A Recipe for Financial Freedom

Published October 3rd, 2022
Reading Time: 5 minutes
Financial Freedom

Written by:

Marianne Rodriguez, CFP®
Zoe Network Advisor

A Recipe for Financial Freedom

Published October 3rd, 2022 
Reading Time: 5 minutes
Financial Freedom

Written by:

Marianne Rodriguez, CFP®
Zoe Network Advisor

Financial freedom is often tied to wealth. The freedom of having the right amount of wealth to let you choose one path over another, pursue a goal, or put it to rest when deemed appropriate.

Who doesn’t crave the perfect chocolate cake? Even if you aren’t a chocolate cake lover, you know that to make one, you need the right ingredients and oven temperature. The perfect cake has perfect texture and taste. To achieve that, you need to follow the instructions of the recipe. 

Financial freedom? Not that different. There is, in fact, a recipe for financial freedom. 

Financial freedom is often tied to wealth. The freedom of having the right amount of wealth to let you choose one path over another, pursue a goal, or put it to rest when deemed appropriate. Whether creating, growing, or preserving wealth, investing is one of the most accessible and readily available means to accomplish all three. When putting together an investment portfolio, there are two critical concepts to keep in mind: diversification and asset allocation. 

A Wide Variety of Ingredients to Choose From

You’ve heard the saying, Do not put all your eggs in one basket.” But what does that mean? 

The “eggs” represent money, and the “basket” depicts the various investments that we get to choose. Diversification is an investment portfolio strategy that helps minimize risk by spreading it out across different types of investments with uncorrelated returns.

In addition to the three major asset classes (stocks, bonds, and cash), there are other types of investments, such as derivatives (options, futures, and forex), real assets (real estate and commodities), and alternatives (private equity and hedge funds). Other newer and more unconventional ones include cryptocurrencies and NFTs. 

Within the more conventional asset classes, sub-categories provide diversified investment portfolios with more breadth and depth. Some examples are sectors (financials, materials, energy, technology, health care), industries (pharmaceutical and biotech within the healthcare sector), company size (large-cap, mid-cap, and small-cap), and the countries where they sell their goods and services. Incorporating all these into your investment portfolio is not an easy task, but it is necessary when looking to mitigate undue risk.

Order Before Chaos: Understanding Asset Allocation 

Asset allocation is implementing strategies that balance risk and reward through your assets by adjusting the weight (percentage) of each asset class within your portfolio. Think of it as baking a cake. The recipe calls for a mix of different high-quality ingredients, just like a financial portfolio requires a combination of asset classes to increase your chances for better returns.

Finding the right “ingredients” for your portfolio is a priority, as it supports the goal to mitigate significant increases and decreases in a portfolio’s value. For example, if you follow the stock market, you will notice that stock prices can appreciate significantly on any given day, followed by a drastic decline the next day, and vice versa. We refer to this fluctuation as volatility. Since building a portfolio is not an exact science, you need to consider adding other types of investments to help alleviate your portfolio’s risk. 

Don’t Forget to Turn On the Oven…

A crucial part of baking a cake is understanding the temperature and time it needs to stay in the oven. Those two variables are equivalent to an investment portfolio’s risk tolerance and time horizon.  

To further define your time horizon, consider the amount of time (number of months, years, or decades) you anticipate investing before achieving a particular financial goal. At the same time, personal risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for potential returns.

The Secret Ingredient

There are two secret ingredients for this recipe: (1) selecting a mix of investments that meet your financial goals within the time horizon you have set and (2) making sure these investments are aligned with a level of risk you can live comfortably with. 

Ask yourself: how much time do I have to allow this portfolio to grow? But most importantly, confront your feelings about what losing value could mean to you, your lifestyle, and your financial freedom. 

Diversification and asset allocation are just strategies that provide clarity and direction; there is much more to being a savvy investor. Managing your investment portfolio is an art and a science; you need time, knowledge, and the will to do it. The cake won’t bake itself!

Tips from the Someone Who Mastered the Recipe

Every good baker follows the recipe to perfection. Here is a breakdown of what we have covered:

  1. Diversify your portfolio: Take a good look at the ingredients available to add to the mix. Make sure they are aligned with your goals, risk tolerance, preference, and overall strategy. This is a crucial part of the process! 
  2. Asset allocation: Measure your ingredients. The perfect cake contains just the right amount of cocoa, sugar, flour, eggs, etc. Financial portfolios work similarly. Evaluate the percentage of assets within your portfolio to increase your chances for higher returns.
  3. Seek a professional: It’s no surprise that working with a wealth expert will ultimately help you grow your wealth and achieve your wealth goals. If you’re unsure where to start, make sure you work with someone who has your best interest at heart. 

Creating, growing, and protecting wealth through an investment portfolio to gain financial independence is no easy task, but if done right, the results are just as “sweet” and rewarding. 

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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