Monthly Archives: January 2021

Family Financial Review: Portfolio Allocation

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Thursday, I shared my thoughts on the real risks I face. That’s where the action happens in my life.

Still, this is a financial review, so it’s the right time to consider asset allocation.

Having spent 30+ years locking in my Core Cost of Living, the main choice I face is how much cash/bonds/no-return assets to hold.

Here’s how I approach that topic.

There is a cost to holding cash, especially today. Zero, or negative, yield.

Cash is exposed to the “ravages of inflation” – on one side.

Cash earns nothing, while you watch bitcoin, prime real estate and other asset classes skyrocket – on the other side.

Against those costs there are benefits. The three biggest (for me) are:

  • a call option to benefit from a future crisis
  • serenity
  • cash/bonds dampen the volatility of my portfolio.

Now, here’s the questions I ask..

1/. How many “years” do I need to feel serene? This will depend on your psychological make-up, earning capacity, earnings diversity and age.

Getting my net-cashflow-burn down is the only way I’ve been able to feel serene. I just don’t have the psychological make-up to soothe myself via luxury spending, more assets or more income.

2/. How many dollars might I need to capitalize on the coming apocalypse? Being able to buy real assets in a down market will make you happy for a long, long time. I’m still happy about a couple purchases I made in 2010.

My financial assets provide me with an opportunity to get out there and live my life. Financial assets provide very little inherent satisfaction – this is a good thing as I can remain (mostly) detached in downturns.

Our actions in the real world provide satisfaction => share experiences (ideally in nature) with people you respect and love.

BTW, here’s a 2019 article I wrote about wealthy people talking about cash. Back in 2019, many wanted to be in cash. Roll forward to 2021, some of the same folks want to be out of cash! Personally, I’m about the same. I spent the intervening period paying off my mortgage and clearing my car loan.

Family Financial Review: Risk, Worry, Ruin

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I ended Wednesday by asking, Am I worried about the right things?

It’s easy to get distracted by the noise surrounding our lives.

Do you know your key risks?

It varies between people and over time => focus on habits that might lead to ruin (leverage, lack of impulse control, smoking, substance abuse…).

See also my review from 2019.

Set your financial life up so it runs on autopilot.

Did you read the PDF from yesterday? Good reminders at any age, as well as an embedded reading list.

Things I focus on more than my portfolio…

  • Near-term: keeping up with my teenagers – what is it going to take to share the outdoors with my family when I’m 60?
  • Medium-term: personal engagement when my kids are gone – what will I do with more time, and less energy?
  • Health: poor choices increasing my risk for cancer and other health issues
  • End of Life: my body outlives my brain

My actions today reflect awareness of the real risks in my life.

My portfolio? Good enough is good enough. Avoid unforced errors and keep on keeping on.

Don’t assume these answers.

Do the calculations from Wednesday, reflect on your life, write it down, review annually…

Then get out there and enjoy 2021.

Family Financial Review: Time

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Tuesday’s post ended with the observation that I pay myself in time.

So, how much time have you got?

Let’s find out.

Scale It => Relate Your Exposure To Your Balance Sheet

I recommend you look at things a few different ways. Print this out and write your numbers on the page.

Make it real, especially if you’re financially fearful.

  • Gross assets / Core Cost of Living = years
  • Net assets / Core Cost of Living = years
  • Net assets / Net annual cash movement = years
  • Net assets / Net annual cash movement (excluding active income) = years
  • Cash / Core Cost of Living = years
  • Cash / Net annual cash movement = years
  • Cash / Net annual cash movement (excluding active income) = years
  • Cash / Gross assets = percentage
  • Cash / Net assets = percentage

I include bond holdings in cash. I focus on the BOLD, while considering each line.

Armed with the above, you can get a feel for how much time is available to you, based on how you are living today.

It’s easy to get fixated on income/spending and lose track of time. The best investments I made in my 30s involved trading money for time.

We tend to over-value money vs time => you can do great deals for yourself once you prove your worth to your firm.

Related => it doesn’t take much time to greatly increase the quality of your personal life. As a triathlon coach, I’d get my athletes to carve out one weekday morning per week where they’d start work late. This would enable us to make Sunday life-focused and spread their training load.

Discretionary/Luxury Spending – will fall outside your Core Cost of Living. My advice here is “pay yourself first” – slice your investment program off the top of each paycheck before you get a chance to spend it.

Don’t borrow any money (personally) until the first credit crisis after your 30th birthday. Then, borrow modestly to purchase real assets that are being priced down due to a banking crisis.

Across the 40-50 years of your working life, you will not miss luxuries not purchased.

As for overall strategy, there is a great PDF here. As the PDF will explain, don’t get distracted, by those who want to profit from complexity!

