Client Portals

Total Picture Investing4 min read

Adding Full Context To An Investment Strategy

Feb 3, 2021 - Max Osbon ( 6 mins to read)

Max Osbon

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.

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