Core Capital - Part One
Cash Reserve, Place To Live, Portfolio Allocation
In the Great Recession of 2008/2009, I found myself the middle of a large insolvency.1
I met with a litigation attorney and he asked,
Are you worth suing?
My friend explained that ability to recover is more important than what the facts indicate.
Nothing personal.
He explained there wasn’t much I could do about the past, but there was a lot I could do about my future.
Over long time horizons:
You’re likely to build Core Capital
You’re likely to experience sudden liability
Today, we’re going to have a look at the first part of financial planning, Core Capital.
Core Capital
What is Core Capital?
Core Capital is money you can’t afford to lose.
Back in 2008,
I was 40
With a new baby
Dealing with unexpected unemployment
I’d spent the prior two decades building financial stability:
Cash Reserve
Debt Free House
Portfolio of Investments
I built them in that order, 1-2-3.
Let’s have a closer look.
Cash Reserve
Out of college, I built a cash reserve equivalent to four years living expenses.
It changed my life.
I saved 50% of what I earned
It sat in a savings account
I didn’t miss the spending
Over the years that followed,
my salary
my spending
my savings…
Everything Grew
Despite a growing balance sheet, my Wealth In Time2 didn’t budge.
However, my cash reserve gave me the ability to:
SAY NO - to anything I didn’t want to do
SAY YES - to new opportunities
TAKE TIME - a year off in 2000
You don’t need to be rich to be free.
You need a modest amount of Core Capital
You need the ability to live cheaply
The biggest line item for most budgets is housing.
That’s the next piece of the puzzle.
A Place To Live For Free
Once you have your cash reserve:
Keep Saving
Look For An Opportunity To Eliminate Your Housing Cost
Some folks achieve this by moving back in with their parents.
I ended up in a different hemisphere.
Arriving in New Zealand, I realized I could
Buy a house
Rent the rooms to my training buddies
Live for free
I was 32 when I made the purchase. I paid cash.
Wait for the fat pitch, it usually comes during a credit crisis.
Bet Time, Not Money
With your cash reserve, and a place to live…
You are free to design your best life.
Across my 30s, I spent my time as:
A full-time athlete
A financial consultant
A part-time fiduciary
Being “time rich” let me help a friend start a business, which worked great until it didn’t (see insolvency above).
Fortunately, I spent 2005-2008 deleveraging my life and removing personal guarantees I had given to the start up.
The global economy was booming 2005-2008, especially the debt markets. Nobody could figure out why I was so conservative.
My concern was TIME.
I could see a scenario where I would have to go back to desk work. I didn’t want to take the risk of losing TIME.
I liked being free.
I had proven my ability to live happily with less spending.
Less Money, and free > More Money, with a chance of ruin3
Keep that front of mind with your investment and life choices.
Investment Portfolio
I’ve known a lot of rich people.
Only a few are free.
The ability to not think about money is a form of wealth.
Read that again, slowly.
The ability to NOT think about money is a form of wealth.
We are not freed from financial worry by making more money.
In Hong Kong I was:
Making a ton of money
Spending a ton of money
Constantly focused on money
Money, Money, Money!
That vibe stayed with me for years.
The vibe comes back when I visit places like Aspen, London and the fancier parts of Asia.
It’s natural.
Choose your location wisely.
What does this have to do with portfolio strategy?
Keep Your Mind Focused On Building Human Capital
Free Yourself To Live, Not Worry
What do I mean?
Simple
Low Cost to Hold4
Focused on Long Term Gain5
Tax Effective
If It Won’t Make A Difference Then Wait
This implies:
Don’t chase return.
Get a good enough portfolio and create your best life.
It’s much easier to make money in your area of expertise than competing against professional investors.8
In Part Two we cover:
Using Trusts To Protect Core Capital
Using Real Estate As Life Insurance
Changes In Portfolio Allocation As My Kids Arrived
The Balance Between Current Desires & Our Future Selves
My 40th birthday was spent signing a large stack of papers that put my employer into insolvency proceedings.
Net Worth “divided by” Current Annual Spending = Wealth In Time.
Some games you don’t want to play. Too often, financial ruin results from chasing money we didn’t need in the first place.
My “cost to hold” is measured in dollars, emotions and hassle.
I can leave my porfolio alone for months. No action required. No share of mind.
Ownership that provides value to the living members of the family system.
I have made myself miserable managing my own properties. Nearly cost myself a bundle in taxes and missed gains from selling to avoid the pain-of-admin. Use property managers and go live your life.
Most the money in financial services is made FROM customers, not for them.