Four Questions About Growing Financial Wealth

Do you ever feel you are behind? That you don’t have enough? That you might run out?

What to do?

Make vague feelings real by writing down some specifics.

Then get to work.


ONE => Is this a Reference Set issue?

If I spend time in Aspen then my “needs” escalate, and my self-assessment “declines.”

Same deal in Boulder, but it’s from a fitness point of view.

Others might have vanity triggers in places like LA, or on Instagram!

Feelings are sensitive to environment. The same life, done somewhere else, will be different.

Feelings of envy, fear and anxiety are sensitive to images – careful with environment, turn off cable news, get off Facebook/Instagram.

++

TWO => Is this a Skills issue?

A 35 yo surgeon with $250,000 of education debt, is in a different position than most. The surgeon is likely to earn themselves into financial security.

  • Where does my current job track lead?
  • Do I need retraining?
  • Armed with additional skills, it is easier to move up the income ladder?
  • Do I need to do the same job for a higher bidder?
  • What is the market rate for my skill set?

++

THREE => Is this a Spending issue?

It’s not always spending… but sometimes it is, particularly when spending isn’t generating satisfaction.

If you have the skills & the salary, but are left feeling uneasy, then a family financial review can make sense.

These discussions are HIGHLY emotional. I recommend a skilled facilitator.

++

FOUR => Is this a Time Horizon issue?

Back to the surgeon… highly skilled, employed, spending under control… the situation is going to play out just fine.

  • Pay down debt
  • Keep spending in check
  • Conservative monthly investment program

15 years along, the family is in a strong position. They had doubts, I did not.


I was asked, what would I have done?

Starting over at 40 yo

Core Job matches my highest paying skill set. Medicine, tech, finance, aviation… track into something that pays well.

The Core Job enables me to borrow long for a Core Investment. Buy real estate in a zip code with great public schools and a diverse local economy.

Secondary Job in an area of personal interest. It’s what many do with coaching/consulting.

Side Projects with Equity Upside. I would be looking for opportunities to invest (primarily time) in situations with financial upside. Do enough of these and something is likely to hit.

One new skill each year – coding, online marketing, blogging, video content, copywriting, language, ministry, education, graphic design, photography… stacked across a decade… powerful.

  1. Core Job
  2. Secondary Job
  3. Equity Upside
  4. Continuous Learning and Skill Acquisition

I have a friend, who did all of the above.

  • Around 40 yo, they were divorced
  • Then their employer went bust
  • Then they found our their pension had invested in the employer
  • So the pension went bust…

Long story short, a rapid journey from “set” to “f*%^ed”.

They could see “effective net worth” was negative due to financial obligations related to the divorce.

What I saw for a decade…

Three jobs: two of the jobs had flexible scheduling. Time off was used to work continuously (7/52/365). The third job was consulting, which was done inside the daily gaps.

Modest spending: given the income rolling in, not much went out.

Heavy investment: every single month, buy financial assets. Take overtime, buy more. Bonuses and financial windfalls, buy more. Buy, buy, buy.

This path isn’t for everyone – it comes with a cost in terms of family life. You need a spouse, who is completely on board. It’s a team effort.

A decade of grinding and the family is in a strong position. Now, the challenge may be to shift away from financial assets and build multigenerational Human Capital.


Final Word

Think deeply about Reference Set

  • There is a weak link between financial assets and life satisfaction
  • We never get time back
  • Too often wants are driven by external influences
  • Know what feeds your soul – write it down, take your shot

Make the target clear to yourself – for me => an active, outdoor life sharing experiences with friends and family

Stay on target.

Sunday Summary 12 June 2022

Top Threads

  1. I Allocate Money to Create the Wife & Life I Want
  2. Late-Season Peaking
  3. Swimming better & my return
  4. Buddy Runs for ultras & heat
  5. Fast Amateur SwimRun Training

High Performance

Workouts & Working Out

Strategic Family Capital

Couples trip to Vail last week – we skinned to the top of Ptarmigan, two days after closing.

Back in Feb, I laid out ideas for Multigenerational Capital, it included my strategy of Sell, Buy & Hold.

