Gathering, Preserving, and Expanding Your Wealth | AWM Insights #169
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Episode Summary
The saying “defense wins championships” applies in a few ways to portfolio management.
Playing good defense (keeping your opponent off the board) and taking the risk out of the important areas of your life is the foundation of the game and gives you peace of mind as an investor. A leaky or inadequate defense leads investors to fall behind, and it’s hard to catch up without taking unreasonable risks.
A strong defense enables you to take mindful risks to get ahead while still managing the current game and potentially saving an arm or giving a prospect some game time for future benefit.
The offense is still very important, but it’s easier for a good offense to flourish when there is very strong confidence in the defense. Our goal is to finish ahead. A dependable and robust defense with a sophisticated and intentional offense is a winning combination.
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Episode Highlights:
0:00 Intro
0:40 How do we think about gathering, preserving, and expanding your wealth?
2:36 What are the benefits of having a custom-made portfolio?
5:45 How does a protective reserve approach allow your portfolio to take on risk to grow?
9:05 Why your net wealth is one holistic number?
11:33 Text us!
+ Read the Transcript
Brandon Averill (00:03): Hey everybody. Welcome back to AWM Insights. Brandon and Justin here. We're excited to get towards the end of this net worth formula that we've been laying out over the past few weeks, because it's the exciting part, it's the part we love, and it's really how do we make your wealth grow.
(00:20): We've worked through, talked a lot about your human capital. What are the different types of human capital? Obviously taxes, the necessary evil. How do we plan around those? How do we make sure that we're maximizing our net income as much as possible?
(00:34): Walked you more recently through the different uses of money. How do we think about giving money? How do we think about saving, spending? We're arriving now at that. How much do we save? What do we do with that savings? How do we grow that savings?
(00:50): And so, we thought it would be helpful, just a refresher for all of you listening on how do we think about growing your money? How do we go through that framework and really make everything individualized, tax-efficient to you? Then how does this ultimately benefit you on a reinvestment back into the cycle?
(01:09): So I'll let Justin, obviously, our chief investment officer, take this away a little bit. But maybe, Justin, hit on for us at a very high level, let's refresh, what is our investment philosophy? What is the best way to grow wealth in our opinion?
Justin Dyer (01:23): So it starts with the word you just mentioned in your intro there, individualized. That's not the philosophy, but it's actually a really, really important component of how we implement the philosophy.
(01:36): I would say, high level, this is a simplification of our philosophy. There's a lot under the hood. But high level is taxes matter, or really a different way to think about that, and this dovetails into the past episode, is expenses. Costs matter. They can be one of the single greatest destroyers of wealth. You can have two investments that on paper look the same. They have the same gross return, but if you're not paying attention to things like taxes or expenses, you can really, really give a lot up to either the IRS or just to the money manager itself.
(02:11): So taxes matter. Then breaking it down further, public markets are largely efficient. Private markets have the ability to generate significant outsized returns, but there's some risk to that.
(02:25): So real high level, we start with those three components of our investment philosophy. But I'll go deeper, I think, into the individualized nature. Then we can really sink into the philosophy side of it.
(02:38): You need, our clients, have the complexity to have a custom portfolio. Very often our industry ... And it's not a bad thing, but very often in our industry, you just take a cookie-cutter approach. You go through some sort of questionnaire or you have a conversation with an advisor and they say, "Hey, how does it feel if your portfolio goes down 10%, 15%?" Then they just put you into a static portfolio. "Hey, here's 80% equity, 20% fixed income. That lines up with your age, that lines up what you communicated, how you feel when markets pull back, et cetera."
(03:17): Again, not terrible, but it's also not precise. It's not as good as you deserve, really, quite frankly. And so, the way we implement is really not ... I don't want to say not paying attention to those components. Certainly investing is behavioral or psychological, which we've talked about and touched on, and we have to acknowledge that piece, but we really want to make sure, going back to what our purpose is, money is a tool to accomplish what's important.
(03:46): And so, the conversation starts there. Hey, what do you truly want to accomplish in life? What are your priorities? What are your goals? What is that greater purpose, if you will? Then we orient your assets towards that. That could result in wildly different portfolios for people of the exact same age. So I think that's a great place to start. I'll let you chime in.
Brandon Averill (04:08): Yeah, no, I think it's a good way to think about it because what I became overly convicted about some time ago in this philosophy is, yes, that old cookie-cutter approach you're taught as you're coming up ... And I think it's a hangover probably from the pure asset management days of the big wirehouses, but you're taught to ask that question, like, "Whoa. How are you going to react when the market declines 15%, 20%?" I don't care who you are. It's no fun when the market goes down 15%, 20%. The other reality is you don't know how you're going to react. You don't know what's going on in your life.
(04:41): But what I got really convicted about, and I think all of us are convicted about, is if we really focus on what we're trying to achieve and we tie our priorities to specific allocations, then we know, back to that protective reserve you've hit on, yes, it's uncomfortable when markets go down, but I have such confidence that my plan is built so I can still achieve the priorities that I'm trying to achieve.
