Welcome Avatar! For anyone reading this you already know that diversification is a scam for *getting rich*. You can’t name a single billionaire who made it with diversification. The only millionaires that make it from long-term diversification are near their death beds or worked in extremely high stress jobs + frugal life. In fact the people pushing frugal living all make $200,000+ a year which allows them to live near poverty and save 6-figures.
Despite all this quality of life decline, they still don’t really make it until later in life. The cost was giving up any and all fun life experiences for people in their 20s/30s (travel, concerts, parties etc.).
As you can see… Getting rich by 35 ain’t the same as 55.
In fact, we’d rather have $2M at 35 than $50M at 55 (assumes the 55 year old had nothing and inherits $50M at 55). We know the nit pickers will say $50M at 55 implies $2M at 35 since they are unsuccessful and think linearly. Nit pickers be gone!
Part 1: 80/20 Applies Again
Similar to the wealth divide, 80% of all your wealth is likely going to come from concentration. The other 20% from diversification. If you learn to build and sell businesses, you don’t even care too much about investing. You only invest with excess money (ironically allowing you to take even more risk + becoming a better investor!)
Anyway.
If you go back to Monday we broke down the quality of life changes by net worth. All calculations are post tax money and *include* primary home equity.
The 5 Stages of Net Worth: When *Your* Life Changes
Welcome Avatar! Looks like the trolls are out again saying that $10,000,000 is not enough to retire. It is most certainly enough to retire. We’re guessing this is just a way to make people give up and not try at all. Realistically you need less than that. In fact, the number you need to feel rich will force you into the $10M+ bracket due to sheer boredo…
Example: If you have a $1M home and $5M in a brokerage? That is not $6M. That would probably be $5.25M. We assume the $6M has 15% of cap gains attached to it. Similarly, a $1M 401K is not worth $1M. It is worth around $500-600K.
Please read Felix Dennis How to Get Rich if you haven’t. Liquid and illiquid net worth are unrelated.
80/20 Explained: With that flushed out, you can get the idea on 80/20 easily. If *your number* is $5M this means you need to aggressively diversify at around $4M. That simple.
Please don’t ask us what *your number* is we’re not you and don’t live your life. You should have your own number and your own quality of life objectives (notice nothing related to status, your quality of life/lifestyle is what matters). Some enjoy the country side, the mountains, the beach, the city, etc. None of our business.
Basic Example: If someone is 35-40 and they have $3M right now with a number at $5M? They have to carry risk for a bit longer. This is because they unlikely make $200K. They probably earn $400-600K. It won’t be too painful to feel a 33% drawdown (2 years of work).
Click fast forward. The guy looks at his portfolio and sees $4.25M. At this point he has to diversify. If making $500K he has 2 years to be done.
Don’t gamble what you need in exchange for working 5+ years.
Huh? 5+ years? Yep. If the high risk portfolio goes down 40% he is down $1,700,000 + the $750,000 = $2,450,000!!!!
Game over. Could be stuck for a decade if cash flows lighten up at any time.
Part 2: But BTB You Guys Carry Much More Risk
Correct. Because it doesn’t matter.
Click fast forward a bit. You hit $5M and you diversify it out. You never touch it. Never means never. No long lost friend / family member. No nothing.
Since you enjoy working you build another company and invest *that* money into high risk stuff. See second sentence. Because it doesn’t matter.
If those investments pay off? You end up going far past all your objectives.
This is how it actually works. The irony is that *your number* locked in will practically force you up much higher in life! This is because your mind will be clear. No money stress, no work stress, nothing. Now you invest without the emotion of greed. Making life a million times easier.
Skills Built Are Already High So Less Like to Struggle with Anxiety
From this basic quadrant, you can see that you will only operate in Flow, Control or Relaxation. Anxiety and Worry are avoidable if and only if you never touch your financial independence money. Never means never.
We have watched a huge number of people lose everything again. Lever up the house to go all in on a risky investment (common). Doesn’t work and suddenly back to the grind.
Part 3: Onto the Math
With the high level out of the way: 1) cut risk significantly at ~80% of *your number* and 2) you can invest in high risk forever with all assets *in excess* of your never sell set for life bucket.
Based on Earnings: Sticking with the same $5M example. If you earn $1M a year or $200K a year the set up is drastically different. A good way to think about the portfolio volatility? Match it to about 1-2 years of *savings* per year.
If you earn say $500K and can save around $350K a year, this means you want you max drawdown to be around $350-700K.
Put Into Excel: There are only two toggles. 1) inflation and 2) max drawdown based on what you own.
If you assume that inflation is around 3% you cannot touch anything with a return below 4%. Taxes would send you to 3% and you broke even at best. (exception to the rule is the standard 6 months in some savings account in case an emergency pops up, a rounding error to a large portfolio).
Using meme coins as part of the portfolio also makes little sense. Drawdown could easily get into the 90% range. Save those “investments” for your excess money portfolio
Excel Math: Enter your post tax savings per year. Make it up and stick to the high-earning example we used $350,000. You’re sitting on $4,000,000 but it's all in one concentrated investment (BTC, Tesla, META, NVDA, etc.). Asset is Irrelevant.
At this point you will need to sell that concentration and come up with something that will draw down at *most* about $800,000 (we know we know we said $350,000-700,000, just using round numbers to go to -20%). Anyone smart will understand that calculating exact decimals at this level never works. Napkin math is always better.
Option 1: You go into more stocks. For some reason you don’t like bonds due to inflation and you don’t like crypto a ton because you feel like you’re nearly done. In that case you could do something like this 60% into S&P, 10% into crypto just because you need some, 15% into a rental property and 15% into your favorite concentration positions.
Option 2: You are a crypto believer. You want more exposure there. In that case you have to barbell it out into bonds/ultra low risk real estate. Since crypto can easily go down 50% while the S&P unlikely goes down by more than 25% or so, that’s going to leave you with a 25% spread. Therefore you’re going to do something like this: 45% crypto, 20% bonds, 10% stocks and 25% ultra low risk real estate that you can control (flips, build your own etc.)
Option 3: You want to hold your concentrated item longer. Okay you’re nuts but instead of fighting emotions (a losing battle) at least cut half of it and move into something ultra low risk. This would mean you take half of it out and you go full risk off. Bonds/real estate 50/50 at minimum.
For the Autists: You already know we’re heavy into tech and crypto so that’s where we’d leave some heavy positions. That said, there are millions of people out there. Some people get rich from tech, some from selling a company some from building houses, some from a bio tech stock etc. We have no clue how you end up making. Chances are if you’re reading this you do make it. The tricky part is keeping it.
A completely different skill.
Summary
Now you have two full posts outlining exactly where your quality of life will change and how you can structure yourself for the long-term (keeping said wealth).
Lotto winners go broke, people who inherit money go broke, people who have one good exit go broke etc. It’s extremely easy to let hubris and greed come in.
The irony of course is that diversifying when you’re close to done? We’d bet everything you make it further!
By locking in your “F-you money” you end up finding better business opportunities and better investments. We’ve seen it too many times to ignore.
On that note, you already know… Sunday will be the Biz/E-com update. You’ll need something to do to keep increasing those digits on a screen.
Stay Toon’d!
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce.
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