DiversiFi’s Investment Waterfall: Our Six-Tier Approach to Smarter Investing
Investing is full of exciting opportunities, but it also carries real risks. Without a clear roadmap, it is easy to get swept up in market noise or make impulsive decisions that can derail your long-term goals. That is why we use a disciplined approach called the Investment Waterfall. This tiered system is designed to help you prioritize where and how to deploy your capital in a way that is both strategic and intentional.
Whether you are just starting to build wealth or exploring private market opportunities, this framework helps organize your financial life into clear, actionable stages. Each tier has a purpose. Each dollar has a job.
In this post, we break down the Investment Waterfall six-tiered framework, its purpose, and how it helps you make intentional choices based on the tier you’re navigating.
What Is the DiversiFi Investment Waterfall?
The DiversiFi Investment Waterfall is a step-by-step approach to capital deployment that we use to guide our clients through a logical sequence of financial priorities. This framework is designed around the real-world financial challenges and opportunities our clients face, such as managing equity compensation, planning for liquidity, and aligning short-term needs with long-term goals.
Each tier of the waterfall serves a distinct purpose, starting with everyday financial security and progressing toward higher-risk and higher-reward opportunities, but only after the prior foundational layers are in place. This approach reflects how we think our clients should be making decisions based on where they are today and what they want in the future. This approach encourages intentional decision-making, prevents skipping critical steps, and provides a framework for balancing liquidity, growth, and diversification.
Our Advisors use this framework in varying degrees depending on the client’s situation. It keeps planning grounded, filters out noise, and brings clarity to the “why” behind each decision. Life and markets are dynamic, but this framework helps our clients stay focused on what matters most, one step at a time.
Why the Sequence Matters
Most mistakes in investing come from skipping steps, like jumping into complex strategies or risky ventures before building a strong foundation. The waterfall approach helps you avoid that by ensuring:
Liquidity needs are covered before pursuing long-term growth
Diversification strategies are discussed to avoid over-concentration
Strategic tax planning is layered in with intention
Private investments are explored only after the basics are secure
Each tier builds on the previous one. By progressing through the tiers in order, you give yourself the best chance to build a financial plan on solid ground.
What Happens if I Skip Steps?
It is easy to get excited about the higher tiers of the waterfall, especially when private market opportunities come into view. But skipping steps can create real headaches. Picture an investor who jumps straight into Tier 5 (Explore Angel & Seed Investing) before focusing on Tier 1 (Build a Cash Buffer). When an unexpected expense or job loss happens, their money is locked up in investments they cannot easily access. To cover costs, they may have to sell company stock at the wrong time, which could mean a big tax bill and extra stress.
Now, picture someone who followed the waterfall in order. They have cash set aside and a strong core portfolio before exploring private markets. When life throws a curveball, they have the flexibility to handle it without derailing their long-term plan.
The takeaway is simple: sequence matters. Making decisions and deploying capital in the right order helps you stay prepared no matter what life throws your way.
Diving into the Six Tiers of the Investment Waterfall
Tier 1: Build a Cash Buffer
Goal: Safety, access, and flexibility
Target allocation: 5%- 15% of your total Net Worth
The first step is to build a financial cushion. This tier includes emergency savings (typically 3 - 6 months of expenses) and cash set aside for upcoming goals like travel, a wedding, or a down payment. At this stage, we’re not focused on maximizing returns. It’s about buying yourself peace of mind.
We tackle this goal through our core offering: Financial Planning. Through financial planning, we help clients establish a realistic budget, set personalized savings targets, and determine not only how much cash to set aside, but also where and how to save it. Whether it’s automating savings, choosing the right account types, or mapping out upcoming expenses, financial planning is what turns this tier from a vague goal into a clear, achievable strategy.
Why this tier matters: Having cash set aside reduces the chance you will need to sell investments during a market downturn, which could increase your tax bill. It also provides you flexibility and confidence, even if unexpected expenses arise.
Tier 2: Establish Core Portfolio
Goal: Long-term growth through diversification
Target allocation: 40% – 60% of your total Net Worth
Once your short-term needs are covered with a cash reserve, your next step is building your core portfolio. This often includes low-cost exchange-traded funds (ETFs), mutual funds, and other diversified investments that provide broad exposure to global stocks and bonds. The goal is to create a portfolio that grows steadily over time through diversification, disciplined allocation, and regular rebalancing.
