Pyramid power (The Financial Athlete #84)

The foundation (tier 1) of the Activities Pyramid is daily physical activities (walking the dog, taking the stairs rather than the elevator, etc.). This is followed by tier 2 of aerobic exercises (long walks, biking, swimming, recreational sports, circuit training, etc.). Building upon this is tier 3 of traditional strength training/stretch & leisure activities (golf, bowling, shopping, etc.). Lastly, the Activities Pyramid is capped by tier 4 of sedentary activities (watching TV, playing video games, reading, etc.) . This pyramid is designed to show how to move more and sit less without overexertion.

Many of  us have the Activities Pyramid upside down with sedentary activities as the foundation followed by leisure activities (golf, bowling, shopping, etc.), and no strength training/stretch and aerobic exercises to build upon this.

Coincidentally, many investors also have the Investing Pyramid upside down. The Investing Pyramid?

THE FINANCIAL ATHLETE INVESTING PYRAMID

1. The Foundation (tier 1)

Actually, Tier 1 doesn’t involve investing activities. It lays the groundwork to avoid having to sell at a loss to meet personal cash flow needs.

  • minimum of 6 months of cash reserve (living expenses)
  • expenses < 90% income
  • financial literacy
  • playbook for investing (a prepared plan for investing)

2. Invest for Positive Cash Flow (Tier 2)

  • distributions from real estate holdings
  • interest income from bonds
  • dividend income from common and preferred shares
  • royalties

3. Invest for Long-Term Capital Gains (Tier 3)

  • target stocks of strong, profitable, and growing companies at a reasonable price and plan to hold for the long-term (1+ years)
  • reside 4+ years in home purchased at a reasonable price and make home improvements to enhance value and then sell it (less than 4 years may not offset closing costs)
  • buy gold (other commodities) at a historically low price (adjusted for inflation)

WARNING: Tiers 4 & 5 are the so-called “fun” activities, which should only be done after cementing Tier 1 through 3 . In other words, due to the nature of higher risk, trading should only be done with excess money. Money set aside for Tier 1, 2, & 3 should never be placed at risk. Frankly, it is entirely unnecessary to partake in Tier 4 & 5 activities.

4. Invest for Short-term Capital Gains — Trading (Tier 4)

  • flip residential real estate purchased at a reasonable price
  • trade stocks using primarily technical analysis to profit from volatility (this should only be done with a portion of the carefully chosen stocks for long-term capital gains)

5. Speculation (not really an investing activity)

  • sell Covered Calls (Derivatives) expiring within 3 months for those “trading stocks” in portfolio
  • speculate on companies with explosive growth potential (unsuitable for most people)
  • collect art and other collectibles
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