Justin Dyer (05:06): That's right.
Brandon Averill (05:07): Then it makes it a lot more palatable to go through those periods of time as opposed to, oh yeah, I know I'm supposed to be comfortable here. My asset allocation's supposed to make it better for me to go through. It's much harder to tie those emotions back and bring yourself back to reality.
(05:25): So, like you mentioned, we are not ignoring the behavioral side of it. We just are setting you up in a much better position to actually go through those emotions successfully.
Justin Dyer (05:36): Right. That's right.
Brandon Averill (05:36): So I think that is a big part of it. Once we get past that protective reserve, we talked about it in previous episodes, it's about really taking a look at those short-term priorities, making sure you could achieve those. But then it also allows you to, conversely, take advantage of the wealth that you built and grow it potentially even greater.
(05:57): So I'd love for you to hit on ... Once we get past that protective reserve, we start to think about public markets and eventually private markets. I mean what kind of impact does this approach have on multi-generational wealth?
Justin Dyer (06:09): Sure. What you're hitting on the protective reserve, really the fixed income part of our portfolios provides that foundation, that ballast, ideally that confidence to withstand market corrections that have happened in the past, again will happen in the future, and it gives us a rightsized amount to "take" risk. We put money at risk in the market.
(06:33): What does that actually mean? Well, if you're doing that in a diversified framework, that means you're going to see some volatility going up and down. That's the traditional definition. We have some slightly different definitions of it, but they're not right or wrong, and we're not going to go down that rabbit hole today.
(06:47): But it does. It allows us to say, hey, this money or these priorities either have a flexible time component or, hey, maybe they don't have to happen at this point in time, or if markets provide good fortune, then we want to execute on that.
(07:02): And so, that basically says, hey, with this capital, for that target amount, we can put into the market, invest it for the long term, because we have a lot higher confidence. There's no guarantee, but we have a lot higher confidence of a specific outcome.
(07:16): Then, to your point, when you start to get into multi-generational wealth or transfer of wealth, which is all generally projection, but at the wealth levels where our clients typically get, that's very real and very tangible part of the conversation, well, private markets start to make a lot more sense.
(07:35): It's not the only time private markets make sense when you have multi-generational wealth transfer, but it's a great time to allocate to the private markets. You're talking about 30, 40, 50, in some cases 60 years out potentially where this wealth is going to a generation at that point in time. Well, guess what? The illiquid nature of the private market becomes irrelevant.
Brandon Averill (08:01): Sure.
Justin Dyer (08:01): You want to rightsize it still at that point in time. We talk about that a lot. You don't want to just put all your eggs in any one single basket. But private markets become a great source of potential higher expected return when you're talking about really long-term, multi-generational wealth portfolio construction.
Brandon Averill (08:19): I think that's important to hit on, is really the timeframe with which you're playing the game. What is the timeframe that you are planning for? You've got to make sure it's individualized. I mean, quite frankly, if you're listening to this, you're not a client, this is a demand that you should have from your group. This is something that, unfortunately, doesn't get implemented very often, but you deserve it. If you're of any substantial wealth, you have priorities. You deserve a customized approach.
Justin Dyer (08:45): That's right.
Brandon Averill (08:46): Yes, it's a little bit more labor-intensive, but at this day and age, with the technologies, et cetera, you should be able to obtain this. There are lots of groups out there that do it, and we just happen to be one of them. But you certainly deserve that.
(09:03): The other part of this we didn't hit on too much, but this entire construction has to be from one pocket. And so, when you think about your wealth, you need to think about it holistically in the sense of what is your tax rate? How are your taxes impacted? What is your overall asset allocation? What are the priorities that you ... How much charitably do you want to give and how do you put that money to work if you don't know yet where it wants to go?
(09:28): Or if you want to get really specific on causes that you want to impact, there's ways and customizations to go around all of these things, and you really need to think about your wealth really in that one holistic nature.
(09:40): And so, at the end of the day, we're growing wealth. That's what we're talking about at this aspect. That allows you to essentially then take that passive growth and reinvest it back into the cycle, whether it's all the way back to the top in your human capital to make sure that you're in the best maximization of your human capital, whether that's physical, on the field, if you're an athlete, if it's getting advanced education in your intellectual capital or even your social. You decide, "Hey, you know what? There's this amazing group of people. I need to be on a plane. I need to go there and be social with these folks."
(10:18): You get to reinvest back at that level, or you reinvest back into your net income, go through the tax piece again, drop it down. You're reinvesting it in the public or private markets. It's a great cycle once it's humming full circle.
(10:33): So be remiss if we didn't mention we have covered the public markets and private markets in depth. We'll put a link to the show notes to our private market series. But if you have questions, we'd love to hear from you. We'd love to hit on them in future episodes. Again, text number is 714-504-7689. You can shoot those questions over. Until next time, own your wealth, make an impact, and always be a pro.