Through my personal network, I am getting several questions about investment framework or exit strategies. Friends ask me things like “How much money do you invest in X coin”. Or “When are you taking profits?”.
I understand why I’m asked this, however, my strategy is customized to my goals, money situation, beliefs, and risk appetite. This is why my strategy isn’t necessarily good for you.
Now how do you create a strategy that is profitable for you?
To answer that question, we need to discuss a few variables that affect your game plan.
Like I mentioned in a previous blog, these are things you need to consider:
- Risk tolerance
- Age & Personal situation
- Opportunity cost
- Time management
You Need a Strategy, Even If You Don’t Know It
For the poker players who read this, you guys understand that having a Pre-Flop and Post-Flop strategy is 100x better than playing on the fly.
Emotion is a money killer.
I repeat, emotion is a bloody money killer.
When we have to make financial decisions under stress, humans are notoriously bad at making the right choices. Even if we know what the right play is, our gut will tell us something different. Like that little voice in your head saying “the price can go higher!”, even though you want to cash out your investment.
This is caused by fear, greed, ego, previous experiences, and other mental blocks you have created in your life.
After working with several mental coaches since 2014, I came to realize I have some huge mental flaws (I’m quite the degen), and I learned how I can prevent myself from falling into my pitfalls.
If we’re investing $1000, and want to become a millionaire with that over the next two years. Well, that’s impossible and we’re setting ourselves up to make brutal mistakes along the way.
We want to understand what we want and what we can handle. Once we know that, we create a plan of action where our goals are in line with our actions. And that’s how you start creating your personal investment framework.
7 Pillars For Your Investment Framework
1. Bankroll – How Much Money Do you Got?
Your bankroll is different from your net worth. With the last, you combine the value of everything you own which adds up to your net worth. But your bankroll is the money you reserve for this dedicated portfolio. As a poker player, the money you use for poker is your bankroll.
For an investor, the money you allocate to your portfolio is your bankroll.
I have several portfolio’s, each with its own dedicated bankroll.
How much money you dedicate to your portfolio is entirely up to you. It’s common that for higher risk investment (example: Crypto) categories you dedicate a lower percentage. While for lower risk investments (example: Gold), you dedicate a higher percentage to it.
Now how you determine a percentage for you, we need to take into account the variables I will write down below.
2. Risk Tolerance – Ready to Die?
Many of you who read this, are poker players. I think we can agree that we have a huge appetite for risk.
However, this isn’t the same for everyone.
Ask yourself, how much risk are you willing to take?
When I purchased my first Bitcoin back in 2013, I had little knowledge about it. And in the early times, we were far from what we are today. Back in those days, it was still possible it would completely fail and go to zero. So for me, the mindset was always: “I’m willing to lose it all”.
Now if you would ask a hedge fund manager if he’s willing to lose it all, they probably say they are only willing to lose a few % on an investment. So they would not be able to jump on BTC in 2013.
If you’re willing to lose it all, you don’t panic about a 10% drop in a day. If you’re only willing to lose 20% of your investment, a 10% drop is putting huge emotional pressure on you. Which could lead to bad decisions, like selling to early or too late.
In addition, emotional mistakes are easy to accumulate. I know several people who were not willing to lose it all, but they still kept on to silly ICO tokens of 2017 who lost 95% of the value. Once you break an emotional barrier, the floodgates for more emotional mistakes are open.
I personally know guys who have 100% of their net worth in cryptocurrency (what a great 2021 they are having), and I know guys who will never put more than 1% of their net worth in cryptocurrency. You can be anywhere in between. Just find out where your comfort levels are by asking yourself the right questions like mentioned above.
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A little mental leak story for you
Try to imagine you have a $10,000 investment in SIA coins because you believe it will go up. You kinda like the project, decentralized storage sounds cool, but you’re only willing to lose $1000 of your investment. Now one day, SIA coin drops 8%. You are still not at the maximum loss you want to take, but you’re getting pretty nervous about it. You go to sleep and wake up to see your favorite coin dropped another 7%. Now you’re at a total of 15% loss, which was higher than calculated. You tell yourself, “stay strong, it will go back up”.
