What I Talk About When I Talk About Building Wealth

SuperGirl

When people ask me about asset allocation, I guide them towards family wealth.


Over your life, you will see things blow up.

  • Jobs will be lost
  • Divorces will happen
  • Guarantees will be called
  • Companies will fail
  • Investments will go to zero

Certain habits make us more prone to blowing up:

Debt – fixed obligations can ruin you in bad times.

Lack of emotional control – this runs deeper than, say, anger management.

People who make a habit of rationalizing a lack of control in one domain (elite sport, closing a sale, acting in a client’s best interest) rarely have the capacity to control themselves across domains. If you might get caught, then you’re fragile.

Substance Abuse – it’s more than the cost of sorting yourself out – it is the lost opportunity of a life well lived and the impact on the rest of your family, especially your kids.

Spending vs Cash Flow – personal spending, burn rate and fixed costs => the more spending you have relative to cash flow, the more fragile your finances.

The above is a long way of asking, “What aspects of your life might blow up?

Which is a polite way of saying, “I’m not sure asset allocation is the most pressing issue in your life.

If you work in an ethically-challenged field, have a lot of borrowings, have a high burn rate or are surrounded by peers with issues…

…then tweaking portfolio construction is a lower priority item than immediately removing what might ruin your life.

I’ve done it. You can do it. It’s better on the other side.


How large is your current portfolio when compared to your lifetime portfolio? – AKA you might have more wealth available in your career than your portfolio.

Investing is different at 25, 40 and 55 years old.

The nature of “different” depends on your personal circumstances.

#1 => Consider your Core Capital. The single best thing I did out of college was save four years of personal living expenses, $100,000 in the mid-1990s. It sat in a bank account, while I worked my ass off at my career.

Having that money enabled me to choose better and choosing better became a habit.


Very, very, very (!) few people can be professional investors – AKA can I get rich by beating the market?

Take an honest look at the people that you know in finance. How many of them “got rich” from their own money? Remember these are the experts.

In finance, most people get rich due to the rules of their game and collecting pools of other people’s money (your money, by the way).

With your portfolio, keep it safe, simple and low-cost. A target-date fund makes a nice core holding.

Having my Core Capital enabled me to take more risks in my career path, and life experience => not with my Core Capital.


Once-in-a-lifetime opportunities happen once a decade – AKA great deals happen when credit markets are shut

Here are the assets I own and why I own them:

  1. Index funds => long-term, diversified, not linked to my home real estate market
  2. US Treasuries/Core Capital => 5 to 10 years family expenses
  3. Boulder real estate => A relative value play against California, a cost-effective way to raise a family and a fantastic outdoor life. Think very carefully before locking yourself into any location. As a young man, my lack of ties enabled me to jump at great opportunities.
  4. Cash => my early retirement was funded by three deals I did coming out of the last credit crisis. Once you have your Core Capital (say, five years living expenses) then building up a pool for “great opportunities” is a consideration.

Starting out? Read this PDF.

Be wary of home bias => you can see it in my portfolio => even more risky is having your balance sheet, retirement and job reliant on the success of your employer.


Switching Costs – AKA think carefully before you sell good assets

I have assets in my portfolio that I would not buy at today’s prices. Financial theory tells me I should sell these assets.

  • I have zero confidence in my ability to predict the future.
  • If I sell assets then I pay taxes and commissions.
  • After selling, I have to figure out where to put the capital.
  • I doubt any “new” plan will be better than my current plan, which is simple and low-cost.

Release yourself from constant optimization => good enough is good enough.

Put your efforts into being a better version of yourself.

 

Baby Essentials

10411151_10152583824527622_2265981354170992571_nA friend just had a new addition. Here’s a summary of what I learned.

Become a Jedi-Master of the baby swaddle – this book will teach you how – there’s nothing more important than being able to settle your baby.

Put a full-size mattress in every room where the baby sleeps – we spent two years hunched up on a circular chair and could have saved ourselves a lot of hassle by spending $100 on a twin mattress.

More than vacations, clothes, a bigger house, visits to family… what your marriage needs (for the next three to ten years) is sleep and time. Time for yourself, for friends and for each other.

Say “no” to just about everything. Now you understand why your friends disappeared when they had kids!

You will get a chance to add stuff back later. For now, just get more sleep and some light exercise.

You are likely to hold a grudge against any child, or adult, to whom you overextend yourself. It is a paradox that you serve your family best by holding some of yourself back.

Forgive each other when you inevitably fall short. It’s a stressful time.

