Reinvestment, Cash Reserves, Feedback Loops, Stability, and Domain Asset Allocation–or What To Do With Funds From A Sale?

After a domain name sells, then what?

First promptly take down listings for the name at any other marketplaces, and update your records. But after that, What do you do with the proceeds from the sale? Do you plow money back into more domain names right away? Or put into some other types of investment? Or maybe use funds to improve your skills or resources? Or keep some as a cash reserve?

Many investors put at least part into expanding their portfolio, or increasing the quality of the portfolio, or both. But the key question: Is it better to acquire names similar to the name that sold, by sector or extension or type, or to diversify into other types of name? There is no definitive right or wrong answer to any of these questions.

The Case for Acquiring Similar Names

Each name that sells is an indicator of your skill in acquiring or creating names, and in particular this type of name. So what could be more natural than acquiring more names of the type that sold?

If you sell a great single-word .ai or .io. why not get a few more in those extensions in the same niche? If you sell a clever two-word .com with alliteration at a brandable marketplace, why not add more of those to your portfolio?

The Case for Reinvesting in Other Names Right Away

It is easy to make the case to leverage your investments by not leaving funds in cash for too long. Surely the way to accelerate the growth of your portfolio and profits is to get funds reinvested right away.

It should be stressed not to compromise on quality just because you are flush with funds right now, however.

But before you spend those funds, think about the following too…

Fill The Reservoir

@Nikul Sanghvi shared the concept of filling a reservoir in the good times to tide you over in the tough times: Domain Name Investing Is Not Fast Easy or Sure.

This is a fickle business. One week sales are hopping, then for the next two or three months, maybe almost nothing. You will still need money for renewals and other ongoing costs. Be disciplined and put some of the big sale windfall into building your cash reservoir.

Cash for Future Opportunities

But there is another reason to keep some funds in a fluid form, cash or cash equivalents: It makes you ready for future acquisition opportunities.

Positive and Negative Feedback

The terms positive feedback and negative feedback in electronics, biology, and other branches of science, have a somewhat different meanings than in everyday life. In everyday life, we might think of positive feedback for situations like leaving a NamePros ‘Like’, and negative feedback a ‘Disagree’ or ‘Dislike’. But that is not what the terms mean technically.

The site Albert.io has this simple explanation:

Positive feedback occurs to increase the change or output: the result of a reaction is amplified to make it occur more quickly. Negative feedback occurs to reduce the change or output: the result of a reaction is reduced to bring the system back to a stable state.

When you buy more domain names of the same type as the one that just sold, that is an example of a positive feedback loop. After the sale you have more of that type of name, increasing the likelihood that another name that sells will be of that type, and you will then acquire even more of them.

Some investors get on a roll with a certain type of name, but that investing strategy doesn’t come without potential risks…

Positive Feedback and Instability

So what is wrong with that strategy? Well we know that branding changes, somewhat, over time, types of company names come in and out of style. If positive feedback leads you into predominantly a single type of name, you are not well placed for changes in the types of names or the sectors/niches that are in demand.

You’ve probably been somewhere when a public address system emitted a high-pitched squeal. What you may not realize, that was due to a positive feedback loop. A little bit of signal from a microphone got amplified, then more was picked up, and it got louder, and so on, a positive feedback loop. How does the high frequency sound come about? One could look at it as amplifying the maximum response frequency of the system. It is also true that, in many cases, the feedback system response keeps growing until the limits of the audio system were overwhelmed and the signal collapses. The growth and collapse process repeats a thousand or more times a second, producing that annoying squeal.

Positive feedback loops lead to instability. While that may not be as obvious in a domain portfolio, the principle holds to some degree.

Also, the original signal that started the loop of sales might have been one of those outlier sales.

When designing an amplifier, a negative feedback loop feeds a small amount of signal that works against the change. Negative feedback gives up some of the potential gain of the amplifier, but the reward is a much more stable system.

Feedback in Domain Industry

I sometimes wonder about possible positive feedback loops within the domain industry more broadly. For example, if someone has a strong sales record for a short period, and as a result are assigned a better agent at the marketplace, that gives them a further advantage leading to more sales.

Or, if a marketplace has successful sellers rate domain names for acceptance, there is a potential bias to accept names that were successful in the past. That may, or may not, be optimal for current naming conditions.

You may have your own positive feedback system, possiblye without fully recognizing it. Let’s say you sell a domain name at Marketplace A. Isn’t it just natural to list more of your names at that marketplace after the sale, increasing your chance that the next sale will be at that marketplace, and the positive feedback loop continues?

I don’t know the degree to which any of these scenarios actually occur. And I am not saying that positive feedback loops don’t foster better returns. Just keep in mind those returns come at the potential cost of long-term stability.

Portfolio Rebalancing

Probably true negative feedback does not make sense in domain investing. But what might have a place, is something similar to traditional investment portfolio rebalancing.

Investment portfolio rebalancing is closely tied to the idea of asset allocation. In traditional financial investing your asset allocation might include large and small cap equities, emerging markets, bonds, real estate investment trusts, etc.

The idea of portfolio rebalancing is that periodically, often once a year, you reset to your goal asset allocation. For example, if emerging markets experienced a really strong return, and bonds did poorly, you would sell off some emerging markets mutual funds or exchange traded funds or individual equities, and invest in bond fund instruments. That is, if you decided to keep the same asset allocation – that too should be considered periodically with help from a financial planner.

What might an asset allocation look like for a domain name portfolio? Potential domain asset classes are things like:

• single-word .com
• two-word .com
• single-word .org and .net
• your national country code
• single word .ai or .io
• other generic country codes like .co, .vc, .tv, .me, .cc, .gg, etc.
• creative brandables
• emerging trend names
• specific new extensions like .xyz or .app
• domain hacks
• new extension names with strong across the dot matches
• multiple word phrase domains in .com
• 4-letter .com
• numeric domain names

This is not an exhaustive list. The idea is not to invest in all classes, but decide what asset allocation feels right for you. For example, one investor might choose 40% in two-word .com, 20% in .io or .ai, 10% in other generic country codes, 15% in single word .org, 10% in creative brandables, and 5% in emerging trends. I would suggest the allocation be by invested value, not number of domain names.

The idea of portfolio rebalancing would be to take funds from sales to keep in step with your planned asset allocation.

In practice, this would mean if you had a really good year in .ai and .io, but a bad year in two-word .com sales, you would preferentially invest in two-word .com. However, that is only if you still feel your asset allocation is correct. You may decide, after research, that you want to change asset allocation.

There is one other aspect of asset allocation. In many things high potential reward comes with higher risk. If you want to tap more speculative domain names, like very early stage trends, or unproven extensions, it might be helpful to cap speculative domain investments that in your asset allocation, such as no more than 10%. Why not 0% you ask? As well as losing out on potential rewards from speculative investments, research has shown that in self-directed conventional investment users are more able to have the discipline to stay in step with their overall asset allocation plan if they allow themselves a small, capped percentage to be used in higher risk equities.

As I said at beginning, there are no right or wrong answers to the questions raised. Only you can decide what is right for your personal situation.

I welcome readers to share in the comments below your own domain portfolio asset allocation, as well as comments on any aspects of the article, of course.