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Core Principles of Financial Well-being

I have discussed how to prepare a minimal financial checklist, how to appreciate the risks and rewards of low-probability events, and a sound strategy of long-term investing. Now is the time to jot down the basic tenets of our financial lives. You should write your own, keeping sight of your goals and the amount of risk you are prepared to handle. Here are mine:

  • Liquidity is paramount. Keep at least 30% of your money in liquid or semi-liquid assets. There is an inherent trade-off between efficiency and resilience. To stay the course for long-term investing, your portfolio must be able to withstand economically uncertain times.
  • Chance events play an outsize role in our lives. Be prepared with insurances, an emergency fund to last 6–9 months, and an opportunity fund to use the unexpected opportunities along the way.
  • No debt, no financial leverage. Properly used, leverage can bolster your portfolio, but there's a large chance of financial ruin if things turn sour. We must stay away from the sharp edge of risk.
  • Don't hold a large portion of your portfolio in precious metals. I recommend 5% allocation in gold.
  • Never buy insurance as investments. Only buy term insurance.
  • Develop a margin of safety. Rental income, dividends, optional part-time work can act as passive sources of income and act as a buffer in harsh times.
While we keep these principles in mind, we must not not take risks. Over a long period of time, super-safe investments have terrible track record of return. Inflation must be respected. Thus, we need to take measured risks over a billion heartbeats, while minimizing the chance of catastrophic wipe-outs.



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