What You Need to Know Before the Smartest Money’s 9 Steps of Investing Will Work for You
Last Friday we discussed The Smartest Money’s 9 Steps of Investing—how to identify great investments and assemble them into the best possible portfolio:
Determine the value of your investable assets.
Determine your investment time horizon.
Determine the amount of quarterly income you’ll need from your investable assets for the duration of your investment time horizon.
Determine the cash reserves you’ll need in addition to your income.
Calculate the risk-adjusted performance of the investments you have access to (across all asset classes) as measured since January 2007 or earlier:
Park your cash reserve requirements from Step 4. into a money market account.
Divide your quarterly income requirements from Step 3. by the highest annual percentage yield (“APY”) of the fixed income investment(s) you have access to that have a duration less than or equal to your investment time horizon and have not cut dividends or distributions since January 2007 or earlier; allocate that amount to that/those investment(s).
Allocate what remains of your investable assets after Steps 6. and 7. to the investment(s) with the highest SΩ and an MDDDS that is less than or equal to your investment time horizon.
Re-evaluate and repeat steps 1. through 8. periodically.
Today at 3pm EDT, we will reveal what you need to know for before the smartest money’s 9 steps of investing will work for you…
Hi Ben,
For step 7, I was wondering why you wouldn’t calculate the required capital by dividing the quarterly income target by the quarterly yield, rather than the annual yield.
If someone needs $120,000 per year and has access to an 8% fixed-income product, the quarterly target is $30,000. Since 8% APY breaks down to 2% per quarter, you would divide $30,000 by 2%, which gives you $1.5MM required capital.
But if you divide the $30,000 by the full 8% APY, the result is only $375,000 in investable proceeds, which obviously would be inadequate if the goal is generating $30,000 in quarterly income.
I might be overthinking this, but I want to make sure I’m reading the math the way you intended.