You have choices on where to put your money. How do you make the best decision? In today’s video, I’ll discuss the best principles to guide your decision.

Video Notes

How to Best Allocate Capital

I have $10k in a low-risk investment that pays 11% over the next year.

1. United States: Series I-Bonds 9.6%.

There is an alternate investment that has the potential to make more than 11% per year. Why not take the money in the 11% ROI investment and re-allocate to this new one?

Guiding Principles:

1. My goal drives a lot of where I put my money.
   1. Based on me saving X amount every year for the next 20 years and needing Y amount in the 20^th year to retire, I discover I need an 8% annual return to hit my goal.
   1. I can’t just park my money in bonds yielding 4% or CDs paying 3% because it will be IMPOSSIBLE to reach my goal. Of necessity, I must own assets that have historically grown at 8%+ annually. That points to stocks.
2. I’m incentivized to put money where it grows the MOST!
   1. Trading System A: Potential return 25% per year
   1. Trading System B: Potential return 10% per year
3. You must also consider the risk or volatility inherent to the asset/system you’re investing in.
   1. Trading System A: potential ROI 25% but it’s insanely volatile and has drawdowns of -60% to -80%
   1. Trading System B: potential ROI 10% but it’s not as volatile and has drawdowns of -20% to -30%.
   1. The lower risk/less volatility of a lower ROI system/asset makes it justified.
4. Likelihood of success.
   1. 100% chance of 9.6% return in Series I bonds.
   1. Less than 100% chance my alternate trading system pays 20% return over the year.
5. Return on stress. Return on effort
   1. 11% gov’t bond = no stress / Return on effort = zero

Tyler’s preference: Favor higher probability of making less return with most of the money and get aggressive with lower probability strategies that make higher potential returns with a smaller portion of the account.

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