Application of the essentials (Capital, Cash Flow, Team and Leverage) into our structured framework will help you analyse where an individual’s investment/asset falls into via the bucketed stages as shown below. The construction of the system involves three stages and each stage could take from months to years to establish, hence, patience is key.
The diagram illustrates different Stages and each Stage signifies different investment vehicles. Every Stage has a different purpose, whether it is to create a sound foundation or strengthen your core or amplify your performance.
Stage 1: Foundation: The objective at this Stage would be to reach a critical amount of Liquid able assets. Without sufficient liquidity at the base, the whole system risks the possibility of crashing to the ground. At 29k, our preferred vehicle for Stage 1 construction is Mutual Funds; preferably diversified across Geographies and Currencies. As long as the conditions of liquidity are met, there can be a flexibility in choice. Some investors may spend sometimes years at this step hence the vehicles like mutual funds offer them a possible inflation-adjusted positive return over investing in traditional vehicles like Fixed Deposit and Gold. We recommend at least 50% of the investable assets to be placed in this section.
Stage 2: Core: At the core of the pyramid is building assets with an expectation of creating cash flow streams. Real Estate with robust yields or Structured Notes with regular coupons is used to strengthen the core. We avoid applying leverage at this stage as any adverse impact can spread to the foundation of your Prosperity Architecture. One bonus essential that we at 29k apply here is to always purchase below par. In other words, always purchase at a discount. This will help build the margin of safety and improves ROI. We recommend 30% of the investable assets to be placed at the Core.
Stage 3: Performance: This is the step that makes good for all the time and effort that was spent working hard navigating your way through Stages 1 and 2. With the assurance that 80% of your assets are safely stored at the Core and the Foundation levels, Stage 3 can be attempted with confidence. Here we introduce Leverage: With the remainder of the 20%, an application of 1:10 leverage means that your wealth under your control amplifies. Again, one has to bear in mind that the wrong application of this added boost in the amount of money under your control could affect the Core and a disastrous application can shake the foundation.
Interested in knowing more about building a robust financial plan? We would love to have a word with you.
Written by Prashanth Prabhu
Founder – 29k Group