Last week, I completed the Sell Goal for 2022. There are two numbers I’d like to revisit:

  • Gross Yield of 43 years, 2.3%
  • Net Yield of 64 Years, 1.6%

I gave up ~2% yield on capital to add to my Strategic Reserve.


From wsj.com 5/5/2022

Snapshot from last week:

  • 2Y to 30Y yield ~3%
  • 30-year mortgage 5.25%
  • VTSAX Dividend Yield ~1.5%

By the end of 2022, short-term margin debt is expected to cost more than index equity yields. Medium-term debt is already more expensive.

These changes mark an end to the free-money policies of the last few years. This is a big change – it is unknowable if the change will prove sticky.

So… wait and see. I did a minor rebalance this week.

The rebalance was a repeat of the “buy less” strategy I shared in Feb.

In March 2020 I increased equity allocations to 72% of my Vanguard portfolio. 

Allocating additional capital in 2022, I made a reserve for “an investment that benefits the present”…

…then rebalanced to 60% equity allocation. 

This reduced the size of the new investment and got me past decision paralysis, driven by a fear of near-term loss.

The reserve now sits at ~15 years Core Cost of Living.


Looking pro

We’ve been looking around for a place in the mountains.

Coming off a year of AirBnB skiing, I know our cost to rent implies a gross yield of 0.75 – 1.75%.

Alternatives to buying:

  1. Stick the Strategic Reserve into VTSAX, rent through AirBnB and let dividend growth hedge rental inflation
  2. Stick the Strategic Reserve into a medium term bond product (VBTLX @ 3%) and earn a margin over my cost to rent
  3. Pursue either of the above, double my discretionary spending and run the capital down between now and my wife’s 85th birthday

For now, I’m taking Door #4

  • Rebalance after large (down) moves
  • Watch the Federal Reserve increase rates
  • See what happens

A 35% market decline implies a dividend yield over 2.25%, which would let me lock in the equivalent of three-months cost of living (after tax, forever).

I tossed my idea of buying a Sprinter Van for camping. The shift towards “assets for fun” doesn’t come naturally.

Real Estate Outlook 2022

How I think about the pricing history of financial assets – note bottom right blip

I sold a large real estate asset this week, a residential rental.

There’s an argument that the buyer got the building for free (Twitter thread on backing out land value).

At the closing, my agent (50-ish) shared that the only recession he’d really experienced was 2008/2009. So the next chart is his personal experience with asset pricing.


Right hand corner blip looks a little bigger

The above chart is ~20-years of mortgage rate history. If you’re 40-something this is what you lived.

Mostly a one-way bet => falling long rates inflate financial assets.


Back to my sale.

I sold for a three reasons:

  1. At 53, my life is changing. The window of what I need to finance is less and less. I have begun a strategic shift towards creating the life I want to live in my 60s.
  2. Real Estate is lumpy, we don’t have the ability to incrementally rebalance. I wanted to reduce exposure before making any additional purchases.
  3. The sale was valued at 43 years gross rental income (2.3%). Cash proceeds, after tax, were 64 years net rental income (1.6%).

Institutional Memory is 1,000 days, max.
Here’s the last 1,000 days in the mortgage market.

The real estate market is like a super tanker, it takes a long time for momentum to shift. After the 2008/2009 recession, non-foreclosure prices didn’t adjust until the middle of 2010.

  • Prices move at the margin => the marginal buyer had a strong tailwind through the pandemic, that has changed in 2022.
  • There will be an impact of the near-vertical move in rates this year => initially, we will see this in markets that require loans to complete.
  • The scale of “the impact” is unknowable and complicated by supply shortages of re-sale houses and for new build.
  • Prices are being supported by rapidly rising cost-to-build and cost to renovate/remodel.

Lots going on – I can make a case for +25% and -25%.


At 53, taking 64 years-equivalent cash-flow off the table, in a rising rate environment, is a decision I’ll be able to live with regardless of future outcome.

The Choices That Define Your Financial Life

  • Act as if personal finance is a game where you only get ten tickets to play.
  • Invest as if you are holding a checkbook with only a dozen checks inside.
  • Speak as if you’re holding a six-shooter, is it worth one of your bullets to make the point that’s on your mind.

