Tag Archives: family finances

Family Financial Review: Set Up

Posted on by

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.

Middle Age in the Free Money Era

Posted on by

Controlling my greed is a useful first step.

But how does one do that?

Build a peer-group with better ethics, and less financial wealth.

Then let human nature pull me where I want to go.

Looking around, with my 1990s financial up-bringing, many popular assets look expensive at half their current values. That said, people are making big money and this can be tough to watch.

I work on creating a vibe that I can afford to miss out and seek to temper my envy.

I acknowledge I’ve done enough winning.

So. Much. Winning. 😉

Yesterday, I shared thoughts for my younger self. What about this time in my life?

I’m not young enough to earn it all back, nor am I old enough to lock-it-in and forego further capital appreciation. I checked our joint life expectancy and we’re 50/50 to get another 40 years.

Given that I’m debt free, I’m hurt more by a doubling, after selling, than a halving, and still owning.

Think that through – it goes against every emotion I have with regard to money (and I’ve had a lot of training).

Married, at 51, I need to be taking a 30-50 year view.

Accept the reality of my personal situation and remember the financial reality of near-zero rates.

  • Stay invested
  • Lean into severe downturns
  • Maintain options, and skills, to add value-added work
  • Stay debt free – while this is a great time to borrow against cash flow, borrowing against margin is nuts – at some point, the debt cycle will snap back and I do not want to get closed out in a sell off
  • Keep my spending choices in check – know that every choice I make sets a baseline for my kids to follow AND creates a cash flow requirement for the rest of my life

Here’s the key lesson from my early retirement => If I’d gotten spooked and sold out (I get nervous in rapidly rising markets) then I wouldn’t have had the capital to buy back my existing positions, which remain “good enough” for my needs.

In a Free Money Era, the risk many of us face is acting on our fears and being priced out of a portfolio we never needed to leave in the first place.

Control your risks by focusing on skills, spending, relationships and daily exercise. These are things I control. Global macroeconomic policy, less so.

Tomorrow, why the heck are people buying non-, and negative-, yielding assets at current pricing?

Sorry about the dud link yesterday at the bottom – it was the same as the one at the top of the page, which worked. Here is is again, it’s the link to a calculation which led to some major changes in my life. Putting a price on my time.

The Declining Value of Ownership

Posted on by

Yesterday, I described the forces creating rapid lifestyle, luxury good and financial asset inflation.

What to do?

Aspire to skills, ignore asset-driven status.

Near-zero yields have created a very different world than I grew up in.

  • The skillful can easily lease their needs, at a tiny fraction of the cost to acquire.
  • Businesses, like property management, that charge based on a %age of revenue are bargains, for both sides of the relationship. Managers can scale valuations at PE ratios over 50x net earnings. Owners pay 0.1-0.25% p.a. (of capital) for expert services. Both sides of this equation were unimaginable 30 years ago. Another way to look at this => “Vanguard” pricing is moving across asset classes.
  • In a world with tiny cap-rates and huge PE ratios, Human Capital is very, very valuable.

Let’s look at an example.

I like to follow real estate, particularly Luxury and Vacation markets. In these markets, there are many people who own $1-10 million places.

Annually, these places cost $15,000 – $100,000 p.a. (cash) to own and, often, sit empty. The cost to hold is not a big deal for these owners because they can afford it.

I’ve always wanted to visit Jackson, WY so I jumped on Airbnb and had a look around. I can lease a Jackson Hole penthouse, roughly equivalent to my net worth, for a few days.

My cost is…

  • 1/20th of the annual cost to own,
  • 1/1000th of the capital cost, and
  • maintenance is someone else’s problem.

Thanks to Airbnb, there’s real value here, especially as I am the one who keeps his freedom.

  • freedom to leave
  • freedom to change my mind
  • freedom to allocate time, share of mind and capital elsewhere

This will be rolled across every under-utilized (negative-yielding and/or depreciating) asset class within our economy. Airbnb’s $100 BILLION market cap, Free Money and the 1000-fold increase in VC gains will make it happen.

Don’t get caught up in the ridiculous valuations we are seeing – what’s important is understanding the process of change.

In a micro-yield world, it costs me 1/1000th of the capital value to get all the annual consumption I desire.

