Let's look at some investment strategies for retirement baed on modern portfolio theory. As a retiree, you are focused more on capital preservation since you can't or don't want to go back to work.
After publishing my post, The Best Asset Allocation Of Stocks And Bonds By Age, I decided to do a comparison of what I recommend versus what digital wealth managers like Empower recommend.
Not only has Empower developed a great free app for managing your net worth that most of you already use, it also manages over $10 billion in client assets.
For those who don't know, from 2013-2015 I consulted for them in their marketing department and still meet up once a quarter since they're in San Francisco. Thus, I'm very familiar with Personal Capital's people and product. Personal Capital was ultimately purchased by Empower, right before the pandemic, to increase its offering.
Suggestion: In addition to building wealth through stocks, also invest in real estate. Real estate provides the powerful one-two punch of principal appreciation and rental income growth over time Fundrise manages over $3 billion in private real estate investments, mainly in the Sunbelt region where valuations are lower and yields tend to be higher. With the Fed embarking on a multi-year interest rate cut cycle, there should be increased demand in real estate in the coming years. I've personally invested over $270,000 with Fundrise.
Its board of advisors include:
Harry Markowitz, recipient of the 1990 Nobel Memorial Prize in Economic Sciences. He pioneered work in portfolio construction and is known as the “Father of Modern Portfolio Theory.” Markowitz received his Ph.D. from the University of Chicago and is currently a professor of finance at the Rady School of Management, University of California, San Diego. His Modern Portfolio Theory is central to the design of Personal Capital's portfolios.
Shlomo Benartzi, a renowned behavioral economist. He received his Ph.D. from Cornell University, and is currently a professor and co-chair of the Behavioral Decision-Making Group at UCLA's Anderson School of Management.
Together they advise a team of portfolio management professionals and have created several long-term investment strategies. But first, let's have a brief overview of Modern Portfolio Theory.
Investment Strategies Based On Modern Portfolio Theory
The efficient frontier is a concept in modern portfolio theory introduced by Harry Markowitz and others in 1952. If there are two portfolios that offer the same expected return, investors will prefer the less risky one. If the price is the same, wouldn't you buy the exact same house with panoramic ocean views over the one with a view of another building? Of course you would.
In Modern Portfolio Theory, everything is RATIONAL, which is why I'm such a big fan. Everybody here wants to improve their personal finances, which is why none of you are on Buzzfeed killing brain cells. Nobody here thinks they'll have guaranteed employment for life, which is why you are building as many income streams as possible.
Lots Of Irrational Investors Out There
Unfortunately, there are a lot of irrational people out there who believe you can get ahead without putting in the effort. I've even met some C students who think they deserve A lifestyles. No wonder credit cards are such big business. They allow consumers to realize their delusions.
According to the Efficient Frontier chart below, optimum portfolios track the hyperbola. Portfolio mixes under the hyperbola are inferior because they either offer the same return with more risk, or they offer less return for the same risk. Portfolios above the hyperbola don't exist because unicorns don't exist. The markets will arbitrage everything away.
Remember, you don't have to be a great investor to make a lot of money. You just need to be a good-enough investor who also has an investment thesis to help them stay invested.
Now that we have some understanding about the basics of Modern Portfolio Theory, let's look at Conservative, Moderate, and Aggressive investment strategies recommended by Personal Capital under the guidance of Harry Markowitz himself.
Investment Strategies For Your Retirement Portfolio
Conservative Investment Strategy
For those who are already financially independent or soon will be, this conservative investment strategy is my favorite. It allows you to sleep well at night and let you focus on life instead of your portfolio.
People following this strategy are usually around 60, but if you've already achieved financial independence at a younger age, consider following this asset allocation. Note 48% of the investment portfolio is in bonds and 2% is in cash to take advantage of any opportunities.
In the past, we've discussed how large endowments and very wealthy individuals invest a heavy portion of their portfolio in Alternatives (50%+) to provide diversification and hopefully higher returns due to inefficient private markets.
The 10% Alternatives weighting is a common weighting private wealth advisors recommend for high net worth clients. Thus, the question to ask is: what kinds of alternatives is one investing in. The answer is usually private equity, hedge funds, venture capital, and real estate.
The blended average weighting of all my public investment portfolios (Rollover IRA, Solo 401k, SEP-IRA, After-Tax Accounts) has a fixed income weighting of 40% – 50%.
All I'm shooting for is a 4-5% return, or 3X the risk-free rate. I'm looking to preserve capital that took 20 years to build and not worry about my investments as much. Instead I'm focused on actively building new active income via entrepreneurial activities.
Moderate Investment Strategy
With a 25% bond weighting, this moderate investment strategy is created for people who are still aggressively trying to save and build capital, but want less volatility due to growing financial responsibilities e.g. mortgage, wedding, spouse, kids, overpriced car, parents, etc. This portfolio is designed for people who are typically between 30 – 50 and plan to work a day job into their 60s.
The assumption behind holding international stocks is that there may be more opportunities for growth and therefore profit compared to domestic stocks. For example, China's annual GDP is supposedly growing anywhere between 6% – 8% compared to just 1% – 3% for US.
But sometimes you lose, like when the London FTSE 250 declined by 12% versus just 3% for the S&P 500 after Brexit. If valuations are reasonable, allocating roughly 20% of your portfolio into international index funds and stocks may be a good idea.
