Episode 095 - All things in balance

For many years, I’ve been seeking out the right balance of financial investments that support an unconstrained lifestyle. Something that keeps things in order, and doesn’t become a burden to those seeking to achieve or maintain financial sustainability. I think I have it. I want to share what I’m doing with you.

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Show Notes

Universal truths – all things that go up, must come down.  We are witnesses to the universe – not controllers of it.

To quote James Taylor, “I’ve seen fire & I’ve seen rain.”   

And yet, I know that without risk there can be no progress.  

So our choices in life vary at different stages that we are at in life.  In our early quarters, particularly the 2nd quarter (Building quarter), we MUST take risks.  

Everything is a risk when you are starting from nothing.  But if you fall back or fall down, there isn’t a large height that you are falling from.  Chances are that it won’t kill you, you can then dust yourself off and try again.

Whereas this applies if you want to go skydiving or drive a race car, at some point the risks become too hard to recover from.  And age is usually the reason that you dial back the “risk-ometer”.  You have (hopefully) had enough of those adrenalin rushes and you don’t need to seek out more risks all the time.  Plus you know that the recovery from a failure is just too hard, when you have less time to be able to get back from where you were.

That’s typically why the investment strategies of someone in their 3rd quarter differ greatly to someone in their 2nd.  I guess I’m stating the obvious, but the older you get, the more likely to prefer conservative things.  Things that don’t have a lot of risk and don’t focus as much on the future, but more on today.  Hence the propensity of older folks to change their political ideology towards conservatism vs. progressive ideals, because they perceive that progressive ideals are inheritently riskier.

I’m not someone that believes in that simplicity.  I don’t believe that just because you are opposed to risk that you would sacrifice the future.  Partly because I believe that my role on this planet is to positively influence a future that I hope to participate in, but if not – that’s ok.  Others will benefit from a positive influence.  It’s all good.

That said, I look to things that have purpose.  Things that have meaning.  Not things that are short term “fixes” or bandaids but avoid the long term problem.  I understand (although I don’t agree entirely with) the idea of going into debt today to create a brighter future.  This appears to be a tenet of our current political administration.

I mean I get it.  We’ve got problems.  If you can’t get healthcare because you don’t have the money, that’s an issue. When every other western country offers it as a basic human right, and so many of my friends are fleeing the USA in search of health care solutions (as I did), then we’ve got a big problem on our hands.  What’s the point of having a ton of money if you are sick, with no hope of getting better?  Healthcare should never be a “those that have it, and those that do not”.  That’s just stupid.

I also get that opportunity must be available to all.  We all need to have the right to begin our journey from the same starting line.  What you do after that is on you, but at least you should have some even distribution of opportunity.  If you do that, then the natural competitive nature of man will force all participants to want to aspire to greater things, but if there is no point because your family could never afford to send you to college, or even if they could the college education is sub-standard and just a lark for bankers to get richer – well I’m not on board with that.

What our older generations need to understand is that as you enter your 4th quarter, you will be relying on the care provided to you by the younger generations, and if you treated them like shit, don’t expect to be treated much better in return.

I know I’ll get a lot of flack for saying that, but it is true.  The reason why elder care is so bad in the USA is that by starving any younger person of opportunity and creating a world in which criminal cartels control nursing homes, then you get what you deserve.  If you participated in anyway in that, then karma has a way to balance these things out in the end.

Which returns me to the original statement I made here.  All things in balance.

After I managed to get my burn rate under control, and found a way to make money organically without having to sell my time by the hour to do it, things started to get clearer.  Clarity.

I could spend all of my life chasing money, without actually having meaningful memories banking up to reflect upon in my 4th quarter.  I could push aside relationships with those I care the most about, while I seek out income, work, etc. or be a stressed out risk taker, looking for another hit of the addrenalin needle.

Or I could stop.  Take stock of what I have.  Look to what gives me the greatest joy and seek that out.  The last thing in the world I would want are money problems to get in the way of that.  

