The Do-Something Investment

Ax_snow1I saw that Clinton’s son-in-law took some big losses at his hedge fund by making bets on Greece. People are speculating that the Clinton family lost a lot of money in the deal.

While the scale might be different, I see this error in every family that I get to know.

We err by making an investment to help someone “do something.”

Some examples from my own investment history:

  • I’m self-employed and have often been tempted to buy myself an office so I can have a place to do something
  • I’ve offered to back friends in start-ups so they can have the funds to create a business and do something
  • I backed myself in a low-return business, where I didn’t understand the market, so I could have something to do
  • I guaranteed the debt of a friend’s business so he could borrow additional money for his start-up
  • I purchased a property so a friend could have a job acting as my property manager

To limit the damage, I have two questions that I ask.

First: What is the purpose of my family balance sheet?

  • Maintain independence and dignity of elders
  • Educate the kids
  • Share experiences with each other
  • Produce a growing stream of cash flow to fund my future living expenses
  • Support a feeling of security and freedom of occupation

You might have a different list. I’d encourage you to write your list down because the checklist might help prevent expensive errors.

Second: How well have I done with predicting my life on a ten-year prospective basis?

While my life has been rewarding, it’s path has been unpredictable on a ten-year rolling basis.

The unpredictability of life means there is value in maintaining a straight-forward balance sheet that isn’t concentrated in any individual, geography or company.

Put plainly, I’m nearly certain to continue to get the future wrong – especially when I try to predict my family’s needs, desires, location…


Let’s say an investment can get past those two questions.

It is time to keep it real.

#1 – Are we backing the best members of our team?

The best people don’t need the help of connected parties.


There is plenty of money available for good people with good ideas.

Therefore, by definition, most family investments are focused on the weakest members of the team.

Don’t do it.

#2 – Can we afford to lose our maximum exposure immediately?

Concentration kills.

If you can’t afford to lose your full exposure, immediately, then don’t do it.


If you’re struggling to say “no” then

  1. say “yes” to spending time to help raise funding from a third party
  2. lease instead of buy
  3. focus on enjoying each other’s company, rather than investing together
  4. make an introduction to an expert in the industry to facilitate a working apprenticeship
  5. pay for expert instruction

These options have had a great rate of return in my life.

What I Learned Last Year

biscottiTwo themes have dominated my goals for the last couple of years: my relationship with my eldest daughter and my finances.


Kids – my daughter worked herself out, no input from me. I didn’t change her nature, I accepted it, and we enjoyed the inevitable progression from preschooler to school-age girl.

For my pals with kids – avoid abandonment and retaliation – everything else is details.


Optimism is the only worldview borne out by the facts.

At the end of 2008, I wrote-off 65% of my family balance sheet, was unemployed, owned a loss-making business and was facing civil liability relating to large-scale fraud.

You may have forgotten but everything we were reading was doom and gloom. In reality, that was one of the most useful periods of my life because I was forced to face the gross inefficiency of my spending choices.

The changes that result from earlier setbacks lead to an appreciation of a more simple life and I’ve continued to strip away non-core activities.

My wife is stumped when asked, “What does Gordo do?”

I enjoy my life and serve my family

Act in the spirit of service to the people that love you.

Act as if things will work out.

Keep simplifying.

Free yourself to spend time on what matters.

For the pessimist in your head that likes to point out that we’re all dead in the long run… be wary of overstating your importance in the world.

My death will be a setback for a few people but it won’t change the positive trajectory of history. I will play my role then hand off to the younger generation.

There will be tears and that’s OK.


Human Capital & Family Finances

What can each of us bring to our families, and communities?

Strong relationships built on mutual respect and strengthened via self-improvement.

Six years ago, I was left with a home and cash assets. With interest rates moving towards 200-year lows, I realized that I had to be invested. I made an error by going all-in with real estate. Why an error?

  • I was geographically concentrated – the bulk of the portfolio was within two miles of each other.
  • I invested too much – I failed to understand the short-term cash needs of my young family, which arrived in 2008/2011/2012.
  • Each asset represented many years of living expenses – lumpy assets are inefficient when you’re moving towards retirement.
  • Real estate takes a long time to sell. With a traditional portfolio, a gradual sell down is easier to achieve.

My purchases had a margin of safety and I was able to trade my way out of the situation – 4 out of 8 addresses have been sold. Start to finish, it will take 8-10 years for me to change my asset allocation. Our family financial structure gave me time to make the change, we earned income, and we had exposure to asset appreciation.

Time worked things out – we did well but so did all others that were invested from 2009 to 2014.


