If all you did was watch TV and read the newspaper then it would be easy to conclude that the main benefit of wealth is stuff. In fact, people that fail to accumulate wealth often have a preoccupation with acquiring stuff.
In my life, “stuff” works against my goal of maintaining freedom of location and occupation. I construct my personal strategy to:
— Maximize freedom
— Protect against things that scare, or can unexpectedly hurt, me
— Play on human idiosyncrasies with regards to rewards
For what follows I’m going to use the word “investment” but what I’m really talking about is a proxy for material amounts of personal energy — it could be a child, a job, a business, a thought you can’t shake, a hobby, a race… ultimately, it all boils down to energy and time.
For now, let’s leave aside ego and envy!
Freedom — My investments exist to support the life I want to lead. Items that require me to invest large amounts of time, stress, or worry need to be carefully considered. There are many situations where you could be paid quite well but they aren’t worth your time.
Ask these questions before you do the deal:
— how can this deal hurt me;
— how will I manage this situation;
— who’s going to monitor this situation.
If the answers point to an impairment of my personal freedom then I won’t invest.
Remember, what really kills you in a bad deal is all the time (and emotional energy) that you waste trying to sort out a losing situation. You can earn back the money – you never get back the time!
Fear and Black Swans — collectively, we are poor at estimating the likelihood of adverse events. We also tend to be blind to unlikely events that would be really bad for us. A great book that you should read is The Black Swan – Taleb says it very well.
Rewards — lots of little rewards make me happier than single big rewards. My favorite example is checks in the mail. I love it – a letter and money! The psychic value of opening the letter, stamping the check, filling out the deposit slip and riding to the bank… it’s real.
So, when I talk about a Lifestyle Hedge, I’m looking for investments that fit into the above structure. Collectively, I want my portfolio to maintain my freedom, address my fears, insure against Black Swans and be tilted towards my idiosyncratic reward profile.
Let’s get into a current case study.
The media is all over whether Quantitative Easing will spark inflation or the Great Unwinding will result in Japanese-style deflation. What to do?
Hopefully, you’ve done your homework from last week. Start by whipping out your personal financial assessment.
Inflation — how will your essential/discretionary personal expenditure change over the next decade?
The things that are going to impact me are: my kids & dependents and my personal choices. Cost of living changes will have some impact but the change in my cost of living will be controlled by my personal choices. I control my personal inflation rate.
Deflation — typically, deflation is bad for governments, corporations and heavy borrowers. The media says that deflation is bad for me but… I don’t see it. Doesn’t scare me (but I’d be terrified if I was highly leveraged).
Given that governments, corporations and heavy borrowers have more say on monetary policy than individuals that rarely spend more than they earn… I think a good burst of inflation is likely.
The most recent inflationary burst was asset-based (housing, shares, bonds) – we’ve been living in a period of rampant inflation with financial intermediaries leveraging our society to mask its effects. If you think that inflation was under control for the last decade then you weren’t paying attention to your personal financial assessment.
I protect against inflation by:
— Owning my office, easier when you work at home;
— Working for an operating business that caters to high performers; and
— Organizing training camps for people that share my passion for exercise.
I protect against deflation by doing the exact same things and avoiding personal leverage. From an inflation/deflation point of view, my lifestyle is hedged.
I have additional strategies for Things That Scare Me but that’s enough for this week.