What am I not considering in my current Financial Plan?

Question

Standard Caveat: I understand the opinions expressed on this forum do not represent financial or legal advice.

With that said, I have a long term goal to preserve and build wealth (in that order) and I have drafted up a plan that I can commit to in order to facilitate this objective.

I'd like second opinions on this plan as it does deviate slightly from the traditional advice of passive, broad-market investing.

---

Take my income in a given year to be X.

2% of X is automatically deducted to our company's 401K program.

This qualifies me for matched contributions. Unfortunately, the fees in our plan (even with total market funds) are on the order of 1-4%, so it does not make any sense for me to contribute more.

The next 21% of X is automatically deducted and divided between 3 accounts

• Account 1: Savings Account
• Account 2: Low Risk, Low Return Investments
• Account 3: High Risk, High Return Investments

---

Account 1 is money that is highly available and acts as "the King's Guard" against my castle being breached.

The success condition of this account is that the current balance must equal 6 months of current living expenses. If that condition is not met, then 7% of income is allocated here

Account 2 is money that held in a defensive position against market movements. The portfolio is roughly 55% long-term bonds, 15% medium-term bonds, and 30% dividend yielding stocks spanning all sectors.

Edit: This portfolio replicates Ray Dalio's All Weather Strategy. The breakdown is in 55% bond combinations, 7.5% gold, 7.5% commodities, and 30% stocks.

The success condition is a 12% return on the current year. If this condition is not met, then 7% of income is allocated here, as well as any other returns or windfalls in my life.

Account 3 is money that is actively put in harms way for the purpose of generating high returns. 25% of this account's value is continuously deployed in high-probability options trades on short time scales.

This is my favorite Options strategy as it allows for rapid compounding of money if you can stomach the looming threat of being wiped out on any given week. I have this strategy written in an algorithm such that I do not need to be actively involved in trading decisions.

All returns made by this account are deposited to Accounts 1 and 2 until their success conditions are met. If those accounts are topped off, then money is retained and compounded. There is no success condition for this account: 7% is always deposited here.

---

I am attracted to this plan as it appears to allow me to accumulate and preserve wealth while still allowing me to take riskier positions for the sake of better returns.

I am relatively young, 25, and so I am comfortable with some risk. However, I value consistent and steady growth above all, and this plan appears to be the best of both worlds.

In the case of there being no free lunches, I wanted to ask this forum what could I be potentially missing in this plan that could throw me off-course?

To summarize: I'd be content with a 3% annual return, but I'd be ecstatic if I could consistently achieve 9-10%, as this would slightly outperform passive index funds.

Thanks for taking the time to read this, and do feel free to offer any criticism, no matter how harsh.

Answer 1

You are directing 23% to savings, 25% with company match. The high bond choice in acct 2 seems conservative to me. I (we, with my wife) were nearly 100% stocks, S&P index for most of it, right until retirement. Now, a 70/30 mix. All in all, you seem to have things well thought out.

Answer 2

Since you asked about what you may not be considering, I would suggest you think about potential changes to your personal and/or family life. If you decide to have a family, you may find yourself much busier and that you have very little time to manage your finances and investments. Make sure you are able to do so with minimal effort. Having children can have a major impact on your immediate budget, change how much you are able to save and what you save for. If you work hard, your salary will likely increase as you develop in your career, so you will probably have capacity to accommodate those changes. Knowing what you want in terms of family and making that part of your financial plan is important.

Answer 3

I'd be content with a 3% annual return, but I'd be ecstatic if I could consistently achieve 9-10%, as this would slightly outperform passive index funds.

Let's keep it simple and assume that you're splitting your money equally into 3 accounts. If you earn 1% on Account 1 (savings) and 2% on Account 2 (assuming it's all bonds) then you need to earn 6% in account 3 (high risk) to net 3%. That's doable and you don't need high risk to achieve that. In fact, you could just buy investment grade preferred stocks which currently average over 5% a year. In some years, some mechanical swapping could bump that yield up.

However, to achieve a 10% total return, you'd need to achieve 27% in account 3 to compensate for the underperformance in Accounts 1 and 2, and that's pretty farfetched.

You're going to make high probability option trades in Account 3? High probability option trades offer low reward (risk and reward go hand in hand). And if you're wiped out in any given week, you'll need to double your money the next week to break even. I'll give you the benefit of the doubt and assume that you understand options thoroughly. If you can succeed at this consistently without blowing out the the money you've allocated to option trading, you're a unicorn.

Note that receiving dividends in Account 2 is irrelevant because dividends provide zero total return. Account 2 is by no means defensive if it contains 30% in stocks. Even low beta stocks such as utilities get whacked when the bear stops by to visit.

I give you props for a well though out investment structure but I think that some your expectations for some components are unrealisiic.

Answer 4

You don't give hard numbers but as your portfolio increases you may want to decrease the percentage of portfolio #3. Being that you work full time, deploying a large number of resources on short term options trading will become very difficult. I would limit this to 25k to 50K, and be more on the low end.

Keep in mind it may be far more profitable to concentrate on your career than options trading.

Boring old low cost index funds should form a basis of your future financial plan. The only action you need to take is invest. It is easy, and you will be well rewarded for almost no effort.

Also, once your emergency fund becomes sufficiently large there is no need to contribute. And you might be well served in making sure it is sufficiently large prior to undertaking speculation (options trading).