Yet all about me I see those that are seeking the highest returns for the highest risk.  They need to take risks because without it, there can be no reward.  They have not yet amassed assets that will take care of them for the future.  So they need risks to help them do it.  I did that.  I had to buy real estate in my early rental portfolio years, in which I put little money down, took big risks on financing and property appreciation, and then when I got some equity appreciation, I had to then double-down and leverage against that for another property.  And another.  And another.

Eventually I used the power of leverage to square my returns, but along the way life happened.  Anything from divorce to major car accidents, death in the family, immigration, globalization, global financial collapse, etc.  All of those things in one way or another sidelined the best laid plans here.

I sat down with my wife the other day over our morning coffee outside in our beautiful organic back yard and we lamented about just how hard it was to get to where we are now.  All of the little things – the stresses of our journey.  Those make or break moments, etc.   and yet we prevailed.  We got to where we are now.

Are we done yet?  Nope.  There are too many other great adventures out there, but with each one, you put more of your past on the line for them.  

I have friends who are addicted to addrenalin and constantly lose out to the rush of their journeys.  But they have some pretty incredible stories to tell.  The problem is that they often lose more than they gain, and that results in having really nothing to show for their journey.  Their memories don’t pay the bills, and so I see the extremes of things as being wrong.  Both to be too much of a risk taker, and to be too little of a risk taker.  Again, all things in balance.

So as I have said in many past episodes of my podcast, you need to embrace reality and take control of things so you can mitigate the risks of life, and yet not be too risk-adverse as to not benefit from the growth & progress that comes with risk.  Risk is really someone you have to learn to dance with.

Remember my story of the surfer.  This is critical to understand.  If you seek out the rush of riding the greatest wave of your life, you won’t get it by sitting on the beach watching everyone else having a good time.  You have to get wet.

And you have to be trained in how to ride a surfboard.  That comes with constantly falling down and getting hurt.  Eventually your skills will emerge.

But most important, you must study the topography of the ocean.  The natural geography of the bay, the riptide, the sharks, and the cycles of the waves out there.  There are times to go into the water, and there are times to sit things out.

You get out there, you see in the distance what you think is a rising wave and you pick your target.  You get in position ahead of it, and you paddle.  You paddle like crazy.  Since you are focused forward, you don’t really see the wave behind you as it gets bigger and bigger.  You just have to have faith that you did this correctly and it will pick you up.  Many don’t.  They peter out or they break at the wrong time.  But then the one that goes to plan comes along, and then you feel it.

The forward rush that comes with being propelled by something bigger than you are.  Something that is natural and universal.  Then it is on you.  You get up, you balance and stand to try and get control of the shaky board.  If you achieve that, then the movement in your knees determines direction and you start to dance with the wave.  You turn the board as you see the wave’s opportunity – the curl of the break, the “Tube” that we all seek.  The time comes when you find yourself inside the tube and that moment never lets go of you.  You realize you are in the belly of the universe.  There’s a split-second quiet that is in that belly.  Time stands still, and eventually there’s this pressure that comes as the wave is breaking that pushes you out of that tube at some break-kneck speed that most can’t balance with that energy.

But you felt it.  You were touched by God in that moment.  You might be beaten up by it, but you don’t care.  You got the return on what you were seeking.

Is this not the same as the desire of any investor?  Is it not that they wish to get that return on their hard work as well?

The question is how much risk are you willing to take to get it.

There’s one problem with surfing though.  After you have had the ride, you have your memories.  But nothing else to show for it.  There is no ongoing return from that ride, other than your experience.  In order to get it again, you have to paddle back out to the back sets and wait for that magic moment to repeat.  Often times it won’t be that day.  It will be at some unexpected time in the future, but you have to keep pitching.  You need to commit to a life of being a surfer in order to quell the desire for that rush.

Investing has some similarity to surfing.

