Understanding Portfolio Critical Mass
The concept of critical mass for a financial portfolio can mean different things to different people, some might say its once you cross $100K net worth, or even once your portfolio contributes more growth than how much you invest into it. To me, portfolio critical mass is when a portfolio contributes more growth on its own than the amount of income one makes from their W-2. This is my goal when it comes to building a portfolio to someday retire and live off of.
To pursue this long-term goal, I want to execute a strategy that involves building a diversified portfolio of investments designed to take on realistic risks that align with the life I want. Investments are chosen with the aim to generate consistent returns that can continually compound over time while also reducing the effects of taxes, fees, and lifestyle costs.
Here is how I my strategy:
- Always Be Buying: Buying more and more assets makes it easier to build a portfolio as it will grow faster with more and more capital being invested.
- Diversification: Spread my investments across different asset classes with varying risk types and return profiles to mitigate risk and improve reliability of growth.
- Income Growth: Grow my income to increase the amount I can contribute to my overall portfolio. This does make the goal a moving target, but it will ultimately make it more achievable to reach.
- Income Investments: Buying fixed-income securities to rebalance allocations or for living expenses that I anticipate.
My personal benchmark for success in achieving critical mass is when my portfolio return is greater than my W-2 income for consecutive years and can reasonably exceed it moving forward.
Strategic Asset Allocation
My strategy for asset allocation is about creating a portfolio that has opportunity to achieve high growth. In doing so, I focus on identifying promising opportunities, diversifying across asset classes, and targeting specific sectors like the financial sector which have the opportunity for consistent returns out pacing inflation. Click here to see the current asset allocation in my portfolio.
Always Be Buying
To build resilience in my portfolio against market fluctuations, I diversify my assets with a mix of equities, bonds, and soon real estate. My strategy is not just about spreading investments but is a deliberate tactic to balance high-risk, high-reward investments like my private equity investments with stable, income-generating tax advantaged assets like real estate.
At the time I am writing this, I intend to buy my primary residence soon, I am saving money towards it in US treasuries which are great for preserving capital and short-term returns. Just because I am on the hunt for a home does not mean I am stopping my 401(k) or IRA contributions. Always be buying is the mentality I have when it comes to pursuing growth in all areas. No matter the time, I want to be investing in all asset classes to fuel constant growth.
Diverse Asset Classes with Varying Return Profiles
My goal with buying a primary residence, like many others, is that it is one of the main generators of wealth in America, as it limits the cost of living in the long term and those costs go towards building equity in the home. This is a very safe investment assuming I maintain the income to support it. As of lately it seems that the cost of renting is seen as cheaper than the cost of buying, however in the long term I believe buying a home and investing in real estate is advantageous in my goal for critical mass.
My private equity investments are just business ideas that I believe in, I am not some big PE hotshot in NYC who has an allocation in a mega fund, but my investments are high reward to me if I play my cards right. In the name of transparency, Portfolio Literacy is one of those cards. It may cost very little to run the site, but it costs time which is just as valuable as a resource. Portfolio Literacy is here to provide free financial literacy to everyone, however there is opportunity for returns once I have grown an audience. I will speak more about it when this website has been monetized.
Achieving Sustainable High Income
To state the obvious, a higher income provides more opportunity to invest. Having one stable income is great, if it is high paying that is even better. However just like assets, there are risks of losing value or in this case income. I do not believe everyone needs to seek out multiple jobs or income streams, if they have a high income or if they have a reliable income. However, diversifying how I make money is a great way to keep investing in my portfolio of assets. I work as an accountant and have strong job stability, but I still want to grow my income by finishing my CPA for my W-2 and with other forms of income.
Expanding Earnings with Real Estate Income
Often referred to as “house hacking” by residential real estate investors, renting out room(s) in your home is a way to increase your income and cover your own living expenses like the mortgage or rent on the property you live in. My goal with my first home is to rent out rooms while living there to cover expenses and buy a cash flowing asset. The rental income will supplement much of the cost of living and will allow me to diversify my income funding my portfolio.
Supplemental Business Income
Another part of my plan to increase my income is with Portfolio Literacy and other projects I am investing my money and time in. As stated on my portfolio page, I do not want to take the income from my private investments to have disposable income, I want to reinvest in expanding the business and the rest of my portfolio to help me reach critical mass.
Optimization of Investment Returns
To achieve critical mass in my portfolio, the acceleration of returns through strategic assets is crucial. My focus is on optimizing investment returns by ABB in each area of my portfolio. It will definitely take time however after the first property, there will be a second, and after the first successful business there will be another. That does not mean I will not fail along the way, but to Always be Buying means to keep investing in all areas, and having a constant flow of capital helps achieve this.
Debt Investments before Capital Intense Investments
Overall, debt securities provide lower returns than equities however, I do believe there are good qualities about having CDs, bonds, treasuries, and other debt securities in a portfolio at all ages. Saving for a down payment is a goal for me, using a combination of bonds, certificates of deposit (CDs), and treasuries are helping me achieve this goal while prioritizing the preservation of my principal. These investments offer a lower risk profile compared to more volatile assets like stocks, which is ideal for funds intended to use within a shorter time frame. By diversifying my savings across these assets, I am balancing between earning interest and protecting my initial investment, ensuring that my capital grows steadily until I am ready to use it.
Varying Investment Maturities and Exits
This will not take place much in my earlier years in investing, however as time progresses, there will be times when I want to exit a position. Whether it be the future benefit not outweighing the risks, a liquidity event for future investments, or just wanting to avoid losing more money on a bad investment. Some of those events I have more control over others, but I still believe having them happen at different times creates less risk of having a huge windfall of cash and hastily getting into unresearched investments.
Tax Optimizations
As I maintain my stable W-2, contributing to my 401(k) and IRA are givens as they will allow for tax free growth. Owning a home, contributing to a work sponsored 401(k), or investing through an IRA are all major drivers of wealth in the US and it seems negligent to avoid the tried-and-true methods. Tax free growth in public equities is a no brainer, but it is important to offset the restrictions of this capital by investing in regular taxable brokerage accounts or directly owning assets outside of those tax advantaged vehicles.
Closing thoughts on Achieving Portfolio Critical Mass
It takes time, there is no question about it. I do not expect to reach it next year, but I am going to go full throttle on bettering my financial life. I will be publishing updates on my portfolio here on Portfolio Literacy and also provide specific updates and thoughts on my portfolio as blog posts.