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Module 6 · Lesson 40

Building a Reinvestment Rule

Writing the rule that governs asset income, including where it goes and when the rule changes.

Key principle

A reinvestment rule specifies destination, proportion and review trigger — the same three elements as the allocation rule.

Lesson

Content

The reinvestment rule extends the allocation rule from Module 1 to a second capital stream: income produced by assets rather than by employment. It states the destination — the same category that produced it, or redirected to rebalance toward the intended structure. It states the proportion — full, partial or none, with the remainder's use specified. And it states the review trigger — normally the quarterly review, plus any stage transition in the framework. One structural choice deserves attention. Automatic reinvestment into the same holding is operationally simple and increases concentration over time. Directing income to whichever category is furthest below its intended role uses the same capital to rebalance, requires slightly more attention, and keeps the structure aligned with the roles written in Module 4. The rule should also state what happens during the income-replacement stage, so the transition from reinvestment to drawdown is a planned change rather than an improvised one. Module 7 develops that transition in detail.

Illustration

Educational example(s)

An illustrative rule: "All asset income is reinvested in full while employment income covers obligations. Income is directed to whichever asset category is furthest below its target role, not automatically to its source. Reviewed quarterly. When employment income falls below 60% of obligations, this rule is replaced by the drawdown rule." Figures are illustrative only.

Examples are illustrative only. They are not forecasts and do not reflect any individual result.

Common mistake

Writing a reinvestment rule with no transition clause. The stage where reinvestment stops arrives eventually, and improvising it under time pressure is the situation the framework exists to avoid.

Risk explanation

Reinvestment directed toward the most-lagging category systematically adds to what has performed worst recently. This is intentional as a rebalancing discipline, but it can add to a holding that continues to decline, including permanently. Rebalancing is not a protective mechanism.

Do this

Action step(s)

Add the reinvestment rule — destination, proportion, review trigger and transition clause — to your written allocation rule.

Reflection question

At what point would you want reinvestment to stop, and have you written that point down anywhere?

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How this applies by framework phase

The same material reads differently depending on what your capital needs to do next. You may be in more than one phase at a time.

Capital Building
Read this as a question about direction: which surplus, which income stream, and which asset should the next dollar move toward — and what would make that move durable rather than opportunistic?
Capital Conversion
Read this as a question about productivity: what is the capital you already own currently doing, what cash flow could it support, and what drag, liquidity or liability constraint has to be handled before it can do more?
Capital Preservation
Read this as a question about durability: what could force a sale at the wrong time, how much liquidity keeps that from happening, and how is purchasing power protected without abandoning growth entirely?
← Reinvest and CompoundLearning path