The final lesson – I am greedy in irrational ways. I can soothe my ego by noting that my flaws are widely shared.

I am susceptible to the Endowment Effect. I overvalue what I have – my wife had to force me to sell our old house, I wanted to hold out.

I overvalue future desires. I’m constantly fooling myself that MORE will make a difference.

My antidote:

  • Write down my desires (steam shower, truck, boat, kitchen appliances, vacations, clothes, car, office, ski chalet) then wait and let desire pass
  • Make the wealth cost of “more” both painful and visible
  • Note the choices that create my best days (train AM/PM, help someone, learn, write, teach, spend time with my wife, under scheduled)
  • Spend money to create true luxuries (childcare, time to think, time to learn)
  • Schedule my happiness essentials (time in nature, time with my wife, quiet time to think)

Keep it simple:

  1. Notice the good in life
  2. Write good things down
  3. Do more good things

Quarterly Financial Review

2014-11-19 13.36.43-1The way you feel right now is how a bull market impacts consumer sentiment.

  • Gas prices are down – a big psychological boost for me
  • Asset prices are at all-time highs – makes me feel safe
  • Your business is performing well – makes me feel safe

In these conditions, it’s tempting to change investment strategy and chase recent high performing assets (or managers).

We’ve decided to stay-the-course. There’s hasn’t been any major change in our life situation so there need not be any change in our investment strategy.

We’re on track to achieve our goals:

  • The freedom to chose rewarding part-time work
  • A source of income that we don’t outlive
  • Educating our kids
  • Passing capital to our adult kids when it’s time for us to say good-bye

Do you know your goals?

Do you know the behaviors that can screw up achieving your goals?


We sold our old house in September and I implemented our strategy of gradually buying equities. We’re 34% equities so there’s been “lost profits” from having money outside of the equity market – especially when the US market hits all-time-high after all-time-high…

Surprisingly… lost profits don’t bother me, or screw up our goals, and I was relieved in October when the portfolio held up well.

Dollar-based equities have continued to outperform our international investments so I’ll rebalance by tilting new purchases towards international. Yes, I’m going to buy more of what everyone is saying will tank in 2015 (VTIAX). I have a strategy of reinvesting dividends and keeping International equity at 50% of my US equity exposure.

It’s likely that I’ll need cash flow to cover year end expenses. I will sell bond funds to raise the cash. That will bump up our equity allocation as a percentage of assets.

The underperformance of our international equities creates the possibility of tax-loss harvesting in December. Next week, I am preparing draft accounts for the different parts of my family and reviewing the cost basis of our investments. Later this month, we will decide if it makes sense to realize losses.


We spend $12,000 per annum at Whole Foods and they are offering a 10% rebate on gift card purchases through Jan 1. They let us pay with a credit card which gives another 1% via cash back. That is an 11% return on investment, on money we are certain to spend.

We eat at Native Cafe and they have an even better offer of a 20% rebate on gift card purchases. There’s only one location in Boulder and the company financials aren’t are strong as Whole Foods. I’ll limit myself to five months worth of meals.

Even better than shopping at Whole Foods, or eating out, is staying at home and using goods purchased at CostCo. We spend $10,000 a year at CostCo and it saves us thousands of dollars.

If you don’t know what, where and when you spend then is an easy way to track your family finances.


Being Good Enough – work finance family

The concept of “good-enough” is essential if you are prone to worry, or if your inability to be perfect prevents you from trying to improve!

Because anxious people get an emotional charge from worry. It’s a tough habit to break!

  • A good-enough mother, father or caregiver
  • A healthy-enough approach to diet and exercise
  • A focused-enough approach to your main vocation (parenting, teaching, coaching, business, sport)

As a Dad, my kids are overwhelming. I was forced to let go (of the unreasonable expectations I set for myself). What enabled me to shift was considering my family’s needs… Do my children say they love me? What does my wife say about my marriage? What happens when I’m not around?

In my work and financial life, it’s easy to endlessly tinker – seeking to optimize a situation where constant change is proven to make things worse, rather than better. My best outcome is to crease a simple solution, that’s good-enough, and limit my ability to screw things up.

What to do? I recommend that you don’t take specific advice from me. Find what works for you. However, I share the specifics of what I do because the simplicity of my approach is a useful counterbalance to the complexity that’s sold to us.

Act as if the goal of the financial services industry is to separate you from your money and run from from any advisor that’s not bound by a fiduciary duty to act in your best interest. Be aware that even the fiduciaries are prone to making money at your expense.