The only reason to buy is to show off, and that’s what humans do. Actually, there is another reason to buy and I’ll touch on that in a couple days.

Given we will stay human, I do not see these changes as a bearish case for asset values, which are driven by the price of money, mood and scarcity.

However, I do think it changes the mental calculus for a young person. In a highly mobile, rapidly changing environment, the assets your (grand)parents aspired to own are a lousy place to put your financial capital.

Tomorrow, some nitty gritty for 16-21 year olds.

PS – I didn’t book the penthouse. I went for a (refundable) 3-bed condo across the street from a playground. I make most decisions assuming they will be multiplied (x3) by my children when they grow up. I like to leave my kids room to (hedonistically) improve on my choices.

Family Financial Structuring

Posted on by

Following on from my Estate Planning Docs post.

Trust vehicles can be useful to your family and I will illustrate with a couple of stories.

First thing to remember => trusts work best if you set them up long before you “need” them.

Grantor Trust

Part One: Around the time I turned 40, I found myself in a situation where I had joint & several liability with a business partner who’d made poor choices. As fate would have it, these choices were made inside an insolvent group with over $100 million of borrowings.

Now, the banks were not going to be getting their money back by suing me but (even the remote possibility of) being wiped out late in life was highly unattractive.

Part Two: Long time readers will remember that I used to do bike-focused training camps with top age-group athletes. I would ride, on open roads, with doctors and CEOs who were completely exhausted. If an athlete was killed, or permanently disabled, then it would be easy to prove a large financial cost to their family.

As a business, we dealt with this risk through waivers, event-specific insurance and a family-level umbrella insurance policy.

When I added up the cost/time/worry of this approach it was expensive, even more so once I had my own family to protect.

Take the two parts together => I was working in two fields. The first field was similar to being a director/fiduciary of a company. The second field is similar to being a professional exposed to allegations of malpractice.

One day, I was talking to a tax accountant about what was going on in my life, and the changes that were expected in Estate Taxation. He recommended I speak with a local trust attorney.

An initial meeting showed me that the cost to set up a new structure would be the same as one year’s insurance bill. Because I have the skills to run the fiduciary aspects, the ongoing cost would be a fraction of what I was paying my insurance company.

Step One was setting up something called an Intentionally Defective Grantor Trust. From a layman’s perspective, I put my share of my house and rental property into a trust that benefits my spouse and kids. I retain the tax liability for the trust, for my life.

From my point of view, the main asset I am left with is my earning capacity, balanced against future tax liabilities. I’m a much less attractive target to any potential litigant.

From my family’s point of view, the trust is similar to an annuity, tied to my life. When I die, they can sell assets and/or move into a small rental property, while living off the rental income produced by the larger rental property.

The specifics are technical, there’s a bunch of tax considerations and you should take expert local advice.

This change gave me a more secure feeling than the insurance policies.

Over time, I exited the disaster-prone aspects of my life and that helped too.

Irrevocable Family Trust

I’ll illustrate with a recent example – my brother-in-law died and his balance sheet will flow into my wife’s family.

What follows isn’t what is going to happen, but it could have => check with an expert in your jurisdiction if this seems useful.

Here’s a story… assume Andy had a brother called “Dude” (he didn’t).

Andy had planned ahead and wanted to leave assets to Dude. However, Dude didn’t need the money, or Andy didn’t like Dude’s wife, or any number of reasons Andy might not want to support Dude’s personal balance sheet.

So Andy set up an Irrevocable Trust. Let’s call it The Dude’s Trust => Dude, and Dude’s descendants are the beneficiaries.

Andy then drafted his will, or his Living Trust, to leave everything to Dude, but gave Dude a specific power of appointment to nominate The Dude’s Trust in his place.

Before Andy dies, he would also have the ability to make gifts to The Dude’s Trust.

Did you see what happened? Andy was able to achieve what he wanted => money to Dude. Dude is left with a choice to inherit directly, or into a family trust.

In a world with an unknowable future, this is a valuable option.

The current Estate Tax Threshold is $11.58 million per individual, double for married couples. I’m far, far below that threshold.

