Now that you’ve established your goals and overall investment strategy, it’s time to translate them into actionable tactics. This chapter will guide you through creating your investment thesis—a personalized framework that will serve as your financial compass for years to come.

In particular, you need to establish your ideal:

• Overall portfolio allocation
• Liquidity requirements
• Tax Strategies
• Asset classes
• Value-add approaches

Design Your Portfolio Allocation

The fundamental idea behind portfolio allocation is that all assets are not the same and you should consciously choose how your portfolio is distributed across different buckets. By intentionally distributing funds taking into account cash flow, appreciation, and risk you can design the ideal portfolio to meet your goals.

Most investors have heard of the 60%-40% stock/bond portfolio that is considered the ideal Wall Street portfolio and underlies the 4% rule used by many financial planners. That strategy focuses on a portfolio that is 100% invested with Wall Street, and makes the most sense for people who are nearing retirement, targeting a fully liquid portfolio, and aren’t concerned about taxes.

More broadly, as you consider your portfolio, you can break your portfolio into 3 fundamental buckets:

1. Cash or cash equivalents.
   • Purpose: Money that is available to spend now, with minimal cost.
   • Examples: savings accounts, money market accounts, and very short term treasury bills.
   • Returns: very low (1-5%).
   • Consider: Can be used to fund your known expenses / lifestyle or to take advantage of opportunities as they appear.
2. Cash flowing investments.
   • Purpose: Money that is tied up in an investment generating a regular, recurring return.
   • Examples: long term bonds and mortgages.
   • Returns: Moderate (8-12%) cash on cash returns.
   • Consider: While the underlying asset may increase in value over time, that is not the primary reason for holding the investment.
3. Assets held primarily for appreciation.
   • Purpose: Money that is focused on long-term wealth creation. The primary return on these assets comes when the asset is sold. There may be some cash flow that is generated from the asset but that is a small percentage of the overall projected return.
   • Examples: Real estate development, stocks, venture capital, private equity, and businesses.
   • Returns:  High returns (15+%)
   • Consider: Your money can be tied up, potentially for a decade or more, without generating significant cash flow. 

Within buckets 2 and 3, you’ll further categorize investments as either high or low risk, giving you five distinct allocation categories. The right mix among these buckets isn’t universal—it’s personal. A 25-year-old software developer with a 25-year financial independence timeline will have a drastically different allocation than a 45-year-old physician aiming to cut back to part-time work in five years.

Determine your ideal allocation proportions before evaluating specific investment opportunities. This prevents emotional decision-making when “exciting” deals appear.

Establish Your Liquidity Requirements

Liquidity is the ability to exchange an asset for cash. Some assets, like a well-traded stock, are highly liquid – at almost any point, you can instantly trade the stock for cash. Of course, the value that you get depends on the market demand when you sell the stock, but you can make that exchange on any day the market trades. Other assets, like real estate, are highly illiquid. It can take months or years to convert the property into cash.

“You can’t eat equity” is more than just real estate investor wisdom—it’s a fundamental truth of financial planning. Your investment thesis must include a clear liquidity strategy. Just having a huge net worth is not sufficient, at some point you need cash not just assets.

Determining your liquidity requirements over the next decade is important to selecting appropriate investment opportunities. Consider:

• Major planned expenses (e.g. tuition and vacations)
• Large capital replacement costs (e.g. a new car or new house)
• New investment opportunities you want to get into

Liquidity planning goes deeper than just maintaining cash reserves. It requires mapping your liquidity needs against your investment timeline. Before committing capital to illiquid investments like real estate or private businesses, create a simple timeline showing:

• How much you’ll need
• When you’ll need access to significant capital
• Which investments could provide that capital, and how quickly

Then make sure your portfolio can accommodate those needs. In particular, since investments never go to plan, you want to make sure that the timing is sufficiently flexible that you are not caught in a position that requires you to sell assets at a highly discounted price.

Investors frequently overestimate their future cash flow and underestimate their liquidity needs. Your thesis should include specific percentages for highly liquid, moderately liquid, and illiquid investments based on your personal timeline and goals.

Leverage Tax Strategies

Over your lifetime, one of your biggest expenses will be that taxes that you pay – income tax, property tax, sales tax, etc. The difference between good and great returns often comes down to tax efficiency. For high-income professionals, taxes can consume 20-50% of investment returns if not carefully managed. As a result, it is worth considering both your current and expected tax situation as you establish your investment thesis.