Next, focus on the four things that truly matter

  • Save – live on less than you earn
  • Fees & Expenses – low-cost passive indexing gives you a big edge
  • Dollar-cost averaging – create a strategy that runs on autopilot and get on with living
  • Be Able To Hold Through Dips – never extend yourself, live debt free, be able to hold through unexpected unemployment

At times, you may need expert advice for:

  • Wills, Estates & Trusts
  • Tax & Accounting
  • Pensions & Retirement

The rules on the above vary by country and state. Get advice on a fixed fee basis and expect to review every five years.

What about portfolio? I aim for something that’s “good enough” and spend my energy staying focused on the tips above (save, low cost, buy a little bit frequently, be able to hold). The more decisions I have to make, the greater the scope for human misjudgment.

I do best when I focus on what I directly control:

  • family annual cost of living
  • new investment rate
  • cost to hold my portfolio

However, what to do about my house? That’s a key asset for most families. Here’s what I’ve told my family council. If I’m gone then help my wife get to…

  • Personal residence (10%)
  • US Equity Index Fund (30%)
  • Int’l Equity Index Fund (30%)
  • US Bond Index Fund (30%)

For the young people reading, the 10% constraint means that it will be a long time before you have enough equity for a down payment. That’s a good thing! I waited until I had 20 years living expenses saved, and had watched two recessions from the sidelines.

One of the neat things about triathlon is the ability to be very good at something by combining good-enough performances in each of its components. With three kids and a young wife, something had to give – from the self-centered approach of my years as an elite athlete.


The financial stuff above is based on a short eBook called, If You Can. The book took me an hour to read – you should read it.

The Yellow Brick Road, not taken

the_roadOne of the best lessons of my life is:

The cost of the status quo is hidden

We never get to see what we miss by NOT changing.

In my early 30s, I made a decision to leave my life in finance and it turned out well. However, I will never see the life that I missed by leaving early.

Recently, I came across a glowing account of Blackstone’s acquisition of Hilton Hotels. The story is written in the style of the hero’s journey.

As I read the article, I realized that the hero was my best-case scenario from an old life in private equity. In the article there is a photo of the hero, sitting in a chair, he has set a personal best performance that’s going to be tough to replicate. In business, and in sport, I’ve had a few of those moments.

Flying back from a Couples Retreat, I asked my wife to read the article. She found it to be an amazing story.

I said, “You just read my best-case scenario from the life I had before I met you. I’m so grateful I got out.”

Similar to what I see when I watch elite sport, my view of elite finance is different than most.

I saw…

  • Buy at the top with other people’s money
  • Pay off bank employees to pass my losses through to their shareholders/taxpayers
  • Provide massive financial incentives for management to work their tails off
  • Let time bail you out
  • Bask in the glow of my peers’ envy

When you look at the life you’re living, what do you see?

Ten Lessons From The Great Recession

pawneeFor my family, September 2014 marked the the end of the Great Recession, which (for us) had started in October 2008. Navigating the recession took a year longer than my worst case assumption of five years.

I wanted to share my lessons as I can feel the temptation to ignore them returning!

#1 – You can’t know your partners – I’ve lived with friends for up to six months at a time and had no idea about their personal situation – my favorite quote here is one about knowing your marriage… “if you’re lucky then you might know 50% of your marriage, YOUR half.”

#2 – Burn rate kills – Between October 2008 and March 2009, I lost 100% of my net income. Without significant changes, I knew the loss of income would screw up our family finances. I would have really freaked if I knew that interest rates were going to zero! Staying variable enabled us to cut 90% of business expenses and 50% of household expenses – these were gone by April 2009. The lesson here is to be very careful of building up long-term financial commitments.

#3 – Real Estate, even prime, is only liquid in a bull market – there is an urban myth that real estate is a low volatility asset class. Until 2009, there were many national markets that had NEVER gone down! I will not be able to time the market – I should always be willing to sell early – future purchases should only be made for assets that the family is willing to hold for more than 25 years.

#4 – For my core capital, my benchmark return is zero – there is a portion of my family balance sheet that would be very painful to lose. Don’t risk capital for tiny yield – examples here are constantly pedaled by brokers (foreign currency deposits, derivative-linked investments, highly-leveraged investment schemes, alternative assets, growth stocks).

#5 – I’m a better man when I’m constrained – This applies in all areas of my life. At the peak of the boom there was tremendous ego and waste in my life. I’m very fortunate that life gave me a kick in the butt and I had to make choices. I don’t have the emotional maturity to be unconstrained in action, maybe someday!

