When we start our careers, many of us are just trying to gain a foothold in our new companies and our footing in our careers. We’re trying to climb the ladder to success and, along the way, higher wages.
Many of us are so busy with work and our careers that we don’t give much thought to our investments. We know we should invest, but we need a clear path for how to do it. So, many of us will default to what’s easy and convenient. Many of us will go along with the masses. This often means going along with what’s buzzworthy and investing for that big home run (e.g., crypto in 2021). The masses are all about taking big swings to make that big gain in the face of high risk and losses.
One default is to follow the masses. The other default is to fall back on what’s easy and convenient, and it doesn’t get any easier or more convenient than the company 401(k).
For many of us, along the road to the top, we encounter unexpected changes to not only our careers but our personal lives that make us reassess our investment motives and objectives. Some of us get married and have children. Some get promotions, but the new position requires more traveling. The promotions mean more money, but they also mean more time away from a home that is now filled with loved ones.
In my own experiences, I have seen that when my friends, colleagues, and family members start earning more money, they do one of two things. One group will use the extra money to buy bigger houses and more expensive cars and take costly vacations – to appease their families and justify all the time they spend at the office.
The other group does something different. They want to spend more time with their families and do what they want to do and not what they need to do. They know they can’t do this as long as they spend hours at the office. The extra earnings can be viewed as a curse because of the extra work involved, but it can also be a blessing. For this group, instead of viewing the extra earnings as a source for more spending, they now view the earnings as a tool that can be used to grow wealth. This wealth will allow them to leave their jobs if they choose. At the very least, it will give them the financial freedom to conduct their lives on their terms, spend more time with their families, and do the things they enjoy. They don’t want to be beholden to their jobs.
For the second group, their motives for investing and their portfolios’ allocations change as they earn more. They know that a 401(k) will not cut it for helping them achieve financial independence. As they look around at those who have achieved financial independence, they start to notice specific investing patterns that they start to emulate to achieve this lofty goal.
For smart investors pursuing financial independence to achieve loftier goals like spending more time with their families, this is how their investing motives change, and – in turn – the allocations to their portfolios change as their earnings grow.
- Protect What They Earn. As smart investors earn more money, they don’t go out and spend it extravagantly. Their priority is financial independence, and speculative investments don’t align with this objective. They minimize expenses and debt to preserve capital for investment in hard assets like commercial real estate and income-producing businesses that offer cash flow and appreciation. Cash flow can be reinvested to build wealth exponentially.
- They Avoid Losses. These investors would rather avoid losses than have to recover from them because they know it takes gaining a greater percentage than you lost to dig yourself out of a hole because losses leave you less to work with. For example, a 25% drop in a portfolio would require a 33% gain to get back to where you started.
Just because they avoid losses doesn’t mean they’re unwilling to take risks. It just means they’re more calculated about the risks they’re willing to take. They prefer the types of risks that can be mitigated through skilled management. Passive investments in real estate and private businesses are conducive to risk mitigation through experienced and skilled managers.
- They Recession-Proof And Inflation-Proof Their Investments. Smart investors preserve their portfolios during recession and inflation by investing in assets that don’t suffer demand during these downtimes. These assets are always in demand with prices and rents that keep pace with or exceed inflation. Essential goods like shelter, food, and fuel are examples of these assets.
- They Invest For Future Generations. Taking a page out of university endowments that invest for both present and future generations, smart investors turn to assets that will generate enough income to provide for current needs while leaving enough for reinvestment for use by future generations. Smart investors have long relied on commercial real estate to meet this objective.
- They Protect Their Wealth From The Tax Man. Does it matter to the bottom line whether an extra dollar comes from additional revenue or whether it comes from savings on expenses? It doesn’t matter to smart investors; investing in assets that offer multiple tax benefits like tax deductions, reductions, and avoidance is an efficient way to build wealth more quickly.
As smart investors earn more money, their investing motives change along with their portfolio allocations.
They no longer embrace the recklessness of their youth. Instead, they’re looking to protect and grow what they earn, avoid losses, insulate themselves and their portfolios from the next recession and inflation, invest with an eye on future generations, and take advantage of tax benefits.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.