Why most investors build their portfolios backwards
Most investors want to jump straight to the exciting stuff: crypto, private equity, alternative investments, the latest hot strategy. But here's what experience teaches: complexity without foundation leads to financial fragility.
A properly sequenced approach isn't about being conservative or boring. It's about building sustainable wealth that can handle life's inevitable surprises while still pursuing growth opportunities.
The investment sequencing framework
Stage 1: Eliminate bad debt Pay off credit cards, personal loans, and other high-interest debt. Nothing you invest will reliably beat 18-25% credit card interest.
Stage 2: Build your emergency fund 3-6 months of expenses in cash. This prevents you from being forced to sell investments during downturns when life happens.
Stage 3: Maximize basic tax-advantaged accounts Get your full employer 401(k) match, max out HSA contributions, and consider Roth IRA contributions if eligible.
Stage 4: Build liquid investment foundation Create a diversified portfolio of stocks, bonds, and other liquid investments that can be accessed if needed.
Stage 5: Layer in alternatives strategically Once your foundation is solid, consider adding alternatives like private investments, REITs, or other specialized strategies.
The key principle: Don't move to the next stage until the previous one is solid.
Why sequence matters more than speed
Liquidity when you need it Life will throw curveballs—medical expenses, job loss, family emergencies. If all your money is tied up in illiquid alternatives, you might be forced to make bad financial decisions.
Mental clarity and focus Trying to optimize everything at once creates decision paralysis. A staged approach lets you master each level before adding complexity.
Risk management Alternatives often come with higher risk, less transparency, and longer lock-up periods. They should enhance a solid foundation, not replace it.
Behavioral benefits Having a clear sequence prevents you from chasing performance or making emotional decisions based on market noise.
Flexibility preservation Early-stage wealth building should preserve optionality. You don't yet know what opportunities or challenges lie ahead.
Common sequencing mistakes
Skipping emergency funds for higher returns "Why keep money in cash earning 4% when I can invest it for 10%?" Because emergencies don't wait for bull markets.
Jumping to alternatives too early Putting 30% of your portfolio in crypto or private investments before you have a solid traditional foundation.
Optimizing the wrong things Spending hours researching exotic investments while ignoring your 401(k) allocation or carrying credit card debt.
FOMO-driven decisions Adding complexity because something is trendy rather than because it serves your specific financial goals.
Ignoring liquidity needs Locking up money you might need for a home purchase, wedding, or other major expense within the next few years.
When you're ready for alternatives
Your foundation is complete Emergency fund funded, bad debt eliminated, tax-advantaged accounts maximized, and liquid investment portfolio established.
You understand the tradeoffs Alternatives often mean less liquidity, higher fees, more complexity, and different risk profiles.
You can afford the lock-up period The money you're allocating to alternatives won't be needed for years, even if other parts of your plan change.
You're treating them as diversification, not speculation Alternatives should reduce overall portfolio risk or provide uncorrelated returns, not just chase higher performance.
You can limit the allocation appropriately Generally 10-20% of total portfolio for most investors, unless you have specific expertise or circumstances.
The right way to think about alternatives
Satellites, not core holdings Alternatives should complement your liquid portfolio, not dominate it. Your core should remain broadly diversified and accessible.
Diversification, not concentration Use alternatives to spread risk across different asset classes, not to make concentrated bets on specific trends.
Patient capital only Only invest money you won't need for 5+ years. Alternatives often require patience to deliver their benefits.
Fees and complexity matter Higher fees and complexity should be justified by meaningfully better risk-adjusted returns or diversification benefits.
Building your foundation efficiently
Start simple A few low-cost index funds can provide broad market exposure while you build other parts of your financial foundation.
Automate contributions Set up automatic transfers to retirement accounts and investment accounts so foundation building happens consistently.
Focus on savings rate Early in wealth building, how much you save matters more than what you save in. Get the basics right first.
Review and adjust annually Your sequence should evolve as your financial situation and goals change, but maintain the principle of foundation first.
Quick Answers: Investment sequencing questions
"How long should each stage take?" Varies by person, but typically months to a few years per stage. Don't rush—solid foundations take time.
"What if I'm already invested in alternatives?" Assess whether your foundation is solid. If not, consider reducing alternative exposure until your base is stronger.
"Can I work on multiple stages simultaneously?" Sometimes, but be careful not to spread efforts too thin. Complete each stage substantially before moving on.
"What counts as 'alternatives'?" Generally anything illiquid, complex, or outside traditional stocks/bonds: private equity, hedge funds, crypto, individual real estate deals.
Can Titan help with investment sequencing?
Yes. If you're a Titan client, we can:
- Assess your current foundation and identify any gaps that should be addressed first
- Create a personalized sequencing plan based on your goals, timeline, and risk tolerance
- Help you build liquid investment strategies that serve as your portfolio foundation
- Introduce alternatives strategically once your foundation is solid and the allocation makes sense
The goal is building wealth that's both growing and resilient across different life stages and market conditions.
Ready to build your investment foundation the right way?
Talk to a Titan Advisor to create a sequenced investment strategy that balances growth with financial stability.
About Titan
Titan is a modern Registered Investment Advisor (RIA) helping high-earning professionals navigate complex money decisions. With a dedicated advisor and access to proprietary strategies and alternative investment options, we're your go-to wealth team for everything from RSUs to retirement. Learn more at www.titan.com.
