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
- 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.