Albert Einstein was once giving an exam paper to his graduating class. It turned out that it was the same exam paper he had given them the previous year. His teaching assistant, alarmed at what he saw and thinking it to be the result of the professor’s absentmindedness, alerted Einstein.
“Excuse me, sir,” said the shy assistant, unsure how to tell the great man about his blunder. “Yes?” said Einstein. “Um, it’s about the test you just handed out.” Einstein waited patiently. “I’m not sure if you realize it, but this is the same test you gave last year. It’s identical.” Einstein paused for a moment, then said, “Yes, it is the same test, but the answers have changed.” Allan Dib, “The 1-Page Marketing Plan: Get New Customers, Make More Money, And Stand out From The Crowd.”
Just as the answers in science and physics change as discoveries and advances are made, so too do the answers in investing. History may repeat itself, but the world of money evolves.
Just since the beginning of the pandemic, there have been dynamic shakeups and upheavals in the economy and the world of investing. Even as things were looking up as we experienced a robust exit from the pandemic, now things are more shaky and uncertain – with the economy entering a new phase of contraction in general and with particular sectors more impacted than others.
Stimulus money is coming home to roost in the form of inflation. The Fed has responded by pumping up interest rates to slow consumer spending and putting the brakes on rising prices.
Reading the writing on the wall, Walmart – a traditional bellwether of the economy – recently made headlines by laying off corporate employees. The layoffs came a week after the company slashed its profit outlook and warned that consumers had pulled back on discretionary spending due to inflation. Melissa Repko, “Walmart Lays Off Corporate Employees After Slashing Forecast.” cnbc.com (Aug. 3, 2022)
Walmart has read the writing on the wall. Have you? How will you respond to upcoming tests on your portfolio? Will you still rely on the answers impressed on you from an early age by Wall Street, Corporate America, your family, your friends, society, and social media?
The ultimate test question is how to create and maintain wealth even in the face of volatility, uncertainty, and upheaval. Tradition has been forcing answers on you that don’t work. The age-old answers don’t cut it. The answers crumble in the face of real challenges.
Here are the answers Wall Street has been feeding the public that has also been failing portfolios:
- The traditional 60/40 portfolio (60% stocks/40% bonds) still works for growing and insulating wealth. The idea is that when stocks falter, the returns on bonds will pick up the slack. This may have worked in the ’80s with bond rates at 10%+., but with 10-year treasuries currently yielding less than 3%, this portfolio no longer works.
- You can save your way to wealth. Whether you’re stashing cash away into high-yield savings accounts, money market accounts, CDs, treasuries, or 401(k) ‘s and IRA’s, chances are you’re not doing much better than hiding your money under the mattress. Inflation is swallowing up the fixed-income options, and the management fees are swallowing up 401(k) and IRA gains. Nobody ever retires early or gains financial independence from any of these options. All these options ensure you’ll have a nest egg that’s been eroded by inflation you can dig into when you’re 70.
- You can buy & hold your way to wealth. You can’t compound wealth with a buy and hold strategy, and stocks won’t replace your income if you lose your job or experience a reduction in income. Also, what if the market is down in the year you want to retire? In 2008, during the Financial Crisis, a buy & hold strategy would have left you about 50% poorer due to the stock market crash.
- You can time the markets to wealth. Speculative investors are constantly looking to hit a home run by trying to outsmart the market. The truth is that nobody outsmarts the market consistently. When taking into account inflation, the average investor loses money on an annual basis.
- Financial advisors and brokers are the keys to wealth. The only ones getting rich from financial advice are the ones giving the advice and handling your trades. Between their fees and commissions, investors taking the advice of these professionals ensure that they stay firmly entrenched in the middle class. Nobody has ever gotten wealthy from following professional advice – especially where it has been firmly established that over 90% of investment professionals fail to beat the market.
- Following the crowd is a safe bet. Following the herd is not a safe bet. Just because everyone is buzzing about something on the internet or social media doesn’t mean Just because everyone else is doing it doesn’t mean it’s sound investing. Following the herd typically means going over the cliff with the herd. Witness what happened during the dot-com bust and the Financial Crisis.
The old answers to the question of wealth don’t cut it. They may have never been right. You were just told they were right. It’s not Wall Street that holds the answer key to the wealth test; it’s the ultra-high-net-worth individuals (UHNWIs) who have already passed the test.
If you want a cheat sheet for wealth, it’s the UHNWIs who hold the answer key, and this is what it looks like:
- Target assets that generate a passive income that can compound to generate multiple streams of income that can compensate for any income loss.
- Target private alternative assets that are illiquid and tied up for long periods to insulate them from herd behavior and Wall Street volatility.
- Target assets that are always in demand – in good times and bad. Assets tied to essential goods and services (i.e., housing, food, and energy) are ideal for buffering against inflation and downturns.
- Leverage expertise. Leverage the expertise of others to generate an income passively – freeing you from the steep learning curve of learning certain strategies and markets yourself.
- Avoid bad debt. Consumer debt that drains capital is detrimental to building wealth, while good debt that can be leveraged to grow capital is a wise use of debt.
- Focus on tax benefits. Investments offering significant tax benefits such as passive investments structured as partnerships that invest in income-producing businesses or real assets can significantly enhance and accelerate wealth.
For savvy investors, the answers have never changed. For investors who were used to all the auto-generated answers in the past that failed their portfolios, maybe it’s time to change your answer to the question of achieving financial freedom.
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.