However, that limit sunsets in 2025 and who knows what tax regime will be in place when I turn 75 (some time after 2040), or beyond 2080 when my kids age up.

I can imagine we shift to a regime I’ve worked with outside the US => deemed sale at death, zero personal exemption, no step-up in basis, the estate pays capital gains tax and the net flows to the beneficiaries of the estate. It’s simple and I like tax simplification.

In that scenario, trusts that were established prior to the change in rules could be grandfathered, particularly if they already own assets. To get around assets sitting in a trust “forever,” the IRS might create a rule for the deemed sale of trust assets, this rule exists in jurisdictions outside the US.

Even if everything stays the same… given the asset protection benefits of a trust, and the ability to “finance” the structure through reduced insurance payments, it made sense for my family.

This is not legal, tax or accounting advice – seek local experts.

Combination article, with chart, from 2013 is here.

COVID Finances

Posted on by
Local fires make for dramatic sunsets. This was last night at swim drop.

What strikes me most about COVID is how little we’ve been asked to do.

For those of us who avoided unemployment:

  • Stay at home
  • Wear a mask
  • Spend a lot of time with our children

I embraced all three, eventually.

Seven months in, our youngest can run her home school:

  • Print daily schedule
  • Follow links to online classes
  • Turn in her work
  • Make lunch and snacks

It’s not ideal but it’s good enough given the underlying reality.

An interesting part of the underlying reality is how well the top of tier of our society has been doing.

The noise of the election has been drowning out this story.

2 out of 3 kids returned to in-person learning on Tuesday and I hit the road for a day trip to the Collegiate Peaks. COVID has enabled me to feel grateful for things that appeared unreasonable at the start of 2020.

I made three financial decisions this year.

  • Sale & leaseback of my house (January)
  • Roll two years cash flow from bonds to equities (March 18-24)
  • Ski local, reallocate ski money into a new car (Q4)

Similar to 2009-2012, I expected to do a lot more.

However, I’ve done enough. Enough to set up the next decade and enable me to focus on what matters.

That’s a lesson.

If you’re focused on “what matters” then there’s not going to be many decisions to make. Most of your focus is going to be on the day to day (exercise, family, admin, relationships, marriage).

If, like me, you are someone who likes getting stuff completed then you’ll do well to create an outlet (other than churning your portfolio) for this aspect of your personality. Otherwise, you’re going to run up a lot of expenses, pay excessive fees/taxes and greatly increase your chance for unforced errors.

In your larger life, if you don’t give yourself something useful to do then politics, social media and petty pursuits will fill your time.

I need to watch out for these distractions => they bring out of the worst aspects of my personality.

Pay attention to who, and what, brings out your best.

The best investment I made this year was the month I spent weaning myself off social media.

It’s difficult to see the net negative return of Facebook/Instagram until you are outside of their feedback loops.

At its core, Facebook makes it easier for bullshit to reach me.

For others, Facebook makes it easy to argue.

For all of us, the algorithms reinforce confirmation bias and reduce our ability to think clearly.

The algorithms are everywhere – they live in every web interaction we have.

Instagram stimulated my desire to buy stuff and reduced my satisfaction with who I am.

Both platforms are pleasurable but what’s the source of the pleasure? The source is external validation on appearances.

Far more powerful is an internal validation for the actions I take, daily, for myself and my family.

True power is the capacity to create a feeling of goodness for the actions you take, daily, in your own life.

My biggest fan

What was your biggest problem of 1, 5 and 10 years ago?

Can you even remember?

I can.

The biggest challenge of my last decade was a little girl who doesn’t exist anymore.

She’s gone and has been replaced by someone who’s an absolute star.

The difficulties of COVID enabled her, and me, to shine.

Parents, children, teachers, students, superiors, subordinates…

What we see, as a problem, will disappear over time.

…and time is the most valuable asset in our portfolios.

Spend it wisely.

Wealth and the price of money

Posted on by
One of my best assets – I always wanted to have hair like that!

I graduated from university in the summer of 1990. I didn’t know it at the time but it was an excellent time to start a career in finance.

The price of money has been falling ever since I graduated (1st Class Honors, Econ/Finance, McGill). My first real finance job was the most junior member of a very successful private equity team in London.