Real estate, whether it’s purchasing a <primary residence> or investing in rental properties, can also be part of your core portfolio. If you’re planning to pursue real estate investing, the capital for those opportunities often comes from this tier, which is why it’s important to this tier as the foundation for both public market exposure and future strategies.
We support clients in building and maintaining their core portfolio in a way that aligns with how they want to be involved. For some, that means staying hands-on as a DIY investor—actively managing trades, monitoring performance, and keeping up with market trends. For others, it means letting us do the heavy lifting through our Wealth Management service, where we manage the day-to-day implementation, monitoring, and adjustments on their behalf.
We also offer clients a way to go beyond index funds and invest directly in individual companies through our direct-indexing portfolios:
NASDAQ25, which targets the 25 largest tech-driven companies on the NASDAQ
Value25, which invests in 25 high-dividend, blue-chip companies from the S&P 500
Both portfolios are designed for clients who want transparency into what they own and the potential to customize their exposure to fit their long-term goals.
Why this tier matters: Your core portfolio is the foundation of your long-term wealth. It may not be flashy, but it is designed to compound over time and help provide balance to your portfolio through market cycles.
Tier 3: Address Concentrated Stock
Goal: Reduce risk & develop equity strategy
Target allocation: 10% - 30% of your total Net Worth
For many of our clients, especially those in the tech industry, company stock makes up a significant portion of their net worth. This can include incentive stock options (ISOs), non-qualified stock options (NSOs), restricted stock units (RSUs), or employee stock purchase plans (ESPPs). While this equity can be a powerful source of long-term wealth, it also creates concentration risk when left unaddressed.
That’s why we have a tier dedicated to this topic in our investment waterfall. Many firms will say “you need to diversify your positions right away.” We don’t. Rather than jumping straight into diversification, our approach emphasizes understanding your full equity picture and creating a strategy to address your concentrated stock (which may or may not include actions to diversify). We help you understand and determine:
How much company stock to keep vs. sell
Your tax exposure
How this equity fits into your overall financial plan
Once there’s clarity, we help clients implement tailored strategies to reduce risk and improve long-term outcomes, without triggering unnecessary taxes or missing opportunity windows.
Common solutions include:
Direct Indexing for tax-efficient diversification, harvesting tax losses while maintaining market exposure
Tax Exchange Funds (TEFs) for deferral opportunities
Covered Calls to generate income from concentrated stock positions, while reducing downside
This tier exists because it reflects a core challenge of our niche: tech professionals with outsized equity positions and no plan to manage them. Planning, not just reacting, is what keeps this from becoming a future liability.
Why this tier matters: Public stock strategies can provide additional income or growth potential to your overall portfolio. They also allow for a more customized approach to areas of the market you personally care about, while still managing overall portfolio risk.
Tier 4: Invest in Late-Stage Private Companies
Goal: Access pre-IPO growth opportunities
Target allocation: 5% - 10% of your total Net Worth
When most people think about investing, they picture the stock market, companies like Apple, Microsoft, or Amazon trading on public exchanges. But there’s a whole other side of the investment world that’s not as visible, yet just as powerful: private markets. For Qualified Clients, late-stage private companies offer access to businesses on the path to IPO or acquisition in the next few years. These investments come with more risk and less liquidity, but also potential for outsized returns. While less risky than early-stage startups, they still carry uncertainty and require patience and the ability for funds to be locked up for 5-10 years.
We created DiversiFi Ventures to enable our Qualified Clients to invest in vetted, high-potential private companies through Special Purpose Vehicles (SPVs); pooled, single-company funds with lower-than-average minimum investments. We’ve helped clients invest in companies such as: Coreweave, SpaceX, Glean, Liquid Death, OpenAI, and more.
Why this tier matters: This tier can expand your investment universe beyond Wall Street. It’s not for everyone, but for Qualified Clients with a strong foundation and the right risk profile, private market exposure can add depth and differentiation.
Tier 5: Explore Angel & Seed Investing
Goal: Back early-stage innovation
Target allocation: 1% - 5% of your total Net Worth
This tier is for investors with higher capacity for risk and long-term horizons. Angel and seed investing provide access to early-stage startups across innovative industries. These opportunities are highly speculative and can take five to ten years to play out.
