Why Investors should understand the 5 categories

In most average economic times, investors agree that we must diversify. The problem is people do not truly understand diversification. Most people understand diversification as different geographical locations and multiple assets. They think this will be sufficient in rocky and tumultuous times. However, this limited understanding of diversification is why many people will lose their shirts. So how do you, as an aspiring sophisticated investor, learn how to truly diversify your investments, and what does true diversification actually look like?

The 5 Considerations of Investing

Understanding these five considerations and how implementing your understanding of these five categories will set your investing strategy far above even the most well-versed financial planners. Learning about each one of the categories can take time, which you may or may not have. If you do not have the time to dedicate to learning and understanding these five categories, then I would encourage you to reach out, send me an email, or schedule a call with me so that I can share with you how I am helping investors do this through my Investment Club. The five categories, and thus your diversification strategy, need to align with the following, in order of precedence:

1. The Capital Stack: No matter how you plan on investing, in the stock market, the real estate market, or as a business seed round investor, you must understand the capital stack and the risks v.s. rewards of which side of the capital stack you will invest in. Thankfully, there are only two; Debt and or Equity (good times = more equity/ hard times = more secured debt investing)

2. The Market: Once you understand the capital stack you can begin to understand the Markets which fall under each capital stack. The three primary investment markets are as follows: Paper/Digital, Hard Tangible, and Business. Thats it. ALL, meaning 100% of all investments made will fall into one of these three primary markets. Now, each market may lean or be wholly captive to a Capital Stack. For instance, the Paper/ Digital Market is strictly on the Equity side of the capital stack. At the same time, the Hard/ Tangible Markets and the Business Markets can be both on the Debt and Equity, with the Hard/ Tangible Markets having more variety on the Debt side.

3. The Asset Type: I will call these the Lead or Primary Assets. The next category will explain why, but in short each market has a multitude of various assets. For example, the Paper/Digital Markets = stocks, bonds, insurance, crypto currency and NFTS. The Hard/ Tangible Markets = precious metal bullion, Artwork, real estate, and collectibles. The Business Markets = online businesses, import/export, manufacturing, service providers etc. I trust you are starting to get the picture and how important it is to know the previous two categories so well. Unfortunately, investors can get trapped into thinking the Asset is where they need to begin their education when in reality, this is far down the list of importance.

4. The Asset Sub-Assets: Now this is where it gets interesting. Why? Most investors would say, “Ed Assets are Assets; how can there be sub-assets within the Primary Asset?” Great question, and here is some clarity along with some examples. Sub Assets exists’ because even when investing in a specific asset within a specific market, using one of the capital stack approaches the sub-asset can vastly change your strategy. Therefore, knowing which sub-asset you’re going to be investing in BEFORE you determine your strategy will be key. Also some strategy will not work with different sub-assets within the primary asset.

5. The Strategy: This is the last category that we as sophisticated investor’s must be aware of. Contrary to popular opinion, the strategy is LAST on the list of importance, yet this is where many investors get it wrong. When you plan on learning a new investment “method” what you’re really learning is the strategy. Take any 3-day bootcamp, mastermind, or educational/seminar course; you will be taught a strategy first paired with the sub-asset that strategy works best with (according to your Guru). But at this point, investors have skipped all prior categories, simply because their teacher does not educate them, and they believe that this is the BEST and ONLY investment method and that this method will work in ALL economic cycles.

How do I become sophisticated with my investing?

I believe that education is critical. Knowledge and awareness of these 5 categories will go a long way in helping you truly diversify your investments, stay ahead of the investing cycles, and be able to pivot when one strategy or market begins to turn. Over the next five blogs, I will deep-dive into each category (to the best of my ability) and lay some groundwork for you so that you can elevate your investing game, make wiser, more informed decisions, and truly become sophisticated with your investments.