Grow Your Assets
Step 3 of the Jurnex Process
Why playing defense isn’t enough to secure your nest egg
|Written by Tom Yeung, CFA | CDFA|
Investment Advisor & Fund Manager, Jurnex Financial Advisors
Everyone knows to save for retirement. But often, even affluent individuals and families aren’t convinced they’re on the right track. That’s because most financial advice focuses on playing defense with savings. But when it comes to investing, a good offense is a FAR better choice. These days, maintaining your savings isn’t good enough; you need to grow your assets too.
That’s because investing too defensively causes people to miss out on investment returns — people who do this run the risk of outliving their savings, also known as longevity risk.
It’s so important to grow your assets that we make it Step 3 of Jurnex’s investment process: how to grow your assets safely and responsibly.
What does it mean to grow your assets?
Growing your assets means using your savings to buy profit-producing investments, which can include stocks, bonds, real estate, and funds, among others. You can later sell these investments for profit or hold them for income.
How does this differ from conventional thinking?
People are often so focused on AVOIDING investment mistakes that they forget to look for investment opportunities. Some will get tempted to park assets in low-yielding, “safe” investments. Others will put 100% of their nest egg into ETFs or target-date funds. Some issues with these two approaches include:
- Lower growth. Slower accumulation of wealth.
- Longevity risk. Risk of outliving your savings in retirement.
- Risk management. “Safe” low-yielding investments often don’t protect from periods of high inflation.
- “Diworsification”. ETFs buy high-quality and dud companies alike, diluting returns.
- Concentration. ETFs concentrate in large-cap US companies.
Instead, grow your assets
A growth mindset means you’re looking to grow your assets by identifying great investments and then buying them with conviction.
You can always buy some ETFs and low-risk investments. But you should always be on the lookout for other growth and risk-management investments, such as real estate, small-cap stocks, international equities, and insurance products.
How does investing differ from speculation?
If you want to grow your assets while controlling risk, you’ll want to focus on investing rather than speculating.
- Investing. Generally longer-term purchases of profit-generating securities.
- Speculation. Shorter-term purchases (often non-producing assets) to sell for a higher price.
The difference is whether the asset generates riches ABOVE its cost of capital. Assets that create real profit can reward investors with dividends and gains. Assets that don’t produce will eventually need a “greater fool” to come and buy the asset for a higher price.
If you’re unsure if you’re investing or speculating, I tell clients to consider the Rip Van Winkle test. If you buy an asset and fall asleep for 20 years, would you worry about the price? Or could you sleep soundly, knowing that you purchased a profit-generating asset?
Four key reasons to grow your assets
When it comes to investing, why should you play offense rather than defense?
1. You want your money to work for you
You might work 8-12 hours a day at your day job. But what about all the dollars you’re earning? Are THEY doing work too?
Most professionals spend decades of their life earning a salary, but don’t think twice about putting their money to work. It’s like peddling a bicycle – the bike eventually comes to a halt when you stop working.
But imagine your dollars acting as miniature workers on your behalf. A nest egg of $5 million could quickly grow at 7.5% per year. That’s $375,000 per year. Here, it’s YOUR MONEY doing the work, rather than you doing it. It’s like riding a bike down a hill.
And the more you invest, the faster the growth will become, thanks to the power of compound interest. Interest earned will make future interest earnings even more significant, and so on.
2. You want to fund specific goals
People often invest their nest egg too defensively because they’re hyper-focused on the object of “never lose money.”
But that’s not a very useful goal.
Instead, people with clear life goals often make the best investors. That’s because with explicit goals in mind, not only will you have the motivation to save more and learn how to invest. You will also understand which investments will help you achieve those goals.
- Taxes. Some goals, such as college education and real estate, can use particular tax-advantaged accounts such as 529 college savings plans and Self-Directed IRAS (SDIRAs) respectively, to eliminate capital gains and dividend taxes.
- Time Horizon. Other goals such as retirement and charitable giving have longer horizons, which gives you greater flexibility for making less-liquid but higher-returning investments.
3. You want to manage risk.
Growing your nest egg doesn’t mean flat-out aggressive investing. Instead, it means taking a 360-degree view of your life, and understanding which calculated risks you can afford to take.
Managing risk often produces unintuitive outcomes. For example, let’s compare a startup entrepreneur to a tenured college professor. (We’ll, assume they’re the same age and share similar characteristics.)
- High career risk → lower risk tolerance. Since a startup entrepreneur’s income can fluctuate, the entrepreneur would invest more conservatively. If their startup doesn’t succeed, they want a dependable cushion to fall back on.
- Low career risk → higher risk tolerance. Because a tenured professor’s income is relatively stable, he or she can invest far more aggressively since investment losses can be made up over time. They might even want to invest in the entrepreneur’s startup!
4. You want to have a great retirement.
Even the wealthy worry about retirement. A study by Personal Capital found the number one concern among affluent and high-net-worth families is the fear of running out of money.
That’s because no one knows how much their retirement will cost. Around one-third of people living to age 65 live beyond age 90, meaning they’ll need extra savings. And long-term diseases such as Alzheimer’s or certain cancers can cost hundreds of thousands of dollars out-of-pocket.
