How to Underwrite a Meaningful Life (Part 2)
The overall focus of the book is how to use your wealth to underwrite a meaningful life. In my last post I wrote about aligning your spending with your values and spending in a way that improves satisfaction and happiness.
Today's post will focus more on the process of financial planning. Financial planning is really about getting your money life in order. Once the basics of planning are covered, then it’s time to make good investment decisions. To grow and stay wealthy, Portnoy recommends these steps in this order:
· Protect: think about risks first
· Match: keep resources in balance
· Reach: aspire for more
Let’s start with the “protect” phase. Most people experience the pain of losses more than the pleasure of gains. It’s what modern behaviorists refer to as “loss aversion”. You can read more about loss aversion here. Many of us are held back by the disproportionate impact of losses. As Portnoy says, we are “both aspirational and scared, greedy and fearful. We like risk, we just don’t like losses”. Managing this balance between risk seeking and risk aversion is something a good financial planner can help you with, and it’s a hugely important step.
To grow your money, you do have to put your funds at risk. The thing is, taking more risk does not guarantee better returns. Taking more risk increases the variability of future outcomes. On average, those future outcomes are higher when you take more risk, but there’s certainly no guarantee of that! To achieve optimal outcomes, it’s best to control risk but not avoid it altogether. Controlling risk requires making sure you are properly insured, taking appropriate risk in your investments, and limiting debt.
The protect stage is challenging because the “reward” for getting things right (controlling risk) is not something you can see. Still, failing to properly manage risk makes it hard to build real wealth. Life’s inevitable and unpredictable “wrenches” often derail plans that aren’t properly protected.
By "match", he means aligning your goals and your investments. This stage is the fun part of financial planning — defining goals and striving to achieve those goals. Portnoy has important advice here: “if you’re making investments outside a well-articulated plan—meaning that some or all investments are not explicitly matched to defined objectives—then you’re speculating, not investing”. If you are just investing and savings for a vague notion of “the future”, you don’t know what kind of risk you can or should take to get there, nor are you very inspired since the goal is nebulous.
You should start by getting a clear understanding of your net worth (what you own minus what you owe), then go from there. Most people never take this first step! Once you've got your net worth, be sure to update it every year or so to track your high level progress. Even if you aren't where you want to be yet, it's good to know where you are starting.
Once you've got your starting point, it’s time to define your goals. It's hard to be precise at this point, but that's ok! Don’t let the perfect be the enemy of the good. Some goals will be very time specific (your child starts college in 9 years or you want to buy a house in 3 years), and some will be less time specific (retirement).
Here's where the "matching" comes in to play. You'll want to match your investments with your goals and timelines. The most basic rule to remember is that the nearer the goal, the less risk you should take. If you don't need to touch the funds for 10 or more years, you can most likely ride out the ups and downs of the market. If you need the funds in 1-2 years, you don't have the luxury of time on your side. If the markets fall 20% between now and when you need the money, you may be forced to sell at exactly the wrong time in the market (locking in your losses).
The final stage is what Portnoy calls “Reach”. Reach is almost like self-actualization in Maslow's Hierarchy of Needs. If you’ve gotten to this stage, you’ve already effectively “made it”. You've taken steps to protect your assets, matched your assets to your goals and obligations, and are adapting along the way. Hopefully you have aligned your spending with your goals and values and created a purposeful life. Very few will ever get here! You’ve funded a life of meaning! If you want to go further, the next stage will look very different for everyone. Maybe you want to travel the world, fund your grandchildren’s college educations or support a charitable cause in a meaningful way.
A critical part of growing and staying wealthy is expressing gratitude. Instead of always wanting more, be happy with where you are. Avoid thinking “if only I accumulate X, I’ll be happy.” There's a difference between rich and wealthy. If you can calibrate your own sense of happiness with the assets to support it, that's true wealth.
If you want to learn more about the ideas discussed in this post, consider reading "The Geometry of Wealth" by Brian Portnoy. Also check out my first blog post on the topic to learn more about using your wealth to underwrite a meaningful life. And if you are ready to start underwriting your own life of meaning, please contact me to schedule a free 30 minute consultation that will put you on the right track.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Alyssa Lum, and all rights are reserved. Read the full Disclaimer.