Focus on what matters: (1) spending vs new capital saved; (2) learning to think in time, not money; and (3) good enough is good enough (low cost, persistent investment, across long time horizons).

Maybe I should add #4… the best stuff in my life happens between people – shared experiences with those I love.

People, not portfolios.

To get ready for tomorrow…

Ask a confidant… When I talk about money, what do you hear?

With your financial concerns… Am I worrying about the right thing?

Family Financial Review: Winning

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Monday’s post here – tomorrow we will start using the data you’ve prepared.

Before we get into the analysis, let’s discuss the game.

My game is NOT won by building income, assets and spending.

Something I hope to teach my kids about money:

Any choice made to appear rich has an underlying effect of reducing family wealth.

My game => increase discretionary time while getting the net burn to zero.

I’m willing to wager you will not feel free, or serene, until you get close to that point.

“That point” being where you can sit back and not care about the ups and downs of the world. Being able to sit with equanimity will improve your thinking, and your relationships.

It’s going to take a while to get there. Here’s something I wrote in 2016 about the process.

I hope you read the link – I chipped away for 31 years and am a better man, on a smaller balance sheet.

The main thing to remember is each time you get an attractive opportunity to lock in a piece of your core cost of living, take it.

Pay yourself in time.

Philosophy of Status

Don’t think I have transcended my human drive to compete for status.

What I’ve done is (try to) channel it away from external approval, virtue signaling and consumption.

Needing a place to allocate this drive, it goes into my writing, marriage, quality of thought and daily actions. For a long time, my drive went into my sport.

Redirection is a whole lot easier than transcendance.

Family Financial Review: Set Up

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The picture is what it cost to send a first class letter when I married my lovely wife. The 55c cost today (+34%) is a reminder that inflation ticks away one penny at a time.

When it comes to inflation/deflation, I like to maintain a neutral position. More broadly, I seek to avoid the need to pick winners.

I also avoid making predictions about an unknowable future. Most importantly, because it’s impossible (!) but also because I have no idea what my life is going to be like ten years from now.

What follows is present-focused.

Quantify Your Exposure

Start with your core cost of living – that’s what’s going to inflate and outliving your money is a key risk.

What’s in my Core Cost of Living?

  • Healthcare ($19,300 of premiums and $7,200 to a family HSA for a plan with a $14K family deductible) – this sector is ripe for disruption, I get little for my spending
  • Taxes, Utilities, Car Costs and Insurance
  • Food, Clothing and Kid Activities
  • Childcare – a massive line item 2009 to 2019, now a source of income for the family, our middle-schooler is a sitter
  • Mortgage, rent, car loans – my main project from 2010 to 2020 was getting this down to zero – once that was achieved, I went a step further and turned it into a source of income

Next, consider your sources of passive and active income. Rents, royalties, dividends, interest (at least in the good old days), consulting and any other forms of income. Write it all out.

Compare your Cost of Living with the Sources of Income and calculate your net burn rate, or your net annual surplus.

Net annual surplus gets routed to discretionary spending, luxury items and/or new investment capital.

The best investment decision I ever made had nothing to do with asset allocation. From 1990 to 2008, I routed 50% of my gross income to new investment capital.

In my early 20s – healthcare costs were peanuts, no childcare costs, living in a shared apartment… I saved a ton. Good thing, too. I had no idea how much my cost of living would pop when I had kids.

My 40s (2009 to 2018) saw unexpected unemployment combine with a big jump in childcare, healthcare and housing costs. This resulted in a burn rate that forced us to make a series of changes, and choices, which proved quite useful in hindsight.

Also write out your balance sheet – assets and liabilities.

Include a liability called “deferred tax and agent’s fees“. Estimate this liability as 6% of the gross value of all the real estate you own plus 25% of all the capital gains in your portfolio (exclude the exempt portion of the gain on your primary residence). Making this number real will help you avoid incurring unnecessary expenses by tinkering with your assets.

The best time to sell great assets is never.

Let it roll.

Writings for an expecting father: Where the rubber meets the road

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The second birthday of your first child is a key milestone.

Life’s about to get real.

I think a lot of guys would be more involved if they knew, in advance, what long-term female bitterness does to a marriage.

How much risk do you want to run?

What sort of role do you want to create for yourself?

  • Take a dominant kid away so your wife meets the other kids (this comes later).
  • Taking a toddler away on an overnight trip so your wife can put her adrenal system back together.
  • Lock in a Daddy Day once a week.
  • Lock in a time slot 5 days a week so your wife can exercise.

Smart, tactical choices will help create the woman you’d like to spend the rest of your life alongside.

What do you do best?

For me, it is 1-on-1 time in nature. Whatever your skill happens to be, do not expect it to be a whole lot of fun at the beginning.

The “win” happens when your wife uses the space you create for her own needs.

To create space for meeting our own needs, I was rarely supportive of “getting exhausted together”.