It doesn’t enter into popular consciousness but many of us have had the benefit of a 30-year tailwind. This tailwind impacts every aspect of our lives and, like oxygen, we’re largely unaware of it (while it continues).

For the first half of my finance career, a modest interest rate cut was sufficient to get everyone excited.

At this stage of the cycle, it takes a healthy dose of shock & awe to move, or steady, the markets.

It’s important to remember:

  • It is impossible to know the future in real time. If you find yourself saying the Fed is making, or not making, a mistake then you’re fooling yourself.
  • It is possible to assess the risk in the system => leverage, debt service, off-balance sheet liabilities, derivatives obligations, debt:equity ratios, months of cash on hand vs monthly cash burn rate… there are a lot of useful measures. You should know these measures for your country, state, county, firm, family and self.

I don’t want to comment on right or wrong. I simply want to share observations that, hopefully, will help you think better about money.

In my line of work, I hear a lot of themes.

I’ll share a couple themes and my counter-dialogue.

The market is so high, I need to sell or I will lose money.

  • Volatility isn’t loss – come back to this one in the next down cycle.
  • Constantly tracking the price of anything will cost you time, lower your return and lead to misery. See Fooled By Randomness, by Taleb, for the best explanation of why you should ignore the volatility of a good-enough portfolio (or life for that matter!).
  • My entry prices are 30-60% below current market. Instead of focusing on a fear of loss, I focus on the cash flow being generated from wise past decisions.
  • If you exit then you need to put the money somewhere. The benefit of a good position is you don’t need to figure this question out. The less I need to think, choose and act… the better.
  • Every positive action costs expenses, taxes and introduces the possibility for error.
  • Most the people who worry about money, don’t need to worry about money. Beware of using financial news as a distraction from what you really should be doing with your life.

Price vs Happiness vs Wealth

  • Price is an illusion – all assets move in cycles.
  • Price changes are not wealth changes.
  • If you build a habit of happiness with price increases then you will experience a multiple of pain with the inevitable declines.
  • Equanimity must be trained, and re-trained.
  • Financial wealth comes from productive capacity, which is the ability to give the world what it wants.
  • What does the world want? My world wants…
    • Cash flow generation
    • Saving time
    • Reducing hassle
    • To survive

When you create a lot of money (see chart above and, note our constant, longterm Federal stimulus), the money needs to go somewhere. When money “goes somewhere”, especially when debt is available on top, prices go up.

The effect is not wealth creation, the effect is asset price appreciation.

The first principle is that you must not fool yourself – and you are the easiest person to fool

Feynman’s rule on foolishness

In 2020, all this money creation might be saving us from disaster. At best, we’ll get a chance to argue in hindsight.

Don’t fool yourself by acting as if your wealth has been increased.

The risk in the system has been increased.

All That Remains

Posted on by
We finished our volcano science unit with a trip to a volcano! This was the first field expedition of Home School.

Someday my kids will move out. This is a summary of what I hope they take with them.

Here’s what’s most important to remember:

  • We’ve already won
  • It’s ok to say no
  • We can handle the truth
  • We can do difficult things
Lunch on top – my wife catered the kids and I made a huge error by self-catering!

There’s a great book out there called Winning The Loser’s Game – a “loser’s game” is one where you win by not beating yourself. The book has an investment angle but, in many ways, a successful family is created with a similar approach of avoiding error.

Errors such as… financial ruin, substance abuse, fractured relationships and emotional upheaval.

Many unforced errors occur, and repeat, because their causes are deeply programmed into our consciousness, and family culture.

To avoid errors, we need to think slower and whittle away at the habits that hold us back.

So how do we slow down our thinking?

We take away feelings of obligation, feelings which can lead to blame and lack of personal ownership => All family is optional

We don’t let pressure build up… Everyone can speak, about whatever they’d like to discuss, and we commit to a “no secrets” policy.

Secrets, taboos, not being able to speak => these habits make it easier for evil doers to do bad things.

Ask child abuse survivors to describe their family culture and you will find a consistent pattern, of repression and secrecy, that enabled their abusers.

I got the next tip from a four-generational family, where the patriarch was deeply successful (work, family, financial, community). The family has multi-generational quarterly meetings and has successfully managed two transitions between generations.

