How To Allocate Your Money for Maximum Returns & Minimum Risk

So with all these money multiplication strategies, where should you put your hard earned savings? How should you allocate your funds to generate maximum gains yet minimize your risks?

I am sure you have heard of the term 'don't put all your eggs in one basket.' Even though you are going to learn how to achieve minimum risk & maximum returns in each basket, it is still wise to allocate your funds into different instruments with different targeted holding periods. In times of emergency when you need the cash, you can be sure that all your funds are not stuck in one place.

Now, here is an important disclaimer. In most financial textbooks, they advise diversifying your funds into many different investment vehicles like bonds, stocks, mutual funds, money markets instruments as well as spreading your money across numerous different sectors and different countries to diversify your risks. To an average investor who has low financial competence and needs the wide diversification to lower risk, this makes sense. However, while this kind of broad diversification guarantees low risk, it also guarantees low returns of 5%-8%.

I personally do not follow this strategy. Warren Buffett advises that 'broad diversification is used by people to protect themselves against their own ignorance.' If you know what you are doing (high financial intelligence), you should concentrate your portfolio into equities (stocks & mutual funds) as they achieve the highest return. And you can achieve low risk not by simply spreading your money around, but by your competence of knowing which funds and stocks to pick.

So, the strategy I am going to share with you would be deemed highly risky by the general financial advisors and bankers. Again, it's because most investors lack the competence to do otherwise. However, with the strategies and knowledge you are gaining in this book, you will prove to yourself that it is actually low risk, high return strategy.

Knowing how to allocate the money you save is the single most important decision that will lead to your financial goals. You should take your monthly savings of 15-20% and allocate it to four money baskets. These are the security basket, growth basket, high growth basket and the luxury basket. Let me explain each of these.

1. Security Basket (Target Return of 1.5%-4.5%pa)

This first basket is as the name implies, for your security. The funds in this basket grow just enough to keep pace with inflation. However, they are there in case of emergencies. If you suddenly lose your job, experience a salary cut or suffer a setback in your business, you know that you will have access to these funds anytime to see you through.

This basket should include cash, fixed deposits/certificates of deposits, personal housing, insurance & capital guaranteed funds.

2. Growth Basket 1 (Target Return of 8.51%-20%pa)

This is the basket where you build your net worth & positive cash flow assets that will lead you to financial freedom. This basket is where you put your money into index funds, Exchange Traded Funds (ETFs) and mutual funds. You should also divide your funds between the US market and Asian markets. Although mentioned earlier that Asian equities have disadvantages, we cannot deny the huge growth opportunities that Asia offers (especially India and China).

3. Growth Basket 2 (15%-25%)

This is the basket where you ACCELERATE the building of your net worth & positive cash flow assets that will lead you to financial freedom. Once again, you should not have to touch this money for five to ten years to let the power of compounding work its magic.

This basket is where you put your money into a winning portfolio of ten to twelve company stocks. And again, you should hold some Asian stocks as well as US stocks.

4. Luxury Basket (0%)

Your luxury basket is where you save up to indulge in your dream assets. This is money that you can afford to spend on things that are fun like:

Upgrading to a dream house, luxury cars, jewelry, boats and other luxuries. Again remember from the chapter on 'How the rich manage their cash flow' that the money to be used for luxuries should not come from your primary source of income, but from the passive income generated from your positive cash flow assets.