What I Learned This Year

2018-11-23 11.00.48

You’re probably going to feel different about that later.

I say that to myself, a lot.

And I never regret following what flows from it.

Namely…

  • Not acting on anger.
  • Resisting the urge to “say what I really think”

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2018-11-19 16.44.04I recharge in solitude, ideally in nature.

I seek to fool myself that the solution (to everything!) lies in withdrawing from society.

I counter this faulty thinking by saying to myself… “I know you feel that way right now but you’re likely to need help, at some point, over the next 20 years.”

If you’ve ever been in a bad relationship then you might have a similar thought pattern…

…thinking that the problem lies in all relationships, not simply the bad ones.

I don’t have a mantra to help you get past your pain but I can say that my marriage is a great source of strength, stability and happiness for me.

“Better” is out there and it’s worth looking around.

Put yourself in a position to meet someone who shares your values.

Try to make yourself into the person you want to meet.

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2018-10-31 08.09.49My BIG change for 2018 was waking up earlier, way earlier.

I’m up two hours before the rest of my household.

At first I used the time to surf instagram and drink coffee on the couch.

Eventually, I started going to the gym.

“Gym Days” are better.

Not easy.

Better.

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2018-11-07 16.18.42-1

Life is better when I’m stronger,

Even at 49.9 years old, I’m able to be stronger than just about all my peers.

Being stronger is available to you.

Four days per week, 30 minutes per day.

Results in… better!

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Get up early, lift weights, be pleasant to those around you and when you are thinking otherwise remember…

…you’re probably going to feel different about that later.

Strategies for Good Times

Here are three areas where I fool myself.

Consider Ruin – I’ve done a good job of addressing the risks identified three years ago. So good that, when I asked myself the question, “What can wipe me out?” I quickly answered, “You’re set amigo.” That’s a top-of-the-market sentiment if I ever heard one.

Having mitigated the hazards of leverage, unemployment, litigation, fraud, risk-seeking peers and insolvency… my main risks are health and accidental death.

Do you know your own?

Stay Variable – I was listening to out-of-state visitors rave about the beauty of the Rocky Mountains.

They’re right.

Where they go wrong is assuming that buying a condo will enable them to lock in the emotions of beautiful spring day.

I’m just like them.

We’re all just like them.

Good times give us access to additional finance/capital. We often use this money to capitalize luxuries and time.

Stay variable, stay invested and resist the urge to lock in family overheads.

Rebalance Time – the best deals I’ve done have been where I traded money-for-time.

It takes vigilance to carve time to become world-class at things that interest me. Mastery makes me happy.

Social media, marriage, long-term friendships, work/non-work, self/family – I don’t advocate being in balance – I do advocate making an honest assessment and asking myself if I’m OK with where my time allocation will take my life.

Geographic Reappraisal – Real Estate October 2017

This business insider article about an SF Bay Area house that sold $1 million over asking caught my eye.

Here in Boulder, we’re up 100% over the last seven years. Most of the increase has happened in the last 2.5 years.

Notwithstanding our big local increase, the “coasts” and luxury vacation markets look expensive from here.

The coasts look even more expensive when I factor in…

Schooling – Can I use the local schools? If not then my cost of living jumps by $25,000 per kid, per annum, after tax see the linked article – public, in-state education will save my family $1 million per kid.

Tax Base vs Legacy Liabilities – How heavily taxed is the location? How large are the legacy liabilities (health care and pension) from former city, county and state employees? The large cities of the oldest parts of the US look awful in this regard.

Other costs of living – Cali always surprises me when I run the numbers. I suspect it’s similar in places like New York and Seattle. Costs are 50% more expensive for the rest of my budget.

I am not recommending that you sell. I’ve made a decision to hold through the next recession.

However, the relative trade into “states with great lifestyles” strikes me as attractive — North Carolina, Montana, Idaho and Colorado.

If you are considering taking-the-leap…

Live where you don’t need to leave — can I create a long-term, year-round, local life here?

When I worked in international finance the “top guys” had homes in three or four countries. That kind of overhead has two negative impacts on your life: (1) your ethics are easier to purchase; and (2) you’ll need (at least) an extra decade of full-time office work.

Kill your commute — can I live within an easy walk, or a short ride, of where I spend my time?

When I was thinking about moving to Cali, I plotted my life in Google Maps. I did the same thing for my prospective life in Palo Alto. That gave me two geographic “triangles” and I calculated real estate and family costs inside the triangles.

Finally, surround yourself with people that live a life you’d like to follow. I do best with an active, outdoor life in a location with abundant sunshine.

