How to become rich
Good morning!
Back in 1992, I had a finance class during winter term.
At Furman, winter term is a condensed course cycle during January and February with longer class times.
While Greenville, SC, is a far cry from winter weather further north, longer classes and shorter days combined with sometimes less-than-pleasant weather was a potent combination for skipping a class once in a while to sleep in.
Or so I'm told 😉
But one day at the end of class, our finance professor told us that in our next session he would reveal the secret to getting rich.
And despite the weather, despite the longer class times, a couple days later our next class was FULL.
And here's what the professor told us...
Start a business
Grow the business
Take the business public (IPO)
Take the business private
Take the business public again
Rinse, wash, repeat
Pencils and pens were flying taking notes during this class. This was before laptops and cell phones.
And you know what, I'm sure someone my class might have taken this advice to heart and followed at least the first 3 steps above.
But I'm confident that most - including myself - did not follow this path.
Why?
Well, that's what I want to cover today. The difference between optimal and practical.
If this concept seems familiar, I touched on it back in early March.
Today, I'd like to revisit this idea and dig a little deeper.
Another way to frame this up is to consider whether or not financial advice that's 100% optimized but is unlikely to be executed is better or worse than advice that's 80% optimized but will actually get put into action.
And before we go further, let me be clear on something.
80% advice, while maybe technically sub-optimal, isn't lazy or half-finished.
It's practical.
It's more simple.
It's better in most cases, most of the time.
And for my clients - even those who are retired - they're busy with their lives, their families, their hobbies and interests, so they don't want to get buried in the weeds of exotic, bleeding-edge financial planning tactics.
At least that's my belief.
And my experience.
And this is the same approach I apply to my own personal finances.
I would say the same applies to the majority of my classmates on that chilly February morning in finance class.
Sure, the idea of become ridiculously rich sounds great.
It's the execution that presents some tough decisions.
It presents trade-offs.
So whether you're considering starting a business to eventually grow and take public or whether you're deciding whether or not to go down a rabbit-hole on how to squeeze every last dollar out of a tax planning strategy, you need to also consider the costs.
Explicit costs like time, money, etc.
But also opportunity costs. Potential Stress. Increased Anxiety.
For example, inevitably most clients ask me what we can do to reduce their income tax burden.
Well, if you're a W-2 employee, there's not a whole lot of options available to you.
If you want to give yourself more income tax flexibility, you should start a business.
Not necessarily a business you'll aspire to take public one day. But a profitable business that supports you and your family while letting you set some savings aside for the future.
And, with the help of a CPA, you'll have some additional tax-saving options at your disposal when it comes time to file your taxes.
And since we're talking about optimizing things, you should also relocate to Puerto Rico and run your business from there. As you'll see in section 2 of this article, you might even qualify to virtually eliminate your taxes altogether.
This is probably getting close to optimal.
But I'd venture a guess that for most of you reading this, starting a business and relocating to Puerto Rico is far from practical.
Here's a simpler example and one you might more easily relate to.
Let's say you receive a after-tax bonus of $200,000 this year and you've decided you want to add it all to your investment portfolio.
You have 2 choices.
You can dollar cost average or you can invest the entire $200K all at one time.
In almost every situation I can think of, I'm going to recommend dollar cost averaging.
Even though it's not the optimal solution.
Over time, the investment markets go up more than they go down. If they didn't we wouldn't invest in the first place, would we?
As a result, and this is supported by history, it's better to always invest the entire amount in one fell swoop.
But what happens when you invest it all at one time and the next day, next week, or next month the market drops significantly?
You're probably not going to be feeling too good about your decision to invest all the funds at one time.
So even though dollar cost averaging isn't optimal, it's a much more practical approach and one that better suits our psychology and emotions.
I could go and provide additional examples.
Like the best portfolio for you is the one you'll stick with in good times and especially in bad times.
Even if it's not "optimized."
Take me for instance...
Back in 2006, after leaving Merrill Lynch, I set up my own business.
I immediately enjoyed the additional independence and freedom that comes from being a business owner. And yes, I also benefitted from some additional optionality (all legal) when it came to our taxes.
But I also had to "run" the business.
Things like bookkeeping, billing, trading clients' accounts, administrative work, and more.
Sure, I could have hired people to take this off my plate, but I didn't want to take on too many fixed costs with a new business.
Fast forward a couple of years to 2009, and I made the decision to wind down my business and join Wealthcare Capital Management as an employee advisor.
And that's where I've been ever since.
Optimal?
Probably not.
Practical?
For me, 100% yes.
Again, it's about trade-offs. And for me, this was a trade-off I was happy to make.
And one that I'd make again today.
And as a result, I get to spend more of my time with my clients.
A question I like to ask myself and sometime ask my clients is,
"Am I making a decision based on a spreadsheet or based on what I want for my life?"
There's often a difference, even if it's more practical than optimal.
As a result, I'm happy with an "80% solution" that's simple and effective over a more complex, time-consuming "100% solution" any day.
And I know some people, including other advisors, that thrive on optimal 100% solutions day in and day out.
How about you?
Links & Things
Sorta related to the concept above is this article from Farnam Street:
The money quote from this article:
“You’re efficient when you do something with minimum waste. And you’re effective when you’re doing the right something.”
Also sorta related to everything above is this from Twitter:
And finally, here's an article that poses an interesting question and thought experiment:
Thank you, as always, for reading.
And if you have any questions or an idea for a future newsletter, blog post, or YouTube video, I'd love your input.
Just hit reply - I read (and appreciate) every email you send.
Until next Wednesday,
Russ