Close but not too close – via staying in your own space – via sorting your own food – with a respect for differences.

Take the above and invert them…

…a feeling of obligation, never being able to say what’s on my mind, staying in close quarters, eating different food…

then… add alcohol, relentless toddler noise, politics or any emotional trigger..

and… BOOM!

Not winning!

Carrying weight is a privilege. On the way down, I grabbed his pack and he busted out a quick hill repeat. Blood was tasted, apparently. He gave himself an introduction to “race cough.” The kid has a passion for hills!

What does winning look like?

We enjoy sharing experiences with each other, usually in nature.

It is about shared experience and, frankly, it need not be all that fun. My son and I find meaning enduring difficulties together.

Each generation, each household, each adult needs to affirm its own set of values and define winning on its own terms.

If there isn’t a consensus then we remember… it’s OK to say “no” and all family is optional.

Also… we don’t need to agree to be buddies and I’ll respect your right to not have an opinion.

Some multigenerational thoughts…

Seek to connect not correct. Do not put a spotlight on people, just ask an easy, “how are you doing.”

Down, and up, the generational chain remember our goal is shared experience, not optimization.

Joys, and disappointments, with founders/followers/descendants are best used to motivate positive personal change in myself.

The most powerful form of teaching is living an open life where people see us modeling the best we have to offer.

Pay attention to those who bring out your best.

What about money and finances?

The fundamental point is everyone pays their own way and we do not create incentives to consume more. By the way, COVID gives you a useful opportunity to make changes in your family spending choices.

Any capital that become multigenerational is managed in a custodial capacity.

What does that mean?

It means you take care of things you didn’t create so others can enjoy them.

When financial decisions need to be made, we remember we are less likely to make errors if we keep it…

  • Simple
  • Low cost to hold
  • Focused on long term capital gain
  • Tax effective
  • If it won’t make a difference then wait

I use the above as a checklist because it slows my decision making.

For me, the three most important factors to remember are: cost to hold, leverage/borrowings and wait if it doesn’t matter. Together they nudge me to avoid the most common errors of investing => fees, tinkering, borrowing leading to ruin, cost to hold resulting in cash crisis….

After I’ve taught the above, I will hand it off and focus on modeling grace through what remains of my life.

Take what’s useful and make it your own.

Celebrate Success

Posted on by
South Arapahoe Peak, yesterday

Given the simultaneous outbreaks we have in the US, our media is going to have plenty of fodder for negative stories this month.

If you follow the news cycle closely, then this could be a tough few weeks for you.

Consider scheduling a few days offline.

The route follows the left skyline – it was at my limit for “unroped spicy with two of my favorite people”

If you’re sucking in a lot of negativity then you might find spillover inside your head. The spillover may manifest as a negative voice beating you down internally.

A lot of us aren’t able to “hear” the soundtrack in our heads. As a coach, I would notice it when my athletes had a habit of negative expression in voice and written words.

To counter a habit of negativity, I’d assign an excerise => buy a small notebook and end each day by writing down one positive thing that happened.

Every single day.

Life happens where you focus.

Change your focus, change your life.

Ax-man was a little buried by the end of the weekend. When it comes to fatigue, he has developed excellent coping skills.

Our Science Fair was a huge hit.

Secret ingredients to the traditional vinegar/baking soda lava recipe – a little dish soap, a little water and red food coloring – you can see the red chunks in the lava
Public speaking starts at home – learning to listen (and not correct) also starts at home

Spoiled is when you think your life is difficult but it isn’t.

Living under COVID is difficult in many ways. We are learning to embrace and enjoy our challenges.

It would have been very difficult for me to engineer rapid positive change without the challenges of closures, home school and social isolation.

Byrn Family Fitness Center – if there’s a will then you can figure it out. Picture is our Saturday morning fitness program. My son is finishing his “walk back” – I’m running my hill repeat in the background. The local college kids have embraced our street and we see some spectacular runners blaze past.

Personal responsibility is a key value of mine. In the past, this was to the exclusion of maintaining relationships. My kids have helped me do better with finding a balance between hard and soft skills.