#6 – Create plans B, C and D – ring fence different aspects of your life, and finances – NEVER guarantee another person’s obligations (see #1 above). In 2014, my life has a series of fallback plans to deal with potential setbacks – I spent the recession taking steps to protect myself, my wife, my kids, and my family.

#7 – Investment properties should avoid furnished rentals, anything with a material housing association payment, and anything with a cost to hold (vacant) that’s greater than long term interest rates – I made good money by investing in real estate through the bottom but would have done better by focusing on properties with a lower cost to hold.

#8low-cost passive index investing gives me what I need. The best gamblers I know take a profit-share on other people’s money and use non-recourse leverage.

#9 – stop trying to win – I misallocate energy, money and time when I forget that a simple life is a good life. Reaching for external success and excessive financial wealth leads to poor decisions and choices. I make my best choices when I measure wealth in terms of health, controlling my schedule and sharing time with people I love.

#10 – don’t capitalize luxury expenditure – particularly, second homes and depreciable assets – stay variable!

My errors and misjudgments persist across cultures and generations!

Choose Wisely


Moving Into An Equity Position – Lump Sum

We sold our house in September, the market is at an all-time high, interest rates remain near an all-time low…


My existing portfolio mix is 60/40 equity/debt. I’m happy with that position so will ring fence those assets and continue to rebalance quarterly.

With the new money…

  • 40% Intermediate Bond Fund
  • 30% Short-term US Government Bond Fund
  • 30% Equity (20 US / 10 Int’l)

I came at the equity number because I could live with the impact of a 20-50% equity market decline (6-15% of total portfolio) if a big drop happened the day after I invested. Considering greater exposure to a drop was too painful.

To move my allocation from 30% equity to 60% equity:

  • Take 130 weeks to do the move
  • Move equal amounts each week by exchanging short-term bond fund for the two equity funds that I use (VTSAX/VTIAX) – set up an automatic exchange on Vanguard
  • Track the individual purchases (automatically via Vanguard) to create options for tax efficiency – if you track your cost based on specific purchase IDs then you can specify the exact shares that you want to sell/exchange at a later date
  • Review quarterly
    • 20% drop in the market will trigger a 10% increase in equity weighting
    • 30% drop in the market will trigger another 10% increase in equity weighting
    • 40% drop in the market will have me shift to my goal weighting of 60% equity

My strategy (30% equity to start) is more usual for an investor older than me. It is particular to my own situation and not advice for you.

For expert advice, check out All About Asset Allocation by Richard Ferri.

Here’s my original article, about buying equities, from March 2014.

Wrong For 25 Years

I try to protect myself, and my family, from the fact that we’re collectively clueless on the future. I also know that my memory rarely extends back more than three years. So, from time to time, I force myself to consider history, and what happens if we revert to the mean.

What does a chart of short term rates tell me about my unconscious influences?

Federal Funds Rate

The chart tells me that, at some level, I’m acting as if interests rates are going to stay at zero forever. In my case, this means that I’m prone to taking more portfolio risk than I would back in, say, 1981 (when cash was king).

How would a return to normal, as well as, a continued period of abnormal impact my family?

What would I do differently if I knew that rates were likely to move upwards over time?

What’s appropriate for a younger investor?

At 45 years old, a higher rate environment would see me take less financial risk. For most of my financial life, I was happy to have money sitting in a savings account. In this extended period of zero interest rates, it’s been painful to have a savings account and I’ve moved out of cash.

Despite telling myself that I’m conservative, my cash holdings are the lowest percentage of my portfolio in my adult life.

What’s normal?

The short-term rate chart (above) covers most of my life, let’s borrow a chart from Ritholtz’s blog and see what normal looks like across many generations. The chart below looks at long-term rates, which are less volatile than short-term rates.

Long Term Rates

It’s worth pulling that chart up on a big screen so you can ponder. The chart is over 200 years of interest rates. Thinking in generational terms:

  • Grandparents’ generation – 30 years down, 30 years up, 30 years down
  • Parents’ generation – 35 years up, 30 years down
  • My generation – 15 years up, 30 years down
  • My kids’ generation – ?

Looking at the chart, I note that there are periods (say, 1935-1955) where rates can stay low for a long time.

  • Long-term fixed rate debt seems like a good idea
  • Cash won’t always have a zero yield
  • Equity and real estate returns could be low for an extended period of time if long rates start trending upwards

How can I reduce portfolio risk in a way that protects my family if rates stay low for longer than we expect?

