Tag Archives: financial education

Teaching Needs vs Wants

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This is an excellent exercise to “break the ice” at family get-together.

Start by asking a question…

What is living well?

Everyone brainstorms ideas for 10-15 minutes, or in advance.

Then, everyone gets a chance to share their answers.

While each individual shares, have the group agree:

  • to stay quiet
  • to make notes if they are having trouble staying quiet
  • to write down the best ideas they hear

After everyone has shared.

  • Get a white board
  • One-by-one
  • Share a great idea

Our summary list below.

I played this game with my kids (10, 11, 14).

They had some really good ideas!

How a 10 yo sees Living Well

In the middle of the list…

Focusing on what you need not what you want

Needs are much easier to fill than wants.

In fact, the definition of our wants is they can rarely be satisfied.

The observation (of a child) led us quite nicely into the next discussion.

Without telling the kids what the numbers were

  • We flipped the white board
  • I read out monthly cash burn, in round thousands
  • We stacked the numbers (Jan to Sept)
  • Each kid added up the numbers
  • We grossed up to a full year projection (multiply by 4/3)

They were surprised at the family burn rate.

We flipped back to the list and asked ourselves…

How much money is required to live well?

My list has been the same for a very long time.

2012 Version

I walked them through my definition of living well.

We ended with a reminder

Talking about family money, outside the family, can create unnecessary issues (for them, and me)

I asked them for an example and they came up with Muffy from Arthur – if you know the kids’ show then you’ll know they picked an excellent example.

…and I left it at that.

When Greed Shifts To Fear

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My inbox is filling with doom-forwards.

Contacts are asking for quick calls to discuss strategy.

UK Pensions nearly blew themselves up.

Remember : worry has never changed outcome

Prepare : know what you want to buy

Watch.

Patiently.

Monday
May

The yield curve, and net yields in the real estate market, are indicating we have a ways to go with price adjustments.

At present, stocks down ~20% and my zip code’s real estate 10% off the peak.

30-Year mortgage rates at 7.5% was unthinkable a few months ago
Seems pretty close, now (6.7%)

If you’re a cash buyer then the psychological pain of waiting is being reduced.

Any USD Money Market Fund is yielding better returns than you can remember (VMFXX 2.8% on Monday).

I know inflation is a multiple of that but financial psychology isn’t rational – nominal yields matter to the marginal buyer.

My advice:

  • Let it unfold
  • Enjoy life
  • Share experiences with friends and family

Be prepared to “give back” paper gains as the interest rate adjustment works through the global economy.

Q3 2022 Family Financial Review

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I had a friend ask me if I thought “cash is king” in the current environment. My answer is more than can fit in a tweet so here you go.

Key Point: when we read reports of monetary policy tightening, I think we are being misled. On a historical basis, policy remains accommodating.

The collective is lousy at remembering history.

US Federal Reserve Total Assets

The value of everything, in the world, has been inflated by the actions of Central Bankers. I think everyone accepts that point. Thing is, it is impossible to measure the scale of the inflation.

In recent memory, the best example will be to cast your mind back to when crypto was a one-way bet.

Asset inflation feeds upon itself, until it doesn’t.

The increase in the size of the Fed’s balance sheet has been a strong tailwind and dominates our collective memory.

If you’re 35 and under, then unprecedented monetary inflation is the only environment you’ve ever known.

Time for another chart.

As at 12 Sept 2022

Here’s a chart of our current reality (black line).

We’ve lived the rate increase, but assets prices have not adjusted to the new reality.

Why?

  • The economy is rolling along – the tailwind was powerful, and strong
  • It is unclear where the Fed’s massive balance sheet is going – there has been 13 years of QE – who wants to bet against another round, I don’t
  • There remains plenty of OPM (other people’s money) and leverage

VTSAX Yield (1.5%), VBTLX Yield (3.4%), VMFXX Yield (2.1%)

Those are equity, bond and money market funds I track, as at last Monday.

US 30-year Mortgage Rates 2015-now

Mortgage rates appear to have jumped.

However, let’s have a look at the next chart.

2003-now

Rates are only just getting back to their 2003-2008 level, a time when people were hardly holding back on real estate.

So what do I think:

1// Assets could get cheaper – I don’t see any case for a melt up.

2// If the Fed materially shrinks their balance sheet then assets will get a lot cheaper. Cutting their balance sheet in half takes us back to 2015.

3// Sit down and ask yourself “what if” asset prices drop to 2015 levels, a 50% reduction. Odds are, you have your interest rates locked in. So the main risk will be short term cash flow due to unemployment. How might you protect yourself?

4// Having a year’s core cost of living in an “emergency” fund makes sense. Personally, I didn’t reinvest the proceeds from a Q2 asset sale. My reserve is enough to navigate a nasty recession without selling anything further.

So a “prudent cash reserve” is King.

I don’t think it makes sense to liquidate positions, and pay extra taxes, because risk assets might fall in value.

I do think it makes sense to look at family spending and see the allocation between: essential, discretionary and luxury. The ability to adjust spending downwards is a useful hedge in an unpredictable world.

Keep living and sharing experiences with those you love.

Time and shared experiences are true wealth.

Sunday Summary 19 June 2022

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Top Five Threads

  1. The 1st step is EASY
  2. Bike Session (30/30s and Power Singles)
  3. When you feel you are behind financially
  4. Give your Self something useful to Prove Right
  5. I’m back on Strava // Post_COVID week summary

High Performance Habits

Workouts & Working Out

Wealth and Consumption Part Two

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Part One Here

Group your spending into buckets:

  • Essential
  • Discretionary
  • Luxury

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.

Remember => I think of wealth in time

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.

Also remember, the generation that follows will build upon your spending.

The choices of family leaders scale.

++

This concept is important as we age:

  1. We will want to spend on different things
  2. We will want to “do” different things
  3. The generation that follows us:
    1. they will INDIVIDUALLY want to spend differently
    2. they will certainly want to do different things
    3. they will have a thirst for more

For your future self, and your legacy, give maximum flexibility to change.

You will most certainly change your mind later.

Sunday Summary 22 May 2022

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Top 5 by Engagement

  1. SuperVet Fitness – blog tomorrow
  2. Things to try before swimming harder
  3. Training Nutrition
  4. Ditch your alarm, with AC
  5. Train the payoff – also with Jené at Triathlete

Workouts and Working Out

High Performance in the Real World

Supply of Money and Interest Rate Transmission Mechanisms

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BoCo in May

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

Live a life where you don’t need to be right.

Strategic Family Capital

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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.

The Choices That Define Your Financial Life

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  • 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. Saving – get 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.

Sunday Summary 3 April 2022

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High Performance & Productivity

Athletic Performance

Wealth