As Tom Wheelwright says, “The tax code is a series of incentives” – so understanding how you can take advantage of those incentives can influence which opportunities are aligned with your goals.

There are two dimensions that impact the taxes that you pay.

1. The characteristics of the deal. The tax code treats different types of investments differently. Long term capital gains are treated differently than short term gains. Capital intensive investments, such as real estate, get to deduct (and then recapture) depreciation. Speculative investments like oil and gas drilling can be written off against active income.
2. Where the investment is held. Are you investing from within your IRA, your Roth IRA, or in your own name. You get a tax deduction when you put money into your IRA, but you are taxed at normal income rates when you pull money out. With the Roth, you pay taxes on your contribution, but you never pay taxes on the growth within that account (assuming you follow the rules) – that money is tax free. Investing in your own name, you pay taxes on the money you invest and you pay on the growth that occurs, but your tax rate on assets held over a year can be lower than your income rate.  There are also other ways that assets can be held – including within a business, corporation, or trust – with different tax treatments for each.

As you develop your thesis, consider where you have capital to deploy and focus on matching investments with their optimal holding vehicles. For example:

• High-income producing assets often work best in tax-free or tax deferred accounts
• Assets with significant appreciation potential might be better in Roth accounts
• Investments with intrinsic tax advantages (like real estate) often make sense in personal accounts

Remember that tax strategy enhances good investments but doesn’t transform bad ones into good ones. Don’t let the tax tail wag the investment dog.

Selecting Relevant Asset Classes

The investment world offers hundreds of asset classes, each with its own compelling narrative. Rather than attempting to master all of them, your thesis should identify 3-5 asset classes that:

• Align with your fundamental beliefs about economics and markets
• Match your risk tolerance and time horizon
• Play to your unique knowledge, interests, or advantages
• Complement each other through different economic conditions

Each asset class comes with its own story. Some examples:

• Index funds: “Markets efficiently rise over time; individual stock selection rarely beats the market.”
• Self-storage facilities: “People always need extra space, regardless of economic conditions.”
• Mobile home parks: “Affordable housing shortage creates stable demand with limited new supply.”
• Apartment buildings: “People always need housing, and professional management creates scale.”
• Crypto: “It will replace gold and silver since it can be easily transported anywhere in the world and is outside of government control.”

Your task isn’t to evaluate which story is universally “right,” but which ones you personally believe in and, possibly more important, which ones you do not. Your confidence in these narratives will sustain your discipline during inevitable market fluctuations. You need to put in some work to differentiate the hype from the substance and come up with an informed opinion, but it is worth the effort.

A personal example illustrates this approach. After witnessing national eviction moratoriums during the pandemic—something I hadn’t factored into my risk assessment—I removed multifamily investing from my target asset class list. Instead, I redirected capital to self-storage and mortgage notes, which aligned better with my revised risk assessment and economic beliefs.

Your thesis should clearly state which asset classes you’re focusing on and, equally important, which ones you’re deliberately avoiding.

Choose Your Value Creation Approach

Finally, your thesis should articulate how you will generate returns. There are four primary approaches:

1. Buy and hold
   • Strategy: Purchase the asset and hold it for an extended period of time. The expectation is that historical trends will continue and, as long as you aren’t forced to sell at an inopportune time, you will make money.
   • Examples: buying small rental properties or index funds.
   • Time horizon: long-term.
   • Effort: Low to moderate.
2. Value add investment.
   • Strategy: Actively do something to make the asset more valuable. The key is that you are able to “force appreciation” through your specific efforts.
   • Examples: Renovate an older rental property to bring it up to current market expectations or buy a business and introduce new efficiencies or put in new managers.
   • Time horizon: short- to mid-term.
   • Effort: high.
3. Development.
   • Strategy: Create something new that didn’t exist before.
   • Examples: Building a house, storage facility, or business from scratch.
   • Time horizon: mid- to long-term
   • Effort: very high.
4. Knowledge arbitrage.
   • Strategy: Apply your specialized knowledge to gain an unfair advantage over your competition.
   • Examples: uncommon knowledge in options trading or a structural engineer specializing in foundations.
   • Time horizons: mid- to long-term
   • Effort: high.

Your thesis should identify which of these approaches aligns with your goals, skills, risk tolerance, and available time. Many successful investors combine approaches—perhaps using buy-and-hold for retirement accounts while pursuing value-add real estate with personal funds.