The days after, SIA moves a little up and down, but not as much to get you back to your comfort levels. However, because the price goes sideways a few days, you’re getting used to the new loss level and you tell yourself “no need to panic, just hodl and you will be fine”. Of course, crypto doesn’t work like that and over the next period of time, you see days of 10-20% losses on the regular. Until you are down a total of 50%.
You just went through an emotional rollercoaster, and you are way deeper into a loss than you wanted. You now decide “fuck it, all or nothing”. I’m gonna HODL this coin until it’s back to the normal price, or I will lose it all.
This is the worst scenario you can be in, and on top of that. Many of you who have been through this situation, sold the coin when it was back to its old levels to get out on break even. Only to see the coin go up 5x more from there.
How do you prevent this?
When we make decisions in the moment, it is very difficult to prevent this.
The best way is to create a strategy before you make the investment. Determine your risk profile and keep reading on to build your investment framework.
Keep in mind, that you determine your own risk and you add pillars to it to fit that tolerance.
3. Cash flow – How Many Income Streams You Got?
The total amount of money being transferred into and out of your bank account is your cash flow.
Is a salary your only source of income?
Or do you have several (passive) income streams that provide you cash every day/week/month?
In addition, how much money are you spending every month?
If you have more money coming in than going out. You have a positive cash flow. This extra money can be used to invest. You can increase your cash flow by adding more revenue streams or reducing the outgoing cost.
The higher your positive cashflow is, the more risky investment strategy you can have.
For many poker players, $10k a month is a decent income, if you’re spending $2k a month as a single guy, you have $8k a month you can invest. Losing half of that on an investment, isn’t a huge deal because 2 weeks later you have won that back with poker.
However, if you have a family, and a job that earns you $5k a month, but your cost is $4k a month. You only have $1k a month you can invest, losing the same $4k is a much larger financial and emotional hit.
You see how I also added a bit of personal information in those examples. We’ll discuss that a little later as it is also important to take into account for building your investment framework.
If you have several income streams that add to your cash flow, it’s better than relying on one. It’s pretty obvious, that if you have one income stream it’s devastation if you lose that.
Look at your cash flow situation, how many income streams do you have, what are your monthly cost, can you change things to increase your cash flow positions? And that those into account when you are creating your personal blueprint.
4. Age & Personal Situation – Are You a Sugardaddy?
Here are 3 examples of completely different age and personal situations:
- A Single, 23-year-old poker player who lives in Thailand with roommates
- A 30-year-old accountant, with a mortgaged house, married with 3 kids and a dog
- A 75-year-old single man, with 9 grandkids who lives of his pension, with a young hot girlfriend
I think you all can understand why each of these examples will have a completely different investment strategy.
let me break down a few important things that matter and why.
The older you get, the less time you have to spend your money. So it becomes less important to make a lot more, and it becomes more important to maintain the lifestyle you are used to by now, like the sugar daddy in the image above. Losing his money means losing his hot girlfriend. So protecting his net worth is more important than increasing it.
On the contrary, the younger you are the more time you have to make money. However, money tends to compound, so the more money you make at an early age the bigger multipliers you’ll have when you get to retirement. You’re also still creating your lifestyle and goals, and if you have 50k or 500k will make a big difference in the life you will have.
As a rule of thumb, the younger you are, the more reasons you have for a higher risk strategy.
Ask yourself this question: “Does my investment bankroll impact other people?”.
If that’s a yes, for example, you have a wife and family, you might want to have a lower risk approach than a single guy. The amount of stress you will add to your decision-making is not to be underestimated.
Monthly Cost Are Important to Consider For Your Investment Framework
This kind of ties to the cash flow situation i described above. But I wanted to mention it again here.