You must see something before it is upon you.  It won’t give you any return if it is an immediate thing, or it has passed you.  And if you attempt to catch the same wave as everyone else, you will likely get a lackluster experience in a crowd.  You want something that is unique to you, if you can get it.

How much risk are you willing to shoulder?

Do you want predictable, longer term returns on your investments?  Are you patient?  Do you have that time, or do you need money NOW for some immediate purpose?

Are you willing to be a life-long surfer and seek out waves every day, or is this more of a sidehustle to you.  You want something on the side, while you do your normal job?  Can you give your investments the time they require based on the risk levels you are entertaining?

Is that what you want?  To be a victim to your money, so you end up trading working for a boss in a job you hate, for working for your investments and learning to hate money?

All things in balance.

I’ve wrestled with this for decades.  I’ve been the high risk, addrenalin junkie before.  I’ve also been the slower, non-participant that missed out of various rides.  I’ve also owned things that were hugely successful, and sold them too early.  But what I’ve learned is that “its only money”.

The thing is that money should work for us.  We should not work for it.  That means that we have to be realistic in our expectations for money.  Seeking out the highest of the returns we can get means taking on more risk.  Being willing to accept low returns but with low risk isn’t an option either.

Here’s the dynamics that we are all dealing with:

1.    The real inflation rate is closer to The Chapwood Index than it is the Fed Reserve Inflation numbers.  The real inflation rate is the cost of living increases that we experience in our lives every day.  You see it everytime you go to the grocery store, or get that letter than your healthcare premiums went up, or your tuition costs at college are increasing.  You see it at the gas pump or at the local restaurant getting lunch.  I believe a realistic number here is going to be 8%

2.    If you don’t make 8% (after tax) on your money, you are losing ground.  The $1 million saved by the FIRE person, is worth $920K year 2, and $830K year 3, etc.  It is shrinking like a melting ice cube.  It needs to be replenished organically, and yet the only way it seems to make it is to take on higher risks which could lose the entire nest-egg.  

3.    Measuring all your needs in $ is a losing game.  If you know that the $ is being disrespected by central banks and governments, then you need a counter strategy here to it.  But you don’t want to jump out the frying pan and into the fire with this.  The alternative has to be with an asset class that can grow organically, has low risk and can be a positive counter to the decreasing value of a $.   We can call this an “insurance policy”.

4.    You expect to be alive for many, many years to come.  You know the power of leverage.  What you do today should build a platform that allows you to prosper tomorrow.  And you have many tomorrows to come.  That doesn’t mean sacrificing the life opportunities and moments of today for it, but it does mean that you must be smart with what you invest your money into so that you get both the short and long term benefit and the power of leverage.

These dynamics are real and they challenge us everyday.  Doing nothing is a losing position.  Doing too much and taking on too much risk, is a losing position.

All things in balance.

The secret that I discovered here is that you have to be actively involved in both speculations, but also have an equal balance with insurance.  Speculations will (and do) go wrong, and they take out the entire investment when they fail.  Insurances have little growth, but they can withstand adverse events that come along all the time.  Often they do much better in counter positions with speculations.

If you want to survive and be able to fight another day, you must weight equally your speculations with your insurance positions.

But that’s missing the point, and missing the secret.

What I’ve learned and what has worked for me is that chasing only massive returns on high risk one-shot investments is a gamble.  Sometimes you win, other times you lose.  But spending all of your investments on low return insurance assets won’t keep up with the degrading of your money.

The secret is that the bulk of your investments should be deployed capital in things that generate income without your labor required.  I call that Financial Sustainability, but really it is kinda like thinking like a farmer.  You front-load your efforts to buy land, plant seed, setup automated watering systems and you let the natural laws of the universe generate a bounty.  You don’t have to go out there everyday and toil the land.  Once it is planted, you get your time back.

You want crops that are reliable, and generate enough income for you to live on.  To do that, you must first know your burn rate – what it actually costs you to live.  Then you farm accordingly.

