For A Balanced Portfolio: The Equal Parts Cocktail Model
We can learn a thing or two about balancing a financial portfolio from one of the world's best cocktails.
The Corpse Reviver #2 is an example of a class of drinks called “equal parts cocktails.” In general they are very good, because they are both strong and well-balanced. The #2 has gin, Cointreau (orange liqueur), Lillet (aromatized aperitif wine), and fresh lemon juice, with an absinthe rinse. If you haven’t tried it, you are really missing something.
What does a cocktail have to do with a financial portfolio? I’m glad you asked.
A portfolio also needs balance in terms of profit, growth potential, liquidity, risk, usability, and other factors. I personally use a “four ingredient” strategy to cover a number of these factors. Each ingredient is 25% of your overall net worth.
Ingredient #1: Low Risk (e.g. VGT) (a.k.a Cointreau)
When some people say “low risk”, they are talking about bonds or money market accounts. When I talk about low risk, I mean something like investing in an ETF covering the entire tech sector of the stock market (i.e. Nasdaq). This gives approximately a 20% return / yr. With compounding, this will set you up for retirement on its own. This gives you a “Plan B” if ingredient #2 has any problems. Everybody loves orange liqueur, you can’t go wrong adding them to pretty much any cocktail.
Ingredient #2: High Risk (e.g. leveraged ETF, such as USD) (a.k.a Gin)
There are various ways to do higher-risk investments, but I prefer leveraged ETFs which extend the money you invest with loans. This makes them much more volatile, but if purchased at the right time, can result in much larger gains than most alternatives. You might have to wait several years to cash these out, but they will pull up the average yearly profit of the other three ingredients. Gin can be strong, so be careful how many shots you use.
Ingredient #3: Real Estate (e.g. primary home, or rental property) (a.k.a. Lemon Juice)
Owning your own home, and possible one or two other rental properties, offers a number of advantages. If something happened to the dollar, or the US economy as a whole, you would still own something with physical value. It also lets you profit from loaned money (a mortgage) which extends your overall investment size. It also gives you the option of refinancing (refi) or starting a home-equity line of credit (HELOC). Refis make property investments more liquid, and you can move capital out, into one of the other ingredients. For HELOCs, see “The Rinse” below. Note that the “25%” refers to your equity (current price - loan), not just the current worth of the properties. Lemon juice can be tart and it spoils fairly rapidly, so bear in mind that rental properties can be a headache and need repairs.
Ingredient #4: Passive Income (e.g. JEPQ) (a.k.a Lillet)
There are many different forms of passive income, some requiring more effort, time, and risk than others. I prefer ETFs designed for passive income that typically don’t gain or lose much value in terms of stock price, but still siphon off profits in the form of monthly dividend payments. These return approximately 10% / yr. Why invest in something with such a low return at all? Because, the above three ingredients are subject the whims of recessions, downturns, and fads. You don’t really want to sell your leveraged ETF or your house when the market is down. Passive-income ETFs continue to pay out roughly the same amount, even during recessions. Thus, they balance out the other three ingredients, and make your personal finances more stable and less stressful. Lillet is actually used for this purpose in cocktails - to soften harsh primary liquors. ◇
The Rinse: Safety Net (e.g. HELOC) (a.k.a Absinthe)
While not technically an investment, you do need a safety net to add the finishing touch on your investment portfolio. You could keep your safety net (extra money for emergencies) in a high-interest rate savings or money-market account. However, you would actually have to take money away from the other ingredients to do this (and earn a low return on it.) Instead, use borrowed money to form your safety net. Applying for a HELOC on your personal home gives you a 100k+ line of credit that typically costs you nothing / mo if you don’t use it. Some banks (e.g. Chase) offer SLOCs (security-backed lines of credit). To get one of these you can take some of your lower-risk stocks (Ingredient #1) and put them in a managed account with the bank. As long as you leave them there, you can use them as collateral for a 100k+ line of credit that costs you nothing, as long as you don’t use it. Another option is using margin (e.g. Robinhood) which also lets you loan and withdraw 100k+ as cash if needed. You can keep all of these for emergencies. We all need a little absinthe for when the going gets rough.
Other Considerations
Interactions: Just as in the cocktail, the above five financial ingredients interact with each other. Low-risk stocks can be used as collateral for a safety net and to balance your high-risk stocks. A house can be used to diversify risk, while supporting a safety net or expanding your investment size. High-risk investments can increase your average portfolio profit. Passive income can give you liquidity during downturns.
Retirement Funds: Some of the money in the above “buckets” should be in your Roth retirement fund. How much to devote to this purpose depends on your age and other factors (less when you’re younger, a lot more when you’re nearing 60). See a previous post on this topic.
Modifications: Some people like more gin, bitters, or sweetener. Feel free to tweak these proportions as you see fit, but this is a rough recipe for an excellent investing cocktail.
△ It is possible that you may want to phase out this ingredient when you are approaching age 60 to avoid the unnecessary taxes, and transition to a Roth instead.
Photo credit: AI-generated by Black Forest Labs: Flux-Pro
Disclaimer: I do not hold any financial degrees or certifications. I am not a tax advisor. Your investment decisions are your own, and it is best to test strategies with small amounts of money first, preferably after extensive back-testing. Question the dogma and discover the facts for yourself.