If you have a mortgage on your house and lease a fancy car. You want to be at lower risk than a guy who lives with housemates and owns nothing but the stuff in his backpack.
5. Opportunity Cost – left or Right?
Imagine these girls are BFF’s and you see them walking by hand in hand. They both smile at you, obviously open to striking a conversation. But you can only pick one of them, as a threesome is not an option. Choosing one means losing the other.
Simply put, that’s opportunity cost.
This works the same with investments, as you can only invest your money in one place at a time. Investing it in Bitcoin means you can’t invest it in Tesla and vice versa.
When you set aside a bankroll, this is something you want to keep in mind. How many other opportunities are out there that you want to invest in? And is there a way to split it into separate portfolios?
In the last bear market, I had money set aside to buy big dips. But when the big dips came, my company had a good growth plan that needed investment as well. I picked to bet on my company and missed the opportunity of buying the dip.
This also applies to time. As you can only spend your time once. If you choose to spend it on working on a project, you can’t spend it on educating yourself on trading. You pick and choose what works for you and what works with the other pillars of your investment framework.
6. Time Management – Tick Tock, Another Hour Gone
This is taking a lot of time already, but we’re almost there.
Ask yourself “How much time do I want to spend on investing?”.
If the answer is 0. Then you want to look at low-risk asset classes that take no time at all, like gold. You can almost blindly buy gold and hold it for the rest of your life.
However, if you’re looking at cryptocurrency, and especially the smaller exotic coins. You’re gonna spend a significant amount of time on it. I’ve seen projects completely vanish because a CEO left without an announcement. Or the lead developer got terminal ill. If you park a lot of money in a project, that relies on 1 or 2 key persons, then you better be tracking that project on a semi-daily basis to see what’s cooking in the kitchen.
Generally speaking, the higher risk the investment, the more time you will spend on tracking it and optimizing your returns.
In 2018, I saw many friends who lost all interest in cryptocurrency, and the smaller projects. But still held on to their speculative smaller coins.
I believe it was the mear hope of it returning to old levels. In reality, many of those coins dropped 95%+ and teams abandoned the projects. If they had just spent time tracking it, it could have prevented them from taking a bigger loss than necessary.
Time Management is also related to the other pillars of the investment framework. If you have 0.05% of your portfolio in high-risk investments, you don’t want to spend much time there. However, if your 30% into an investment, naturally you will direct more focus towards it.
7. Goals – Big Dreams, Bigger Risks
Do you want to buy the Playboy Mansion?
Or do you want to pay off your mortgage so you and your family can live without the pressure of those monthly bills?
Even if you start from the exact same financial position today, you can probably guess, both of these goals have different strategies.
You have to ask yourself, what is your mid-term and long-term goal with your investment portfolio.
If you want to slowly build it up, with a low risk of losing it all. Naturally, you pick a lower risk strategy than a dude who wants to buy the Playboy mansion.
I usually start with my goal. What do I want to accomplish 5-10 or even 20 years from now? I work backward from there to make sure the other pillars help support the infrastructure I’m building.
One important thing to keep in mind is that you want to set a realistic target. If my goal is to reach 1 Million in the next 3 years, and I’m only at 10k after 3 months, it’s easy to find excuses to give up. Therefore you want to set achievable goals or work with multiple targets like targets 1, 2, and 3.
If your goals are not in line with the risk profile, time, and bankroll you have, you’re setting yourself up for failure.
Create Your Personal Investment Framework Now
You still have to do it yourself, my advice to you is to do it in the following order:
- Set mid-term and long term goals
- Determine how much time you want to spend
- Set a bankroll, keeping in mind your cash flow, age & personal situation
- Determine your risk profile and check if the first 3 points are in line with that
- Check if you miss any opportunity cost with the above
After this, you should have a clearer view of your investment framework and you’re ready to start building the right strategy. More on that in my blog in March and currently on my Twitter.
If you have friends, who struggle with the same thing. Please share this blog on your social media, they will be grateful and so will I.