There are a few core design principles I have used in designing my version of the Passive Income Streams. These principles guide me in deciding where to invest the money in my taxable accounts. Here goes.
- Spread the money into different risk buckets
- Vanguard has a risk rating scale of 1-5 for all the investment vehicles it provides….1 being the most conservative/least risky and 5 being the least conservative/most risky.
- My design principle is to invest money in all risk buckets.The percentage of investments in each bucket varies depending on how the market is doing.
- For example, as of today (09/02/2014), the stocks are highly overvalued….don’t take my word for it…the experts thinks so too 🙂 So, more money towards buckets 2 and 3 and less in 4 and 5 risk buckets. If the market tanks, then change the skew more towards buckets 4 and 5.
- I can hear comments about market timing already 🙂
- For each risk bucket, have a minimum of two investment vehicles.
- Each fund manager may go through his/her own mistake prone period. By having two different investment vehicles, I am betting on the fact that both fund managers do not have their respective bad times at the same time.
- Almost every dollar has to provide some income in return.
- I want assets and not liabilities 🙂
- Almost all the money is spent in dividend producing vehicles: muni bond funds and dividend stock funds.
- Invest some money in Capital Appreciation (high risk) buckets
- I call this the lottery ticket investments.
- I.e. small cap and mid cap investments.
- All the investments coming from taxable accounts have to be TAX-EFFICIENT.
- I will talk in detail about Tax-efficient investing in another post.
- The basic idea is to postpone paying taxes to a more opportune time when the tax bracket is low, invest in tax-friendly investments like muni bonds, etc.
- Automate as many investments as possible
- I have no time, no knowledge, no patience, etc etc to spend a lot of time doing stock tracking and investing.
- So, automatic investments and hence mutual funds are my best friends.
In a subsequent post, I will talk more about the actual funds where I have invested money in, based on the above design principles.
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