Also invert the situation and consider…

What does your partner like least? …but maybe that’s outside your skill level. In that case…

What can you subcontract? Teaching your kid(s) to be put to bed at an early age from someone other than their mother is one of the best things you can do for your marriage.

I experienced some resistance to outside help with our first kid. The resistance was _completely_ gone by the time our 3rd arrived.

Subcontracting is not a clear cut issue. I can easily subcontract cleaning but it’s one of the highest return things I do in my house. Unassailable authority when I assign chores or ask for help.

Do no expect your kids to thank you => remember you’re doing this for your marriage and to hedge your bets for tomorrow.

You can not do it all => What are you willing to give up to create space for this new initiative?

In the short term, as you adjust to your new reality, it will feel like you’ve given up everything => Because you have!

It’s a brand new life you’re creating.

Writings for an expecting father: The Start

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Three things:

  • Learn to swaddle
  • Focus on your wife’s sleep
  • Babies cry

Nothing else matters until you’ve mastered these points.

Why?

Done well, these points bring relief and create space for the rest of your life.

Downstream effects

Where you’ll be sleeping => I spent a lot of time, alone, in the basement.

Sleep schedules => Baby, Mom, You => in order of priority.

Use of outside help => support the marriage by supporting your wife’s sleep and up-skilling everyone’s ability to swaddle and deal with the reality of the baby (they cry).

Pay attention to what works, and doesn’t.

Keep what works and build a schedule.

Writings for an expecting father: Why

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How do you deal with the risk that your body lasts longer than your mind?

Serve the young.

A pregnant wife is the start of an outstanding opportunity to de-risk the back end of your life. The skills required to take advantage of this offering are likely to be very different from what you’ve been using so far.

You don’t need to be a father to take advantage of these posts – young spouse, young students, other people’s kids, grandkids, neighbors… the key element is consistent service to others.

Now, in my own case, it wasn’t a desire to “get” future help.

Rather I had a strong desire to “avoid”.

  • Avoid another divorce.
  • Avoid the pain of future regret.

Still not sure? Listen quietly while grandparents talk about their life decisions.

Remember Kindness

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A couple weeks ago, I shared that Andy was “everywhere.”

No place is this more true than my home.

My new reality took a little getting used to.

At first, I resented the intrusion. My resentment struck my rational mind as somewhat strange.

Uncharitable feelings, but real.

So I dug a little deeper.

  • Worry. I couldn’t heal my wife.
  • Worry. Andy’s ghost might take my wife away.
  • A general, get-out-of-my-house sentiment.
  • A desire to use avoidance as a coping strategy.

Lots of not terribly useful thoughts.

So I decided to re-frame.

I asked myself:

  • What did Andy do far, far better than me?
  • Why was Andy loved so deeply by our community?

Kindness.

When I think about him, I’m reminded of kindness.

Kindness at a standard that seems far out of my reach.

So I’ve made him a buddha, of sorts.

…and when he’s popping up in my life, I know he’s reminding me to remember kindness.

PPP – What To Do

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Let’s close the series with personal lessons.

Home Gym – best money I spent in the pandemic, make time to use it every single morning. It does not matter what I do! My life, and health, get 100% of the potential benefit by simply waking up and doing something.

Autopilot – kids and self – go through to pain to let good habits run on their own.

Specific to my life, waking up crazy-early forces me to ditch the poor choices I make after 6pm. To reinforce my inability to screw myself up, I volunteered to drive my daughter to her evening swim practices. We love talking to each other and I read while she swims.

The Easy Way – overcoming (myself, the pandemic, whatever) generates lasting satisfaction. We don’t serve our families when we remove the opportunity for our children to challenge themselves, fail and learn by experience. Same advice works in my own life – difficulty is an opportunity for personal satisfaction.

Travel less and shorter – my pandemic gains were big – stay put and grind is a winning strategy, and not just for athletics. I’m closing in on 100,000 words published during the pandemic.

Travel is a bit like social media – a pleasant distraction from the work that brings me lasting satisfaction. Travel is best in small doses, used to recharge before returning to work.

Year round tutoring – part of getting ahead is never falling behind. Our tutors did much more than help us fill the long days of school break. They helped the kids become confident, skilled, learners.

What’s my conclusion?

Frankly, I’m not sure!

Human nature tells me that I won’t need to add much to feel great. Like my kids, I’ve adapted to pandemic life.

So, for a bit, I’m going to enjoy a quiet house and resist taking on any new initiatives.

More in the future about “how to spend” => the weirdest thing about this pandemic is every asset class I follow appreciated.

Strangely, 2021 feels like 2017 => Like I said at the start of the Trump Administration, if you’re selling to rich people… increase your prices. There is significant pent-up demand due to the effect of zero-rates and lockdowns.