We’ve noticed a significant jump lately in the number of people interested in long term investment planning. Given how COVID has upended so many plans, this is not all that surprising. It’s clear that many are thinking about semi-retirement, full retirement, or working from home in perpetuity. Many are considering what it would be like to focus on a new variety of income-producing activities like board work, consulting work and entrepreneurial activities. We’ve always said that portfolios need to change for two reasons: when markets change and when personal circumstances change. Let’s explore the elements that affect the total picture.
Consider your expenses
We put this first on the list because family expenses are the most important factor in risk management. Consider your family’s total expense picture broken down into three categories: essential, important and discretionary. Essential expenses are things you would not give up or bargain on. Examples are mortgages, food, medical costs and so on. Important expenses might be family education, down payments, wedding expenses, which can be trimmed or delayed if absolutely necessary. Discretionary expenses typically are items like vacation homes, extra cars, travel expenses and charitable donations.
Essential expenses are central to a family’s well-being and should be protected with highly confident assets. Consider the time horizon and level of importance of these expenses. Unexpected events (black swans) happen more often than statistics might suggest. We often underestimate tail risk. A prolonged global pandemic is a perfect example of a strange but possible hypothetical scenario. As long as you plan to always be able to cover your essential expenses, black swans become significantly less important.
Consider your income
Sum up your sources of income from real estate rental income, base salary and bonus, pensions, stock grants, board income, consulting income, etc. We consider this to be your human capital and it can also be recorded as an asset. It sits at the top of the asset stack in terms of risk, because it is not guaranteed.
Social security is an overlooked and important source of income. Given where interest rates are today, this can represent the equivalent of a $1m+ bond portfolio. You can check your SS detail on the agency’s website.
Consider private and illiquid holdings
Private and illiquid holdings can provide substantial long term upside. However, they are not easily accessible and should be treated differently. You can’t pay your essential expenses with illiquid assets. When we consider the full picture, we look at the difference between liquid, semi-liquid and illiquid assets. Real estate can often be liquidated within 90 days while many private equity holdings cannot be sold without significant reductions in value. Liquidity should always be there for you in case you need it. We call it the “protective reserve”.
Consider what is unique to you
Inevitably there are challenges and opportunities that are unique to you and your family. There may be kids to support, inheritances, health issues, legacy family assets and so on. Moreover, these situations can be spread across generations, so it is important to see all sources and uses of money over time and to prioritize them. Younger families may have substantial human capital in the form of future earnings or large stakes in private assets. Older families may have more sensitivity to financial changes and may require a larger protective reserve. What other factors should we consider? It’s a question worth asking on a regular basis.
Invest in themes that can grow
We wrote about investing in Cloud Computing Technology back in October. This is part of our larger collection of investment themes that have natural tailwinds. This week was a big week for the cloud computing world. Jeff Bezos announced that he is stepping out of the CEO role and putting Andy Jassy in charge. Andy started the cloud computing division of Amazon known as AWS. No surprise to see the head of the cloud computing division guiding the future of Amazon, one of the world’s most valuable companies. Google reported phenomenal results from its Google Cloud product with revenue up over 40% over the past year. The digital finance theme had a major win yesterday with PayPal announcing its profit tripled over the past year. The earnings results related to our major investment themes look quite healthy to us.
Consider the full picture
Only when all of the facts are analyzed and all of the entries are made can you get a complete sense of the security of your investments. Starting with a protective reserve you can easily see what adjustments you have to make in case of big drops in value, changes in expenses or other scenarios. Conversely, you can see how fixed payments and cash allow you to hold illiquid investments that may have long term appreciation value. A family’s financial assets are ultimately a means to achieving their life objectives and our priorities-based investing framework lays the groundwork for a robust strategy.
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.