Fortunately, by learning how to invest and grow your assets, you can close this risk. Insurance products, such as indexed annuities, can help mitigate longevity risk. And having a handful of high-quality income-producing investments such as real estate or particular stocks can even add a growth aspect to your retirement portfolio.
How to grow your assets?
Now that we’ve covered the importance of investing, let’s look at the five lessons that will help teach you how to invest and grow your assets.
1. Have a master plan and stick to it.
The best investors all have two things in common: drive and dedication. Not only do you need the right plan. You also have to know how to stick with it when the going gets tough.
Of course, you have to be flexible enough to change directions when things aren’t working. Knowing when to change your mind takes experience and skill.
What a master plan should consider:
- Time-frame. The longer your time horizon, the longer-duration your investments can be. The US stock market, for example, lost -36.6% in 2008 but gained 30.2% in 2013. But the S&P500 has never had a negative 20-year return.
- Risk tolerance. How do you view risk? For example, if you lost 20% of your nest egg one year and then gained it back the next, would you be comfortable? What would cause you to sell your investments?
- Requirements. What goals are you trying to achieve? Do you have any types of investments you want to avoid?
2. Choose the right tax-advantaged accounts
US investments are subject to double-taxation: once at the corporate tax level, and a second time at the dividend level. The IRS also taxes investors on any capital gains.
Why do taxes seem so high? That’s because the US government needs funding.
US Government spending-to-GDP jumped to 41% during the great recession before declining to 35% in 2019.
By choosing the right tax-advantaged accounts, you can reduce your tax bill by $100,000’s over a lifetime. These are perfectly legal entities allowed by the IRS to encourage tax-free savings.
- 401(k). An employer-sponsored retirement plan that eliminates capital gains and dividend taxes while deferring income taxes.
- IRA. Individual retirement plans that act similarly to 401(k) plans
- Self-Directed IRA (SDRIAs). SDRIAs allow for tax-free investing in non-exchange-traded assets, such as real estate, tax liens, commodities, and gold.
- Life Insurance. They are commonly used by high net worth families to avoid triggering estate taxes.
- College 529 Savings Plans. Flexible savings plans allow changing the beneficiary to siblings and grandchildren as needed.
3. Choose the right investment brokers
Brokerage firms come in many shapes and forms. Some focus on day-trading, while others on longer-term investments. Choosing the right one can be vital to your investing success.
- Low-cost online brokerages. An excellent option for those who are comfortable investing by themselves and want to save on costs. Read my review of the top-4 brokers.
- Robo-advisors. A DIY option for those looking for financial advice and have relatively straightforward investment questions.
- Financial advisors. Because growing your nest egg is so essential, consulting an investment pro is often the best choice for people investing for the long-term.
To learn more, you can read my article on How to choose the right financial advisor
4. Choose the right investments that control for risk
Anyone learning how to invest will quickly learn this: the quality of a portfolio is no more than the quality of its parts.
Just like a failing soccer team, buying hundreds of subpar stocks will still leave you with a lousy portfolio. Instead, you want the Dream Team on your side. That’s because picking out a handful of great investments can make a fantastic portfolio.
What about diversification?
Diversification happens far faster than most people think. According to research from Dresdner Kleinwort, buying shares in just 8 to 12 high-quality companies gives 90% of the diversification from buying shares in 100 companies.
It’s better to have 10 great stocks than 100 lousy ones.
Warren Buffet’s 20 ticket punch card
If you’re tempted to buy a sub-par investment, remember Warren Buffet’s advice:
“Improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches — representing all the investments that you got to make in a lifetime.” – Warren Buffett
Under these rules, you would think very carefully about what you buy. You would also load up on these investments when the opportunity arises, allowing great investments to make an even bigger impact.
5. Look for alternative investments too.
There’s a temptation to follow the herd into stocks, bonds, and funds. But as you learn how to invest for yourself, you’ll start to find investments in unexpected places.
- Real estate. Because US mortgages are unusually cheap thanks to government subsidies, multi-family units can provide above-average returns for a lower investment.
- Granny flats / rentals. If you already own an investment property, you could subdivide the property, earning more income. Even better, check with local laws about building an additional unit on your land, also known as ADUs (accessory dwelling units)
- Private businesses. Accredited investors are those earning more than $200,000 per year or with over $1 million of net worth. Reaching this status opens significant possibilities of alternative investments in private equity, venture capital, hedge funds, and real estate syndications.
Alternative investments can open up possibilities above and beyond regular ETF and fund investing.
If this seems like a lot of information, don’t worry. The great news is that help is available. That’s because here at Jurnex, we work with individuals and families just like you to make the most out of investing. I’ve helped invest client money for over a decade in the same old-fashioned way. And that’s to seek out great companies in great industries that can you can buy at a discount to their fair value. Sounds too simple to be true? Give me a call today, and I’ll show you that it’s still possible after all these years.
We are an independent registered investment advisor and asset manager. We have the securities backing of Charles Schwab, yet we retain our operational independence from any third party. This means you can have the confidence your money is safe with one of America’s best brokerages and still receive knowledge and advice from an independent firm focused on YOU.
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