If you live long enough and you pay attention, you eventually realize that you don’t find insights, they find you. This week I found myself in two conversations with two different people about the same thing – money. I love money, but sometimes I also hate it. I suppose that’s just the nature of things. But I respect it, and I’ve spent over 50 years of my life trying to understand it. Here’s a simple and foundational idea money and investing that will help you have enough money to live a decent life.
The Basic Idea
So these two conversations – the reason they were interesting was the age of my counterparts. One was half my age, the other a little older than me. Two men in American society trying to get what they can, take care of their families and communities and stay out of jail. Sound familiar? We didn’t agree on everything, and I’m ok with that, but as these conversations evolved, I was eventually able to share my own evolved point of view that I think they bought. You should buy it too because if you can embrace what I’m going to share with you today, it will save you a lot of time, grief, and maybe money too.
The basic idea is pretty simple: there are two kinds of money and three stages in your investment life. One kind of money is appreciation or equity, and the other kind is cash flow, or debt. Even if we don’t realize it, each of us measures our financial worth on the same two basic sheets as any country or giant corporation: the balance sheet (BS) and the profit and loss statement (PL). Your BS measures your net worth, and your PL measures your cash position. You need both. You also need to understand the three stages of your financial life.
Stage 1
Stage 1 is roughly age 25-40 (roughly). During this period of life, your investment objective should be aggressive growth or appreciation. A long time ago some sage came up with the cliché that risk correlates with return; that’s complete bull. But here’s a truth: you should take the most risk at this stage of life because you have the most time left to make up for mistakes, market corrections, or just your own stupidity (I’ve enjoyed all three).
Stage 2
Stage 2 of your investment life is when you are somewhere around ages 40 – 60. At this stage of life you should be investing for a balance of growth and income. This is the “Goldilocks” conundrum: not too much, not too little, just right. You want to find the balance of risk and return that works for you. Remember – your body isn’t 25 anymore. Don’t invest like it is.
Stage 3
Stage 3 investors are roughly age 60+. At this phase you should be investing for cash flow. Some appreciation on the side if you want, but mainly cash flow. And this is where a lot of people get really jaded. They hear stories of 20% and 200% and that seems really sexy. And it is sexy. And maybe you can find it. But here’s the problem: if you screw up, you don’t have a lot of time left to get back to zero. Better to drop your return expectations in exchange for safe returns and sleep without worry.
The Story
As any adept storyteller will tell you, a story is presented in 3 Acts: Beginning, Middle and End. And so it should be with your investment strategy: in the beginning you should focus on the balance sheet to grow the corpus of your estate, in the middle there is a transition from growth to income, and finally the focus moves to on income or your PL.
Last Word
In the end there really is only one rule about money that governs us all: if you live your life with more money than time, you’ll be ok.
Good luck and have a good week.
Joe Still
2024.08.04
Cite
“Some people, through luck and skill, end up with a lot of assets. If you’re good at kicking a ball, writing software, investing in stocks, it can pay extremely well.”
– Bill Gates