But I’m not talking about literal “farming”.  Although food production is critical and best if you can grow it yourself, I’m using the term farming as a metaphor for any generation of income that comes organically.  I call that “Smart Income”.  Smart income is really dividends.

Dividends come without you having to sacrifice the asset to get them.  The old “Don’t kill the goose that lays the golden eggs”.  The greatest asset that fits this is rental real estate.  Although often expensive to get started, unlike buying stocks, bonds, precious metals, crypto-currencies, etc. you don’t need to have 100% of the money to acquire the asset.  You get the power of leveraging banking finance and using your customers (tenants) to pay off the financing.  If you can do this early and defer the gratitude of your investments, in a relatively short period of time (based on how many tomorrows you expect to have), you can let the tenants pay off the real estate, so you can then live entirely on the dividends that come from the property – the rents.

Your investment continues to go up at reasonable rates (let’s say 4%) and yet it returns against the assessed value of the asset.  Rents are inflation proof in that as your costs of living go up, so do your rents that you charge your tenants.  

You also get the power of leverage in that your growing real estate property can be refinanced out to release cash, that gives you the power to buy more real estate property.  That doubling down on what is considered a relatively low risk investment means that you can build a portfolio of performing rental properties that can be paid off by your tenant income, so you get to a certain point where you are no longer working in a job you hate.

This is a future punt.  Sure, it might take 10 or so years.  But for most people, 10 years is a drop in the bucket.  Maybe not if you are in your 3rd or 4th quarter, but even at that point there is still time to get income to cover you once you start to collect social security.

So back to the Balanced Portfolio.  Remember – all things in balance.

What I do is this.   I live by the 80/10/10 rule.  

That is 80% of my investments are in smart income assets.  Mainly real estate, but I also generate dividends from my investments in server hosting, computer systems I’ve built in the past, residual commissions, vending machines, etc.

That money is more than enough to cover my burn rate.  By bring it higher than my burn rate, I can adjust my lifestyle inflation to that level.  Never higher, but no need to sacrifice to be lower either.  I compartmentalize all of my expenses so I try and cover certain line items on my expenses by way of non-$USD denominated currency.  That means growing food that I can eat where possible, using coins from vending machines to pay for things I can get from vending machines.  In Arizona, that is mainly water from water dispensing vending machines.  Swapping things I have and don’t need, for things I don’t have and do need.  And generating travel rewards through normal organic spending to siphon off free travel so my family never have to pay for an airline ticket or a hotel room at all.

That’s 80% of everything for me.  I’d make it 100% if I could, but then it would take the fun of the game out of the equation and I like to have some fun.

So 10% of my portfolio is in speculations.  These are investments that I can afford to be wiped out over.  I don’t intend for that to happen, but I do know the natural ups and downs of the universe and the markets.  That means that I can afford to speculate on blockchain assets, or some stock market investing (again focused on dividend returns), etc.

The final 10% of my portfolio are insurance assets.  This is mainly gold & silver, but also some annuities.  I prefer to try and use assets not denominated in $USD if I can, but I am also exploring using Infinite Banking in this category – by deferring access to money saved for 5 to 7 years, building up a cash value of an over funded life insurance policy with the goal to borrow against it, but let it continue to appreciate at 5-6% over time as a conservative investment.

Now you might notice that there is little traditional “stock market” investing here, or any products that are typically sold or referred by the financial services industry.  Why?  Because I don’t like paying commission to a broker, who most of the time is “broker than me”.  Why should I reward someone with income for recommending something that I can find out about myself?  I know I’m going to upset many that work and rely on the income of that financial services space, but I am a strong proponent of a decentralized peer to peer economy, and a believer that (where possible) cut out the middle man.

It is also part of my need to have control over my assets.  This comes from being in positions before where I’ve lost it all.  When you have been around the block that numbers of times, you start to appreciate the value of things and why being too risky is a bad idea, but not being risky at all is just as bad.

All things in balance, as they say.