How should we be investing? 5 factors to consider

Suddenly felt like writing a back-to-basic topic. Some people think that age and investment strategy are correlated. I beg to differ.

IMO we should not plan our investment portfolio simply based on age. Age is just an arbitrary number - an easy form of measurement when it comes to statistics and policies but confer little meaning when we try to measure it against our actual lifespan (we cannot predict how long we can live but ironically still have to do planning base on mean statistics) and how we should be managing our portfolios. Realistically, we can say our age is directly proportionate to our energy level and mental agility but not to our net worth, liability, investment risk appetite, wisdom and personality.

These five factors - net worth, liability, risk appetite, wisdom and personality are key to how we should be investing throughout our lifetime. They should be assessed in close relation to one another and fully dynamic to life events.

How much risk to take depends on one's net worth and liability

First and foremost, before making any investment, we need to ensure that all the basics have been well taken care of (eg. cash flow for daily essential expenses, insurance coverage, emergency funds, loan repayment). With that out of the way, we can comfortably expose the rest of our income / savings to certain degree of risk. Yes, all investment instrument come with risk (even bonds).

The higher our net worth and earning power, theoretically, the higher the risk we can take but don't forget to subtract the liabilities from it. Liabilities are our outstanding loans (leverages), dependents, bills etc - things that suck money out of our wallets. With a calculation of our liability to net worth, we might be able to better determine the types of investment we are suitable for (lower the ratio, able to withstand investments of higher risk type). If assessing a company, we would want this ratio to be lower than 1.0, and a good ratio should be lower than 0.4.

We can easily obtain a figure for our liability to net worth, however, the tricky part is how are we going to assign a figure to risk and then do the match.

Risk profiling your investment instrument / types

Perhaps by classifying our investments according to their risk profiles, we can get a clearer picture on whether we are "investing within our means". 

Some factors that determine an investment's risk level are volatility (beta), downside risk (maximum historical drawdown), time risk (lock-up period) etc. 

When we try to quantify risk, we are basically quantifying our chance of losing money.

Of course, there are ways to minimize risk even on extremely risky investments, such as practicing stop loss and doing a barbell strategy. That will be extra reading for those who are interested. 

Also, in the unlikelihood of a black swan event, even the so-called lowest risk investments cannot escape getting massacred.

Risk appetite: Too risk averse = Missed opportunities?

When we don't take substantial risks when given the chance to do so, we are giving up opportunities for bountiful rewards.

Some signs of risk averseness:

1) Not wanting to learn and try as everything seems risky

2) Selling winners too early for fear of losing back

3) Waiting and waiting for market crashes but fail to act big when the crash comes

4) Negative self-talks making the risks seem bigger than they actually are

However, I need to highlight that having some risk averseness in our system may actually be good thing. It can help us to avert dangers and prevent jumping into rash decisions by FOMO-ing.

To concentrate (go all in) or to diversify?

I think SMOL's post here provided a very good answer to that.

I will further simplify it as:
If one is lazy to hone one's craft or do research... diversify! 

As discussed in my past post, it is a double-edge sword - diversification means limiting the gains on the winners but you won't lose your pants on a bad investment pick.

If one has the alpha, first-mover advantage, specialized skill or whatever that holds an edge over the masses, then it makes perfect sense to concentrate and (hope to) make it big.

What is something "in between"? 

Diversify with position sizing in mind. Read also: Risk factors in trade loss

At the same time, don't stretch your resources too thinly and diversely as it will be harder to manage. I would think a fair number might be 3-4 investment vehicles, with not more than 10 for each vehicle.

Climbing up mountain versus Going down mountain

Ask ourselves which stage in our life are we at?

Are we still climbing the mountain or ready to make our way down? There's a take that if one's climbing up the mountain, one should experience all the risks there is out there in the wild and if one's going down the mountain, one should just draw down on one's coffer and not take on risks.

The purpose of climbing mountain is to build as much resources, assets and wisdom as our energy and time allow, especially in the period when there's no liability to worry about. (Now some may argue that liabilities go up with age, which in a way I won't deny if you are talking about starting a family.) 

Interestingly, some people prefer to climb a steep arduous mountain then stroll down an extremely long gentle slope. Boredom not a problem. And some like to climb mountain all the way (ho say la).

For the majority of us, after climbing the mountain for years and reaching our self-proclaimed "summit", we probably want to stroll leisurely down the mountain without any stress. If taking on risks equates to subjecting yourself to unnecessary stress, then the choice is obvious - you should preserve and draw down on your net worth. No risk... unless you outlived your assets (suay or poor calculations?).

Generally, when one has little or no liability, one can move out further on the risk curve when climbing mountain to harness higher capital gains. Some may go as far as making use of "good" leverage.

Eventually, the assets or capital gained can be our sources of sustainable income e.g dividends, when one decided to go down mountain. That's also known as retirement income

Wisdom and reward

Why do one invest?

The reason is simple - because the reward of investing exceeds the risk undertaken.

If you are sold a product with high risk yet returns little reward, would you take it?

Look at the diagram above and your common sense says no.

Then how to assess if something is worth investing?

By expanding our knowledge and wisdom. And of course learn from experience!

There are many methodologies out there for the various instrument vehicles, but if you have not tried, you will not know if they work for you.

Wisdom is connecting the dots & knowing how to think backwards

Sometimes it could be paradoxical that the more you know, the less incline you are to investing in something.

[Tidbit: Do check out Seth Godin's post on 2x2 for choices in life, it resonates with the quadrant above.]


Personality is hard to change. Personality is greatly tied in to how we steer our mind. We also need to know what drives us.

Is risk averseness a part of our personality?

I will leave you to debate that.

When we can identify our personalities and make peace with it, we can better manage our weaknesses in making wise investment decisions.

Now back to the question on "how should we be investing?".

Well... You know yourself best for the answer right?

Related post: 

Why do we often make fair but not excellent investment decisions?

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