I’ve been hearing versions of the above my entire life. It’s been great advice and encouraged me to:

  • Slow down
  • Resist the urge to interrupt compounding
  • Keep it simple
  • Focus on the big decisions
  • Treat small movements like noise

So, we started your kids with the allowance game.

Then, we moved onto discussing the family’s allocation of capital towards education.

With that, we considered the impact, across generations, of borrowing.

What next?

Teach your kids their financial lives will be about no more than a dozen choices.

Here are mine:

  • Study finance (class of 1990)
  • Save 50% of my take home (1990-2007)
  • Partners investment scheme (late 90s, all in then, equivalent of 1 yr spending now)
  • Work to build a startup (2000)
  • Sell into the frenzy (2005-2007)
  • Move into a low-cost Vanguard portfolio (2008 onwards)
  • Boulder real estate (2010 & 2012))
  • Downsize (2012-2013)
  • Borrow long at 3.25% (2013)
  • Debt free (2007 & 2020)
  • Have kids with a kind woman from a humble background (on going)

Every other choice turned out to be noise. What to do?

Focus on actions, not outcome.

What does that really mean?

Do what moves you forward and have faith. Sport, marriage, money, all things… daily action is the fundamental force moving you towards “better.”

Education matters => I was given a chance in Private Equity because I had high marks in a useful field. Between my high school graduation (1986) and my youngest’s (2031) the nature of “useful” will have changed. However, the need for skilled people to “do” will endure.

The most useful part of my degree wasn’t finance! It was financial accounting, programming and mathematics => I learned fundamental knowledge in college. I learned my profession on-the-job. You learn the valuable part by doing work, for the best people you can find.

This keeps popping up over and over again (professors, partners, coaches, mentors, twitter follows). At 53, I’m learning from people less than half my age! Do work to learn.

Avoid Ruin => studying, then working in, financial accounting helps you learn when a situation doesn’t feel right. Embezzlement is an old game and it’s useful to learn the patterns. Financial fraud happens, and will continue to happen. Take steps to reduce your family’s exposure to ruin.

With the accounting, I learned the most with 9 credits spread across three courses. Financial Accounting 1, 2 and 3. Small investment, huge return. Do it when you’re young. Being forced to rely on others to do your financial math is a disadvantage that will cost you.


Let’s pull it together for you…

Starting your working life (in a useful field, with your financial accounting courses done)…

You are at least a decade away from making the shift to lifestyle sustainable, so you focus on:

  1. Learning by doing with the best people who will hire you
  2. Savingget that first $100K banked, you will be grateful when you’re older
  3. Waiting for the fat pitch – once in a lifetime investment opportunities happen once a decade
  4. Turning yourself into the sort of person you’d like to marry, the friend you’d like to have, the parent you aspire to be => meaningful connection is true wealth

Your mind will try to trick you into thinking it’s the investment choices that matter.

It is not.

It is the four habits I outlined above, and avoiding substance abuse.

When One Dollar Costs You Ten

My kids won’t fully appreciate my choices until after I’m gone.

My #1 financial goal for my kids is debt-free education in a field that enables them to get paid.

With the very best of intentions, the US Government has completely screwed up both (a) the cost of college education and (b) the financial lives of the students they were seeking to help.


Debt isn’t free.

Every market juiced with easy money gets screwed up.


Explanation below – my life mirrors the blue line – graduate early, debt free, start saving

I googled up average debt at graduation and average graduation age.

$40,000 and 23 yo.

So let’s make three simple scenarios:

  1. Debt free early graduation (21 yo) => McGill 1990 finance grad
  2. Debt free at 25 yo
  3. Debt free at 30 yo

Let’s run it forward assuming:

  • Investment return of 5%, prior year close
  • $20,000 per annum savings

The late-start saver

  • who saves at the same annual rate
  • who earns the same return

ends up ~$1 million behind at 60 yo.

This is not the whole story, not even close!

In my demographic, families can burn ~$250,000 of capital to help a kid “get started” => 529 accounts and parental support. Even more if you roll private from Kindergarten.

