The Algebra of Happiness is a great read. Professor Galloway has a hit on his hands.

In the book (page 83), Professor G says “I’m 80% in cash.”

I am used to hearing about wealthy guys’ portfolio allocations, I didn’t give it much thought.

However, his statement caught my wife’s attention (Big Time) and I spent a while explaining why I’d give the Professor an “incomplete” on this short section (of an excellent book).

Here’s what I said…

Start by laying out your sources of income:

• Social security
• Day job
• Consulting gigs
• University professorships
• Unearned portfolio income
• Rental property income
• Tech fund consulting
• Royalties from bestsellers
• Spouse’s income

The segments, and the total, are useful to review.

These are figures you should know, roughly, off the top of your head.

Now, consider the information against your core cost of living.

I guess Professor G’s core cost of living is well covered by his sources of income. I’d further guess that his balance sheet has his family’s living expenses covered for the next hundred years. He is unlikely to be hurt by any investment strategy he selects.

The spread of your income sources will show concentration and diversification. Concentration can ruin life as you know it. You are likely to have skin in this game.

Addressing concentration can save you from ruin. Tweaking asset allocation, less so.

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Next, consider the areas of your life that hold option value:

• Youth
• Education
• Ownership (bi-coastal real estate, start-ups, portfolio investments)
• Wealthy relatives
• Carried interest in tech firm general partnerships
• Fame
• Bestsellers
• The ability to spend less
• Equity stakes people toss you for being an entertaining non-executive director
• World-class skills in well paying, niche specialties

When successful people talk about holding a lot of cash, they rarely mention the MASSIVE option value in the rest of their lives.

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What is cash?

As I write this I have six weeks’ living expenses in cash.

Seems really low!

1. What if I add my US government bond portfolio?
2. What if I net my unearned income sources from my core cost of living?
3. What if I take a part-time job in one of my niche specialities?
4. What if I downsize my house by moving?

In that case, my six weeks of cash should see me through to my 75th birthday.

Incidentally, I did all of the above 2009-2012 after my professional life was crushed.

Thankfully, I had a large cash holding at the time! 😉

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What should you hold in cash?

When allocating capital, most people want to receive a forecast of the unknowable.

Avoid pundits, forecasters and the predictions of others. They are worse than useless.

Each time I make an important decision, I write a file note to myself. Sometimes I publish these notes! Do this for 30 years and you’ll have a written record of your strengths and blindspots.

I use my limited attention to consider the implications of being wrong.

Overweight in cash and I am right:

• Rich already => no implication, if you’re not satisfied with what you have today then you will not be satisfied with more tomorrow
• Rest of us => Need to decide when to invest
• Rest of us => Need to decide what to invest

The track record of “rest of us” is clear. We do an awful job at market timing and dynamic asset allocation.

Overweight in cash and I am wrong:

• Rich already => no implication, my unborn grandchildren inherit less unearned capital
• Rest of us => my widowed wife runs out of money in her 80s
• Rest of us => I become a financial burden on my adult children

Some games you don’t want to play.