Keep Me Rich, Don’t Get Me Rich!
A Necessary Mindset Shift
Retirees often have to shift their mindset from “getting rich” to “keeping rich,” which means swapping higher-risk growth-style investing into reallocating to more stable and lower-volatility assets. This involves more defensive risk management and acceptance of a more disciplined wealth preservation process — often resulting in more humble returns, but also lower drawdowns and volatility. And it’s more sleep-enabling.
This can be hard after ~30 years of a more pro-growth mentality — especially if the retiree made the majority of their money from owning and managing their own business. In my experience, these entrepreneurs often believe they understand business so well, they can do their own public market investing. The “DIY” type, however, often fails.
Why the DIY Approach Fails
The failure has little to do with their business knowledge. It’s more related to misunderstanding that their expertise is in one idiosyncratic firm, while investing is more about the portfolio characteristics and risks of an aggregation of firms.
- Operational simplicity
- A single governing body, rather than committees
- Lower administrative costs
- Usually consolidated risks
- Multiple entities create risk silos
- Compartmentalized operations, assets, and liabilities
- Separate operations and products
- Correlated earnings across public companies that do business together
This makes managing a portfolio of stocks quite different than managing one company.
A Lesson from Physics
There is a branch of physics called “statistical mechanics” which attempts to explain how the microscopic behavior of individual atoms or particles creates the macroscopic properties of the bulk. A helium atom behaves very differently from the collection of He in a balloon, for example. How does one get from “1 to many”? How do the details of one particle translate to bulk attributes? What physical characteristics change along the transition?
In human behavior we have differences between an individual and a group — autonomy vs. collective interdependence, self-direction vs. coordination, mutual alliance and groupthink or herding. The individual has internal motives, personal merit and initiative relied on to make a decision, while evaluation of a group looks at collective patterns, cultural frameworks and shared objectives — not to forget social pressures involved in the decision-making.
Moreover, individual expertise and experience aggregated on a problem is believed to be, and has shown, the collective decision is usually better than any one “expert.”
That’s why diversification of assets is usually the lower-risk alternative to investing vs. a single or few stocks. But also, why doing so involves focusing on portfolio-level characteristics, while not ignoring some idiosyncratic firm-level data.
The Illusion of Diversification
The active management industry since Ben Graham’s day (1930s) has grown up with a strict discipline of focusing on individual firm financials. That is well and good for selecting a candidate firm’s stock to put in an investment portfolio, but it fails to account for the correlation of risks.
Though stock correlation is dynamic and moves around some, modern methods taking advantage of it do exist, and when applied properly result in greater diversification, lower firm-specific risk, lower drawdowns, and higher return-to-risk ratios. All the necessary ingredients to “Keep You Rich.”
The BlueFire Approach
BlueFire’s methodology aims to offer higher preservation of capital through time than your standard large-cap equity fund, while still offering exposure to the great firms at the edge of the dynamic U.S. economy. While there are never guarantees our objectives will be met, the process applied consistently through time is risk-reducing vs. standard index investing.
Investments involve risk and, unless otherwise stated, are not guaranteed. Information provided is for educational purposes only. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.