Planning pipelines for investments and trades

December 27, 2022

One way to think about spreading investment and/or trading risk and return is to set up multiple pipelines - for example, one pipeline for long-term investments, one pipeline for mid-term investments/trades and a third pipeline for short-term investments/trades.

If we put too much of our portfolio into long-term investments, we generally avoid accessing those until much later in life (greater than 5 years for Roth IRAs or a minimum age between 59.5 to 71 for 401ks and RRSPs respectively) if we want to avoid tax penalties.

If we put too much of our portfolio into mid-term investments (~1-5 years), we lose the tax deferral opportunities of long-term investments and if we put too much of our portfolio into short-term trades, we put too much risk into higher taxed capital gains/losses and fees, especially if we trade frequently while the market may not have enough arbitrage opportunities for us to profit significantly.

Depending on when we decide to reduce wage income and increase passive income (enabling financial independence), adjusting these pipelines is a way to limit risk, reduce taxes and also increase gains over time.

Early on in our working years, the ideal focus is putting more earnings and reinvested dividends into long-term investments. The earlier we put this into long-term, the greater the gains are in future decades.

Depending on our debt load in our mid-career years, if debt is minimal we can split our earnings between long-term and mid-term investments, where mid-term contributions are considered taxable gains/losses once we sell or receive dividends.

If we still have earnings to contribute in our mid to late career period, we can put a smaller percentage into short-term trades if we want to apply some risk to our portfolio without significant negative volatility affecting our entire investment portfolio.

Once short-term and mid-term investments/trades have a portion of taxable dividend income generated each year, re-investing this income increase dividends for the next year. We also don't have to reinvest all of the dividend income - some of it can be used for day to day spending. Doing this over time will create enough passive income to lower the necessity of a an income dependent on wages.

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The content above contains my personal thoughts only and are not representative of anything I am involved with. The following content may contain financial opinions and these opinions do not reflect any professional advice. Speak to a licensed financial professional for actual financial advice.