Lots of personal responsibility was on display this past weekend: packing our own gear for a climb, learning to recover from a deep bonk (with grace and without blaming anyone), taking care of siblings.

The habit of having to take care of ourselves at home is spilling over into our larger lives.

Ax looking down the wrong turn I was about to make for my family. Thankfully, we managed an upward traverse back onto the main route.

Money and Kids

The basics:

  • An unconditional allowance set at $1 per week, per year of age
  • Money sits with Bank of Dad and yields 10% APR – I want my kids to get very excited about compound interest – we have a generation of kids growing up in a no-yield environment – this will have a HUGE impact on our societies – don’t know specifics but do know it will change finance for a long time
  • I hold a veto on any spending out of the “allowance account” – there is no obligation for me to be reasonable – if you disagree with my decision then…
  • Buy it yourself, kids can earn their own money – own money equals own choices – I want my kids to get excited about providing value to others and earning money for themselves – this is much more important to me than winning in sport
  • Summer reading prize – read every day across the summer and get a very good prize – it costs me $100 per kid, per summer, to create a habit of morning reading, without being asked!

The incentive structure has been successful.

Our latest addition is babysitting – our oldest taking care of our youngest. We’ve settled into $7 per hour for the oldest with $2 per hour to the youngest at the same time. We give them a written schedule with some easy chores to complete. This is the easiest “kid combo” for us to manage – the older sister/younger brother dynamic hasn’t been figured out, yet.

Another popular product is exterior cash wash at $5 per car, per kid.

Our oldest makes scrunches, masks and children’s stuffies. Orders, pricing, manufacturing, delivery… all sorted by her. Since school ended, she is averaging $75 per week of supplemental income.

Dawn breaks near the 4th of July Mine, Indian Peaks Wilderness

Helping Friends and Family

Posted on by

Tuesday’s essay generated interesting questions.

These three questions touch on my work as a fiduciary.

#1 – What are the best types of incentives?

There are so many issues here.

Who is deciding, why are they deciding, what is the goal of assistance, does helping help, are you seeking to “parent” an “adult”, what does the situation require, where will this take us in 10/20/40 years, where is my energy best spent… and on and on.

A starting point for tackling these questions is this reading list. If you’re operating in a fiduciary capacity then the linked books are essential reading.

Before we get into thoughts about others, how are you doing? How’s your life? I ask myself this question over and over because of certain realities:

  • I am more likely to be successful helping myself
  • My ability to influence people outside myself is limited, prone to error and usually leads to resentment
  • The people most open to my help don’t need it
  • And the biggest thing I have found… what we think is “right” will most certainly change over time

How do you react when others try to help you? Many of us believe we already know what’s required of ourselves. Having an outsider give us more information rarely causes improvement.

Do you care enough to change? By this I mean, “Do I care enough about this individual to inconvenience myself?”

Am I willing to spend time with this person, consistent & frequent time, to help them achieve their goals?

…and it needs to be their goals. Not a goal of pleasing someone else. Not a goal scaffolded onto them by someone who thought it would be good for them.

If you “flow chart” the above then you’ll see there are high hurdles to overcome before you’ll be in a position to consider helping someone, beyond your daily example and the choices you make.

…and that’s a good thing because what most people truly need is you to listen and hear what they think about their life.

Listening, without knowing, and taking small actions will greatly improve your relationship and that’s more valuable than any external incentives you might apply.

#2 – What do you think about financial incentives inside family systems?

I believe in universal support: such as childcare, health insurance and value-for-money education.

Reduce stress inside the marriage (childcare), reduce the risk of ruin (health insurance) and improve human capital (education). Modest, achievable goals.

I do not believe in subsidizing personal consumption choices.

I do not believe in making it easier for a family member to enter the housing market. Learning how to wait, and buy modestly, is an essential life lesson.

A core value, that was taught to me by three prior generations, “everyone pays their own way.”

When considering financial support to an individual, run the numbers on providing the same benefit to everyone in the family system for 20+ years. Small choices have large impacts when repeated across decades and extended to successive generations.

Just like when you evaluate risk, you must assume you will repeat this choice many times. The discipline to assume you will repeat, for a long time, will help you think better.

#3 – What’s my role?

