The most “costly” part of the pie is whatever you happen to believe is “essential.” It usually doesn’t feel this way => you truly believe you need this stuff. I feel the same!
When you suffer your first serious setback, you’ll be surprised how little is essential. In 2009, I cut my “essential” in half, overnight.
Similarly, as we age, we may find we were giving time, money and attention to things that don’t seem to matter anymore.
Know your buckets – they will help you think more clearly.
Specifically, Net Worth expressed in “years spending.”
$1,000,000 / $125,000 = 8 years
As we change the spending, we change the years.
Risk, and INFLATION, are easily mitigated when you understand how easily you can change spending.
Risk Concept => not all spending, or financial obligations, are created equal
Be most aware of:
Debt, including contingent – an obligation where non-payment can force the sale of an asset
Spending that comes with spending – large HOA/Club fees come to mind here – put plainly, a hotel visits feel just the same on an ego, yet, don’t require an annual membership fee
Going further => Don’t Capitalize Luxury Spending => the “luxury bucket” from above, if you turn it into a capital obligation then it can bite you, especially when combined with debt.
We don’t need to own the hotel to receive the services offered to a guest.
Same with… plane, waterfront, ski chalet… whatever you find inside your “luxury” bucket.
Staying flexible with the ability to stop spending can feel like a “waste” – even more so when highly-leveraged peers appear to be making easy money.
This feeling is false!
We over-estimate the value of current spending
We adapt very quickly to any level of spending
We notice changes, not absolutes
You are paying for the flexibility to: (a) stop paying; (b) change your mind; and (c) keep your capital invested productively.
Feels like I’m getting to the end of my Thursday finance series!
Things I’ve noticed in May 2022:
Stablecoin instability
Pain at the retail level
Step-down price adjustments of stable businesses with mkt cap >$1 billion (disappearance of margin trade on reliable dividends, perhaps)
Buyer of my sale was 95% debt financed with a payment of 3x the gross rent I was receiving
Market down 19%, as I write
What I haven’t seen:
Widespread pain
Institutional capital destruction
Anything, anywhere, that looks cheap
Given the money creation of this cycle, those are key words to watch:
Pain
Capital Destruction
Cheap
Until those arrive, I’m going to be patient and live my life.
A reminder.
The Great Recession of 2008/2009 first got my attention with trouble in the interbank lending market (Early Summer 2008), this was after ~20% market decline.
There was a long way for the bear market to go, and its effect on real asset prices had years to run.
Great deals were available 2010-2012 => the equivalent of 2-4 years from “now”
Same thing in the UK Recession of 1990, my first out of school.
If we’re in a blip then rebalancing will be just fine
If we’re in for something more serious then it takes time to develop AND it takes years for price expectations to adjust
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:
Stick the Strategic Reserve into VTSAX, rent through AirBnB and let dividend growth hedge rental inflation
Stick the Strategic Reserve into a medium term bond product (VBTLX @ 3%) and earn a margin over my cost to rent
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.
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)…
Waiting for the fat pitch – once in a lifetime investment opportunities happen once a decade
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.
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:
Debt free early graduation (21 yo) => McGill 1990 finance grad
Debt free at 25 yo
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.
You burned the capital
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.
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.
Feel The Byrn 
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