What’s the 30-year cost of this choice?

$250,000 * (1.05)^30 = $1,080,000

Million bucks gone, you never see it.

  1. You burned the capital
  2. The kid figures life out by 30, and spends most of their 20s pissed at you (for tapering their support) 😉

$2 million opportunity cost, spread between two generations.

You assume it was what you were supposed to do and are grateful you finally got them off the payroll.


A possible alternative…

Our default position is in-state education and I’ll buy whatever’s left of your 529, at $2 on the dollar, once you save $100,000 of your own money.

What do we want to have happen?

  1. conserve family capital
  2. use debt sparingly
  3. build a habit of saving

Everyone pays their own way.

The #1 Mistake Financial Professionals Make

…is not leaving


Living!

Let’s start with the best money advice I’ve seen in 2022:

Don’t build a plan that requires your death to succeed.

Yes.


Rather, create a life that supports how you want to live.

How are we going to do that?

Get some money off the table.

How much?

5x “last year’s cost of living”

This is Core Capital – it is a function of your spending as well as your savings.

Once you have Core Capital, protect it.

The return on Core Capital doesn’t matter. Keeping it does!

It’s the most valuable money you will ever have, there are rapidly diminishing returns beyond this point.

Core capital doesn’t free you from the ability to stop working.

That’s OK.

You don’t want to stop, ever.

That’s another mistake the financial services industry makes => selling you a dream that you won’t enjoy.

You want the freedom to choose, to take chances with your time, to stay in the game.

You want this freedom to choose as soon as possible. Not late in life.

INVERT: You want the freedom to choose “not to.”

Not to deal with:

  • other people’s BS
  • fast money schemes
  • worry
  • golden handcuffs
  • creeps & crooks

Two weeks ago, in asking five questions, I gave you a nudge to start thinking about life.

  • Learning & Peers
  • Travel & Exploration
  • Values

That article introduced the concept of Lifestyle Sustainable => a low-cost base of operations where, ideally, you can live for free. The idea is to remove cost-of-housing from your financial concerns.

That’s the core financial asset for your portfolio. It cost me US$110,000 in 2000.

This is a great place to park your Core Capital.

Removing housing from your list of concerns gives you more than a financial return.


Alongside your key financial asset, I hope you have a loving, lifelong partner. This person is the most important decision, financial or otherwise, you’ll be making.

The highest return investments I made in my 30s & 40s, were not financial in nature. With a low-cost base of operations, & marketable skills, I was in a good place.

Many high-earners fail to see the value of what I just pointed out.

  • Low-cost base of operations
  • Marketable skills

Beyond that, most everything is lifestyle enhancement and ego.

Thankfully, I had a major setback in my early-30s (divorce) which gave me pause.

In 2000, I saw my future in front of me… lifestyle enhancement and ego… and I made a change.

A big one.

I became a world-class athlete. With (athletic) success came the realization that something was lacking.

So much success, still lacking!

  • If you’re good at making money…
  • If you’re good at playing the game of “career”…
  • If you are nearing the top of your field…

…then you’ll be tempted to keep doing what you are good at.

I’d encourage you to establish that low-cost base of operations, then try something really challenging…

The highest return investments I made were improving my suitability for marriage and learning how to parent. Most of my learning happened after I was married and my kids were born.

It is never too late to invest in the human capital of your family.

If you get these investments right then you might not notice the benefits. Honestly, a big driver in my life has been a fear of getting divorced again (not-divorced, winning)

Fear that drives positive action is useful.

I’ve been paid by less drama, and less problems (we don’t see all our wins).

I’ve also de-risked some of the challenges my future self will face (companionship, engagement, dementia). Study (the problems of) who you are likely to become.

You’ll notice my portfolio advice (still) doesn’t talk about asset allocation.

This is deliberate!

Asset selection is not the differentiating factor for a life well lived.

  • Marketable skills
  • Low-cost base of operations
  • Fixed-rate mortgage, if you like
  • Target date fund for your future self

Then focus on living your life and creating the friends/family with whom you’d like to share it.

