The 3 Investment Buckets Every Investor Should Have

If you want to be a success at investing, diversification is the name of the game. You need to place your investments in a variety of locations both …

Alternative Investments

If you want to be a success at investing, diversification is the name of the game. You need to place your investments in a variety of locations both inside of individual asset classes, as well as across various asset classes.

But that’s just the start. In order to protect that nest egg and maximize your chances of creating substantial wealth, you also have to diversify across differing ROI categories. In other words, investments should take a tiered approach to risk/return.

Every financial advisor or investor will have his or her individual approach, but one time-tested strategy is to divide up investments into three “buckets.” Each features a different risk-reward profile, which increases the potential for generating a significant return.

Here’s how it works.

Bucket #1: Guaranteed Investments (Low ROI)

This first bucket is your safety net. It consists of guaranteed investments. Naturally, it also offers the lowest ROI (0.5 to 4 percent). Typically, investments in this bucket consist of:

Try Gemini Today! 123

The Gemini Exchange makes it simple to research crypto market, buy bitcoin and other cryptos plus earn Up to 8.05% APY!

  • Life insurance. You can view both term life insurance and whole life insurance as investments. The former obviously doesn’t give you a rate of return, but it does provide guaranteed financial security for your family if something should happen to you. Whole life provides a death benefit and a small, steady rate of return.
  • Another good option is to invest in an annuity. These are technically an insurance product, but they deserve their own category. With an annuity, you make payments for a period of time. Then, once a certain date is reached, the annuity sends you a monthly check. In some cases, these payments will be made for the rest of your life (guaranteed). Check out this article to learn more.
  • A certificate of deposit (CD) is a low-risk savings tool that offers a guaranteed return on your money in exchange if you commit to the investment for a period of time. You won’t earn much of anything with a CD, but it can be a solid way to guard against inflation. Many people use a technique known as a CD ladder.

Bucket #2: Proven Investments (Mid ROI)

Though you’ll want to place some of your funds in guaranteed investments, the bulk of your investments will go into bucket two. This is where you have proven investments that offer a middle-of-the-road ROI (5 to 12 percent).

Technically, you could lose money on these, but it’s unlikely over a long period of time. Common options include:

  • 401k and/or IRA. The bulk of your investments should go into a 401k, IRA, or other tax-advantaged retirement investing vehicle. Admittedly, these investments can experience volatility, but that have largely proven to generate pretty significant ROI over a period of 10, 20, or 30-plus years.
  • Real estate. Once your retirement accounts are maxed out, further money can go to real estate. Assuming you get good advice and run the numbers accurately, real estate tends to provide a nice monthly rate of return. (Plus, you get tax benefits and appreciation.)
  • Precious metals. Gold and silver are a nice form in which to store value. Over time, they tend to increase in worth and generate a reliable ROI.

Bucket #3: Speculative Investments (High ROI)

The final bucket consists of speculative investments that carry a large risk-reward swing. You could lose everything, or you might generate a massive return of 50, 100, or even 1,000 percent or more.

Because of the level of risk, you wouldn’t want to put a significant portion of your money in this bucket. A small amount will do.

  • Individual stocks. It’s never advisable to invest in individual stocks within your retirement account. But if there are a handful of stocks you feel really good about, you can always throw some money at them as part of bucket three.
  • Whether you’re a firm believer in crypto or a skeptic, the potential for three- and four-digit returns exists. Putting a small percentage of your investments into Bitcoin or Ethereum might yield massive profits in the years to come.
  • Finally, if you have a substantial amount of cash on hand and want to invest in a startup or small business, this could be part of your bucket number three. You shouldn’t anticipate getting this money back soon (if ever), though. You’re taking an educated gamble for a shot at enjoying a massive upside.

It’s Time to Get Diversified

You’ll have to meet with a financial advisor or investment planner to figure out the best approach for your situation. But as a general rule, you might consider putting 25 percent of your investments in bucket one, 65 percent in bucket two, and 10 percent in bucket three.

The point once again is to diversify. Avoid putting too much money in any single category (particularly if a high-risk one). Average things out and wait patiently for time to do its thing.


Share This:

In this article