This last point is important — know what you want — know where you do best.

What Makes Real Estate Assets Cheap – Tame Your FOMO

Because we are hard-wired to be poor investors, your family’s best bet is dollar-cost averaging in low-cost index funds. Consistent investing, over your working life, it’s as close to a sure thing as you can get.

Despite, and because of, the above truth, many people are going to dive into the real estate market.

When the masses get into trouble, you can do very well by applying this post.

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Wait for…

FINANCIAL DURESS — Once a decade, debt markets rapidly contract and everyone has a freak out.

DIVORCE — Corporate, professional or personal — vendors will hurt themselves to damage former partners

MOMENTUM — Collectively, our long-term memory is about three years long. The Great recession ran from December 2007 to June 2009. It took three years years for us to “forget” the asset price run up of 2005-2007.

If you don’t have two-out-of-three then wait. Discounts are coming!

Do work…

INFORMATION — I assume the vendor knows far more than me, and probably you

How can we improve our knowledge?

Wait & study — while waiting for the next crisis… live in the location where you’re thinking about buying. The cost of the rental will pay for itself through better information.

Fundamental Value — do this with every large investment (or purchase)…

A./ What is the net cash flow the asset can generate after current taxes, all operating costs and the investment required to keep it producing cash?

B./ What is the total capital required to purchase? Include every_single_dollar.

C./ How does the implied yield (A/B) compare to the yield on 30-year US Treasuries (currently ~3%)?

Example… across 2014 and 2015, I was unsure if I should sell, or hold. The common wisdom was long-term rates were going to rise and prices would stagnate. Tempting to switch asset classes…

I calculated my cash yield was roughly equal to the, then, 30-year rate.

I considered…

1./ My sites were exposed to the upside from Boulder County economic growth

2./ My alternative investments had lower yields than my existing investments

3./ I would crystalize significant deferred tax liabilities

4./ My existing position was good enough to meet my goals

I decided to sell a negative-yielding asset and hold the cash generators.

NOBODY predicted what happened next, long rates fell by a third, and local real estate values rose by 50%.

FWIW, long rates are back up but fear of missing out (FOMO) is driving the market upwards.

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When is our margin of safety highest?

  1. Let prices, and transaction volume, fall for two years
  2. Look for a distressed seller
  3. Look for a deal where the cost to own is less than the cost to rent
  4. Confirm your taxed, net cash yield is greater than the 30-year treasury rate

Your FOMO will tell you that the above will NEVER happen.

WRONG!

Since I graduated university (1990), very favorable conditions have happened FIVE different times where I was living.

It takes a long time to build capital and two great deals (in 50 years) will let you meet your goals.

Tame your FOMO and choose wisely!

The Road Ahead

Four recent reads.

A neat concept from Pasricha is to view a week as three bins of time.

  • 168 hours in a week.
  • Splitting into thirds, we get three bins of 56 hours.
  • Most folks drop two bins (112 hours) into sleep, work and commute.
  • Leaving 56 hours for everything else, which happens to be the subject of his book.

The author encourages us to have a look at our allocation. Here’s mine…

  • Sleep and unscheduled personal time – 65 hours
  • Kids — meals, bedtime, homework, housework, dad time and school drops – 40 hours
  • Exercise, strength training, time in nature – 21 hours
  • Admin, taxes, legal, finances, writing – 15 hours
  • Travel, Driving – 15 hours
  • Open, Reading – 12 hours

When I bring energetic action, time and expert instruction to an area of my life… I get results.

If it’s not happening then it’s not a priority.

Better to tell the truth — especially to myself!

Younger Next Year was written for Baby Boomers but I found it entertaining and useful.

Around 2030, I’m going to have a 40-hour slice of time land in my lap. Leaving my desk job in 2000, I have been through much of the author’s story. What I haven’t dealt with is aging and decay!

This winter, I learned to ski well. Learning to ski was humbling — I found myself lacking in absolute power, power endurance and quickness. Add that experience to the gradual deterioration of my vision. Aging and decay!

Through an explanation of Harry’s Rules, the book reminded me of other potential gaps in my life — connection, commitment, passion.

“Kids” have taken a big slice of time in my forties. Because we’re likely to have another 15,000 hours to come, I’ve been working on up-skilling everyone.

Some day the “kid” slice will be gone. My marriage will remain.

The two books by Gray (as well as The Soul of the Marionette) were fabulous and challenged the narrative my local community tells itself.

When I’m doing, connected and engaged…

…I don’t overthink any passing emotional state.

It’s worth making an effort to fill-the-gaps.