World War Three Portfolios

One of my favorite things is skiing with my wife.
I’ve made a decision to keep living.
Reality is going to catch up with me at some point, I know.

When stressed, you are going to be tempted to shuffle your asset allocation.

Churning your portfolio isn’t the answer.


Geography, Citizenship & Right of Abode

I’m parked in the middle of the American Empire => by choice.

I naturalized to the US and don’t need anyone’s permission to stay here.

Being born Canadian, I have the option to live in Canada. It’s a valuable option to a wonderful country (with a different political system).

I also have the right of abode in New Zealand (a third political system). I like to think of it as a smaller Canada, on the other side of the world.

My Kiwi visa doesn’t expire. Unfortunately, I can’t pass the visa to my kids. However, each of my kids has a Canadian Citizenship certificate.

Three political systems, two hemispheres, all English speaking.

Hemispheres, continents, countries and political systems.

The location to start from scratch.


Monetary Environments

Who regulates the custodian for your financial assets?

Unsure what I mean?

Who has the ability to lock your money inside a political regime?

Where can you send money, with a single instruction, that’s outside of your home regulatory environment?

The capital to start from scratch.


Income Streams

  • Do you have an alternative source of income?
  • How long might it take to develop one?
  • Are your skills marketable internationally?
  • Might you be able to develop a set of marketable skills?

The skill set to start from scratch.


Look at the above on an individual, generational and family-wide basis.

The unimaginable happens once a decade.

Why You Should Consider the Window of Time

I was taught that all my (financial) problems would be solved if I made enough money.

Money, absent saving, doesn’t work.

Spending, absent reflection, creates golden handcuffs.


Living a big-city lifestyle had my younger self trapped. His large spending created a hurdle that would have taken him years to overcome.

Valuable years!

Put another way, the weight of my spending was preventing me from launching towards my true self => meeting a wonderful wife and creating my current life in Colorado.

My solution was simple

  • Save half my take home pay
  • Get myself to a low-cost environment
  • Create independent income streams to cover my cost of living
  • Surround myself with people who lived my values

All well and good, and my 30-something self got some things right.

What he wasn’t able to see was the Window of Time. It didn’t matter to him because he was rich in time, and knew it. Having his basics covered, he risked time on changing direction.

For the prudent, the march of time will eventually require a change in approach.

Each of us is free to change our approach at any time.

At some point, all of us are going to realize that our wealth in time is approaching the point where we have more wealth than time.

This is most likely to occur in what we call the “peak earning years.”

It’s really hard to change direction when you’re coining it.

I know, I did.

Cutting spending, leaning into saving, buying an extra couple years before I’m old…

…all trades you should consider.

Even if you don’t change your path, knowing that you could will strengthen your ability to act with integrity.


So the two landmines I hope you avoid are:

  1. Peer-driven spending that leads you away from what fills your heart
  2. Creating capital for future family members, when they’d rather spend time with you now

Buy time gradually.

Spend time with intent.

None of us get a refund.

WIT is Wealth In Time

I am going to show you how to connect spending, time and wealth.

Let’s bring back my 20-something self. He was living in London, working in finance and renting a room to keep his overheads down. 

Coming out of college, having more cash flow than he needed, he felt rich.

But was he?

He earned $75,000 and was spending $32,000. How wealthy was he?

Remember from last week, his net worth was $20,000.

Net Worth “divided by” Spending = WEALTH IN TIME

His WIT was 7 ½ months.


Roll forward to my early 30s. I’m a young Private Equity partner and hit $1 million net worth.

I was spending $250k a year, felt flush, but was I wealthy? Let’s find out.

$1,000,000 / $250,000 = 4 Years

Not wealthy, especially when you consider my life expectancy (>50 years).

++

At 31, I realized my spending was buying me NOTHING. What I liked to do was swim, bike and run. I had fantasies of leaving the corporate world. I took action.

I applied to emigrate to New Zealand. Arriving in Christchurch, I was able to buy a five-bedroom house for US$110,000. My cost of living plunged to $25,000 (NZ$60,000).

My WIT jumped to 40 years.

I didn’t return from my leave of absence. Most of my family thought I was nuts.

Best trade I ever made.