 they want to invest in Gold & Silver, the way we teach. Now, you want to take NO MORE than 25% of the allocated amount (not the portoflio amount) and invest that this month. So what does this mean. They’ve decided to invest $100,000. Well THIS MONTH they’ll invest no more than $25,000. I don’t care if Silver goes to $100 an ounce, they will not invest more than $25,000. Then next month another 25% taking the investment to $50,000, the 3rd month another 25% bringing it to $75,000 and then the 4th month the last 25% taking it to a full $100,000 allocation. Now we move to the next rule.
So first month, target investment: $25,000. So on the 1st of the month, you’ll go and invest $12,500. And then again on the 15th of the month, you’ll invest another $12,500. This will allow you to take advantage of any market movements and other opportunities.
Rule No 3: Do NOT move onto adding a new amount of money in UNTIL you see that months investment turn a profit.
This will keep you from getting over excited and make you actually reflect on the rules of the strategy, remember, Money Talks & Bullshit Walks, so if there’s no profits, don’t invest more.
Most people will follow Rule 1 which is what they read in most books and hear at conferences, and then they’ll invest the whole of that amount STRAIGHT AWAY. That is a big mistake. You’re not allowing your brain to keep up with the investing and new skill you’re learning.
So take it easy.
As you can see, these rules mean our students will be taking 4 months to actually invest the whole $100,000, but it INCREASES their chances of success hugely. Why? because say you invest the first $25,000 and that month you don’t make a profit. You WILL NOT be investing any more UNTIL it does. Go back to your coach and find out why it didn’t make a profit, change and improve until it does.
This keeps your money safe, it keeps your mind at peace, people around you at peace.
Most importantly, it gives you a chance to make a profit.
I hope you take this seriously, let me know what you think of these money management rules in the comments & I’ll speak to you soon.