  • Pay off variable-rate debt and leave banking facilities in place
  • Lock in fixed rates and longer maturities
  • Open low-cost lines of credit
  • When considering a move to cash (or a lower family net debt position), rank portfolio holdings in terms of yield and exposure to future capital gains.

The lowest return assets in many personal portfolios are condos, large main residences, vacant vacation homes, surplus land and luxury items. Right now, the “cost” of holding these low-return assets appears to be far lower than historical norms.

Would I hold these items if cash could earn a low risk 2.5% per annum? 5.0% per annum? 7.5% per annum?

If you’re highly leveraged with short-term or floating rate debt then it’s worth considering if your life would change if rates moved up.

Over the last two years I’ve downsized my main residence, sold non-core low return assets and max’ed my long-term fixed rate borrowings.

In 25 years of investing, it’s been a paradox that the best time to sell is when I’m most tempted to hold on.

Quarterly Review

boat2Completed my quarterly review last week and wanted to pass along a few observations that could save your family money.

My default stance with personal expenses is “stay variable.” Renting, rather than owning is a good way to live. In-and-out of a property costs you a minimum of 15% of the gross capital value and being tied down geographically reduces your human capital.

That said, the best deal that I’ve done in the last few years was the purchase of my current house. It’s a half block away from a great public school and my mortgage/taxes/insurance cost me 65% of my owner’s equivalent rent. While I have a large amount of equity tied up, it’s increased 30% in the last two years (see – how I value real estate for a calculation method).

Three factors dominate my cost-to-own being less than my cost-to-rent:

Mortgage interest rate – these remain historically low. My rate is fixed for another 28-years – a valuable asset for my young family.

Cost to insure – Ten months ago, I realized that my home was grossly over-insured. As part of a 2nd mortgage restructuring, my place was appraised. I used the appraisal value to get a more realistic level of insurance in place.

Local Taxes – In 2013, the county reassessed my property at a 30% increase in value. I reviewed the county assessor’s website, pulled together more appropriate comps and requested a do-over. The assessor agreed with my comps and cut my taxes significantly.

The above, combined with an incorrect escrow calculation, means that my monthly payment has been resetting downwards all year. Starting October, I’ll be paying 20% less than two years ago.

The lesson is to be pro-active with checking the components of your mortgage payment. It takes times to get things right but there’s likely money to be saved. Everywhere I poked, I could save money.

Be patient with property purchases – great conditions happen once a decade and it’s nearly always better to wait.


In my portfolio, three main adjustments:

  • Sold US Equity Index to rebalance and raise funds for a property deal. This came out of a taxable account and I’ll pay CGT on the sale. Normally, I’d avoid the CGT but the account is a minor custody account that we’ve decided to spend on the kids before they’re 18.
  • Exchanged International Bond Index for US Bond Index to simplify my portfolio, lower my total cost and because the fund manager wasn’t able to convince me of any benefits of the product. Non-taxable exchange.
  • Staying the course with asset allocation ratios but will tweak if I sell an investment property.


Our long-term care insurance provider increased Monica’s premiums by 45% so we dropped the policy. Due to my cycling, it will be a tougher decision if they seek the same with me.


Our largest discretionary expense is preschool and childcare. We started tracking this weekly and comparing against my spouse’s gross income from working part time.

  • This calmed my mind because it showed that we were more in balance than I thought.
  • It gave us a weekly snapshot of how we were doing with cost control.
  • It showed us the trade-off between more work and more childcare.



Overall, we keep chipping away at making our family a little more efficient each month.

How Am I Fooled By Fear?

Monsy in Boulder

The best antidote I know for fear is a good laugh that is followed by asking myself, “What’s best for my wife and kids?”

Once we can see our fears, we discover their impact on every decision in our lives – relationships, office politics, athletics, contract bidding, you name it.

This thinking comes from Your Money and Your Brain, which was recommended in If You Can (link to free eBook). Turns out that I’m a case study for how we fool ourselves.

Extreme Loss Aversion

Periodically, I’m stalked by a fear of being wiped out.

An antidote is to view the world through a bigger lens. Evaluate bad news with regards to my life – most “bad” news has no impact on me but I transfer remote fears into my home life.

Strike It Big!

The flip side of my risk aversion is a feeling that striking it big would solve all my problems. The voice in my head tells me, “then you won’t have to worry about anything.” However, that’s unlikely. I’ve always had fearful feelings.

The antidote is to point out the obvious:

  • we’re in a good position
  • keep doing what we’re doing
  • inappropriate, and unnecessary, risk is one of the few things that can screw us up

It’s a message that I give to others, and I’m repeating it to myself, here.