We offer solutions to clients who would like to explore these options. Whether it’s through our own DiversiFi Ventures Angel Fund or through fund managers we partner with, we communicate opportunities to our Qualified Clients as they arise.
Why this tier matters: While risky, angel and seed investing allows you to participate in innovation from the earliest stages. For those more comfortable with uncertainty, this tier offers a chance to support visionaries and potentially capture significant upside.
Tier 6: Consider HNW (High Net Worth) Alternative Strategies (Optional)
Goal: Layer in sophisticated strategies
Target allocation: 0% - 20% of your total Net Worth
This final tier is designed for clients who have already addressed earlier priorities and are looking to incorporate more complex strategies to round out their portfolio. We think of this less as a single tier, but moreso a way to layer additional strategies across the other tiers. Not every client will reach this stage, we consider this tier optional and something to be discussed with your Advisor.
We believe these strategies shouldn’t be the starting point, but they can play a valuable role once core planning and investment needs are in place.
Examples of HNW Alternatives:
Philanthropy (Donor-Advised Fund): Flexible charitable giving strategy that allows you to contribute now, invest the funds, and recommend grants over time.
Estate Tax Minimization (GRAT, CRUT): Advanced trust structures designed to reduce estate taxes while transferring wealth to heirs or charitable beneficiaries.
Long/Short Equity Strategies: Hedge-fund style investing that aims to manage downside while capturing growth (“alpha”).
Credit & Private Credit: Strategies like direct lending, mezzanine debt, or distressed credit that offer income and diversification outside of traditional bonds.
Real Estate Investment Trusts (REITs): Both public and private REITs that provide exposure to real estate without direct property ownership.
Business Development Companies (BDCs): Vehicles that invest in small- to mid-sized private companies, often through debt or hybrid structures.
Global Macro & Multi-Strategy Funds: Sophisticated funds that hedge or position across currencies, interest rates, and commodities on a global scale.
These are tools, not necessities. For clients who reach this level, we assess whether alternatives align with their goals, risk tolerance, and overall portfolio strategy, always with intentionality, never just for the sake of complexity.
Why this Approach is Effective
The value of an investment waterfall is its structure. By progressing through the tiers in order, you can first prioritize your financial security, then focus on growth, and finally explore more complex strategies.
This approach helps you balance liquidity, risk, and opportunity in a systematic way. It also encourages thoughtful planning instead of chasing the latest trend. While no strategy is risk-free, the investment waterfall provides you with a clear framework for making informed, intentional choices.
DISCLOSURES
The content in our blog posts is designed to provide information and insights but should not be used as the sole basis for making financial decisions. The content provided in our blog post(s) is provided “as is,” and/or “as available.” Diversifi Capital LLC will to the best of its abilities maintain the content to be up to date. However, Diversifi Capital LLC does not represent or warrant that our content or our services found within are accurate, complete, reliable, current, or error-free.
This webpage and information are provided for guidance and information purposes only. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This website and information are not intended to provide investment, tax, or legal advice. Any client examples were hypothetical and used to demonstrate a concept.
DiversiFi Ventures offerings are available exclusively to “Qualified Clients” as defined under Rule 205-3 of the Investment Advisers Act of 1940. In accordance with SEC guidelines, individuals must satisfy at least one of the following criteria: 1) Have a net worth of $2.2 million or more, excluding the value of their primary residence; or 2) Have at least $1.1 million in assets under management with the investment adviser managing the fund. Prospective participants must meet these requirements prior to investing. DiversiFi will confirm eligibility as part of the onboarding process.
DiversiFi Capital will recommend investments in its Ventures service(s) to those clients for whom investment in the fund is suitable and who meet the investor status requirements. This presents a conflict of interest in that DiversiFi Capital, or its related persons, may receive more compensation from investment in the fund than from other investments. Nevertheless, DiversiFi Capital acts in the best interest of the client, consistent with its fiduciary duties, and clients are not required to invest in the private fund if they do not wish to do so.
We strongly encourage readers to conduct their own research, seek advice from qualified financial professionals, and consider their unique financial circumstances before making any investment or financial decisions. Your individual situation may vary, and it's essential to make informed choices that align with your specific goals and needs.