Putting It All Together

Looking at our three case studies [from 1, 2], we can see how their tactics align with their overall goals.

Ron, the Aspiring Entrepreneur

Ron’s thesis leans heavily on appreciation assets (75% of portfolio) through his construction business and rental property. His tactics center on development, leveraging his construction expertise to build specific homes (3-5 bedrooms, 1650-1950 sqft) in carefully selected markets (good schools, 5%+ population growth, limited new construction).

His thesis addresses risk through specific metrics: $20,000 minimum profit per project, expanded emergency fund before quitting his job, and no additional real estate investments until his business stabilizes. His liquidity comes entirely from cash reserves, creating a clear constraint on his investment activity.

Kay, the Professional

Kay’s thesis prioritizes tax efficiency, with heavy investment in tax-advantaged retirement accounts. Her near-term goal (home purchase within two years) dictates a temporary high allocation to cash and short-term bonds (60% of non-retirement assets).

Within retirement accounts, she splits between index funds and notes, applying a buy-and-hold approach that requires minimal time while she focuses on her career. Her thesis includes a planned pivot after home purchase to incorporate more cash-flowing investments.

James, the Near-Retiree

James builds his thesis around cash flow security, with 60% of assets in income-producing investments. His buy-and-hold focus on specific niches (notes, mobile home parks, RV parks) generates 6-10% cash-on-cash returns while requiring minimal time commitment.

His thesis incorporates deliberate “fun money” allocation (0.5% of net worth) for speculative investments (a new crypto coin, an AI startup, and a fintech company), creating a place to explore opportunities while keeping the core portfolio conservative. His liquidity management accounts for the illiquidity of his real estate holdings by maintaining sufficient assets in brokerage accounts.

Enjoy the Journey

Now it’s your turn. Here’s a simple framework to create your investment thesis:

• Allocation targets: Specify percentages for each of the five buckets
• Liquidity requirements: Map out capital needs over the next decade
• Tax approach: Identify primary tax-minimization strategies
• Asset focus: List 3-5 asset classes you believe in (and why)
• Value creation method: Choose your primary return-generation approach

Your completed thesis might be as simple as:

“I will maintain 20% in cash/equivalents, 50% in cash-flowing investments (30% low-risk, 20% high-risk), and 30% in appreciation assets (20% low-risk, 10% high-risk). I need $50,000 liquid for a down payment in 2027. I’ll maximize tax-advantaged accounts while focusing on index funds, dividend stocks, and small rental properties using primarily buy-and-hold with selective value-add opportunities.”

Or it might be considerably more detailed. The key is creating a framework that allows you to quickly evaluate opportunities against your predetermined criteria.

While the process of establishing an investment thesis can seem overwhelming, the benefits of being able to quickly and confidently evaluate investment opportunities cannot be overstated. This clarity brings confidence. Rather than reactive investing, you’ll make deliberate decisions aligned with your long-term vision. Instead of analyzing dozens of potential investments, you’ll quickly filter opportunities, focusing your limited time on only those that truly merit deeper investigation.

Once you’ve developed your thesis, you’ll experience an unexpected benefit: freedom from financial FOMO (fear of missing out). When colleagues breathlessly tell you about their cryptocurrency windfall or brother-in-law’s amazing real estate deal, you can genuinely be happy for them without feeling compelled to chase similar opportunities if they don’t fit your thesis.

Your thesis isn’t static—it evolves as you grow. Review it annually, making minor adjustments to reflect your changing circumstances, knowledge, and the broader economic environment. Occasionally, significant life changes or economic shifts may prompt more substantial revisions.

Remember, the goal isn’t to create the perfect thesis, but a useful one. A good thesis provides clear direction without being overly restrictive. It reflects your personal circumstances, not someone else’s template for success. As a result, the process should be fun, minimal effort, and highly beneficial.

By developing your investment thesis now, you’re taking a crucial step toward breaking your paycheck dependency—creating a roadmap that transforms your high income into lasting financial freedom.

For additional reading:

1. https://www.mbc-rei.com/blog/61-establishing-your-investment-thesis-part-1-define-your-goal/
2. https://www.mbc-rei.com/blog/62-establishing-your-investment-thesis-part-2-clarify-your-strategy/

This article is my opinion only, it is not legal, tax, or financial advice. Always do your own research and due diligence. Always consult your lawyer for legal advice, CPA for tax advice, and financial advisor for financial advice.