Share knowledge from prior generations, to listen, to love and to set the absolute best example I can within my own life.

The gift I give is my time and a key benefit I bring to the family system is having my own life in order. I am living the life I wish for you.

I am keeping my life together, so I don’t become an emotional or financial liability to my grown kids. I won’t be able to avoid every problem but sticking to the basics will eliminate many unforced errors.

I cultivate the humility to appreciate that I am clueless about what’s best for you. I’m willing to share what’s worked for me but, beware, my memory is clouded by hindsight bias and an inability to see where luck has greatly benefited me.

If you’re unsure then… just love ’em.

Be the brand.

What I Talk About When I Talk About Building Wealth

Posted on by

SuperGirl

When people ask me about asset allocation, I guide them towards family wealth.

Over your life, you will see things blow up.

  • Jobs will be lost
  • Divorces will happen
  • Guarantees will be called
  • Companies will fail
  • Investments will go to zero

Certain habits make us more prone to blowing up:

Debt – fixed obligations can ruin you in bad times.

Lack of emotional control – this runs deeper than, say, anger management.

People who make a habit of rationalizing a lack of control in one domain (elite sport, closing a sale, acting in a client’s best interest) rarely have the capacity to control themselves across domains. If you might get caught, then you’re fragile.

Substance Abuse – it’s more than the cost of sorting yourself out – it is the lost opportunity of a life well lived and the impact on the rest of your family, especially your kids.

Spending vs Cash Flow – personal spending, burn rate and fixed costs => the more spending you have relative to cash flow, the more fragile your finances.

The above is a long way of asking, “What aspects of your life might blow up?”

Which is a polite way of saying, “I’m not sure asset allocation is the most pressing issue in your life.”

If you work in an ethically-challenged field, have a lot of borrowings, have a high burn rate or are surrounded by peers with issues…

…then tweaking portfolio construction is a lower priority item than immediately removing what might ruin your life.

I’ve done it. You can do it. It’s better on the other side.

How large is your current portfolio when compared to your lifetime portfolio? – AKA you might have more wealth available in your career than your portfolio.

Investing is different at 25, 40 and 55 years old.

The nature of “different” depends on your personal circumstances.

#1 => Consider your Core Capital. The single best thing I did out of college was save four years of personal living expenses, $100,000 in the mid-1990s. It sat in a bank account, while I worked my ass off at my career.

Having that money enabled me to choose better and choosing better became a habit.

Very, very, very (!) few people can be professional investors – AKA can I get rich by beating the market?

Take an honest look at the people that you know in finance. How many of them “got rich” from their own money? Remember these are the experts.

In finance, most people get rich due to the rules of their game and collecting pools of other people’s money (your money, by the way).

With your portfolio, keep it safe, simple and low-cost. A target-date fund makes a nice core holding.

Having my Core Capital enabled me to take more risks in my career path, and life experience => not with my Core Capital.

Once-in-a-lifetime opportunities happen once a decade – AKA great deals happen when credit markets are shut

Here are the assets I own and why I own them:

  1. Index funds => long-term, diversified, not linked to my home real estate market
  2. US Treasuries/Core Capital => 5 to 10 years family expenses
  3. Boulder real estate => A relative value play against California, a cost-effective way to raise a family and a fantastic outdoor life. Think very carefully before locking yourself into any location. As a young man, my lack of ties enabled me to jump at great opportunities.
  4. Cash => my early retirement was funded by three deals I did coming out of the last credit crisis. Once you have your Core Capital (say, five years living expenses) then building up a pool for “great opportunities” is a consideration.

Starting out? Read this PDF.

Be wary of home bias => you can see it in my portfolio => even more risky is having your balance sheet, retirement and job reliant on the success of your employer.

Switching Costs – AKA think carefully before you sell good assets

I have assets in my portfolio that I would not buy at today’s prices. Financial theory tells me I should sell these assets.

  • I have zero confidence in my ability to predict the future.
  • If I sell assets then I pay taxes and commissions.
  • After selling, I have to figure out where to put the capital.
  • I doubt any “new” plan will be better than my current plan, which is simple and low-cost.

Release yourself from constant optimization => good enough is good enough.

Put your efforts into being a better version of yourself.