Remember, what is considered international to us is considered domestic to others. For example, for a moment pretend you're a Canadian investor. Your portfolio probably consists mainly of Canadian equities and perhaps small international investments in the US, Asia, and Europe.
In other words, we tend to invest in the places we know best. Never invest in what you comfortably don't understand. This is called home country bias investing.
Aggressive Investment Strategy
This investment strategy is what most investors in their 20s and early 30s pursue. Returns are strongest in a bull market and terrible in a bear market. Yes, bear markets do happen as we saw most recently from 2000 – 2002 and 2007 – 2009.
While my asset allocation chart has a 100% equities allocation up to age 30, I'm nervous for anyone whose net worth is made up entirely of their public investment portfolio.
Having a 3% allocation in bonds and 0.5% allocation in cash doesn't provide much protection against declines. Nor does it produce much income. Thus, if you want to be aggressive, you might as well go all-in 100% equities. I would consider the 3% bonds weighting as part of a 3.5% cash allocation for equity buying opportunities.
For those who follow this Aggressive Investment Strategy please do not confuse brains with a bull market, especially if you're 35 years old or under. It's very hard to know your true risk tolerance when you haven't lost much money on an absolute level or large percentage basis (30%+).
Come up with a better dollar cost averaging strategy and continue to actively grow new income streams.
Your Investment Portfolio Should NOT Equal Your Total Net Worth
When pure digital wealth managers or financial advisors with incomplete information give you investment recommendations they often do so based on the mistaken assumption that your investment portfolio with them equals your entire net worth. For most people, this is clearly not the case.
For example, public investments in stocks and bonds make up roughly 25% of my net worth. ~38% of my net worth is comprised of physical real estate and private real estate investments. Another ~12% of my net worth is made up of risk-free assets such as CDs.
Finally, the remaining 25% of my net worth is my online business. My net worth is diverse because like most people, I have diverse interests. Life is not just about making money to invest in stocks and bonds!
Net Worth Composition Is Conservative
If I had 50% of my net worth already in CDs and money markets because I plan to upgrade houses within the next three years, then an advisor recommending any cash weighting in my investment portfolio may be suboptimal.
If an advisor doesn't realize you have 70% of your net worth tied up in speculative real estate projects, perhaps following an Aggressive Investment Strategy of 90% equities is the wrong move.
Without knowing your entire net worth makeup, it's difficult for pure digital wealth managers to make the most appropriate investment strategies. If you don't want to be completely forthright with your financial advisor about your overall wealth, then it's up to you to first analyze your own net worth and then accept or disagree with their recommendations.
The good thing about Empower is that it is a hybrid advisor with technology to leverage and people to talk to about your financial situation. The bad thing about Empower is it charges more than its 100% purely digital competitors to manage your money because financial advisors cost money.
Luckily for all of us, they have free wealth management tools for everyone to use whether you are a client or not.
Whomever you decide to invest your money through, make sure they know your entire net worth composition. Bare all! If you decide to invest all the money by yourself, be sure to consider your entire net worth when allocating weightings.
Differences With My Asset Allocation Weightings
There is no one size fits all investment strategy recommendation. Everybody has different financial goals and liquidity needs. Further, within the overall split between stocks and beyonds there are obviously many different types of stocks and bonds to choose from.
My asset allocation recommendation is based on Harry Markowitz's modern portfolio theory, but has some key differences.
1) New normal.
I take into consideration the new normal of highly interconnected markets, more volatility, lower inflation, and lower interest rates. Further, markets are now highly efficient thanks to technology, thereby limiting successful arbitrage opportunities.
In other words, the returns of the past will be harder to replicate today. Yet with massive corrections every 5-10 years, risk seems to have stayed the same or increased.
Remember, Markowitz came out with his Modern Portfolio Theory over 60 years ago. The people still sticking with a 4% safe withdrawal rate in retirement are not changing with the times.
2) We are living longer.
In 1952, life expectancy was about 60 in America and 65 in Europe. Someone born today expects to live past 80. Longer lives mean more risk necessary to generate higher returns. A 50-year retirement could be a reality for millions of people born today!
At the same time, however, longer lives mean that if you take on too much risk, there's a greater chance for you to be screwed unless you jump off a bridge. Given its better to be safe, than broke, my asset allocation recommendation is more conservative once you've reached your financial nut.
3) More opportunities to earn money.
In the past, once you were retired, to survive you relied on Social Security, savings, investment income, and maybe a pension. Today, it's possible to retire by age 40, live off your multiple income streams, and do some consulting or gig economy work to make up for any financial shortfalls.
The Affordable Care Act has given middle income and lower income people more work flexibility to be untethered from a job they dislike because they no longer have to worry about medical bankruptcy with subsidized coverage. It's been 4.5 years since I held a day job and I can unequivocally say there are endless ways to earn money thanks to technology.
When it comes to investing in public markets, it no longer pays as well to take on the same level of risk as before. Look at the 10-year bond yield at ~4.1. Now look at the average annual return of the S&P 500 over the past 15 years versus the previous 15 years. Look at the dearth of IPOs as private companies stay private for longer. So many signals are telling us to be more conservative.
For these three reasons, I recommend everybody build their financial nut as soon as possible and then get as close to a 50/50 stocks/bonds allocation to preserve capital and keep the passive income flowing. You don't have to wait until 65 to get to a 50/50 weighting if you amass your enough money at a younger age.
Stay On The Ball With Your Retirement
Don't view public equities as your retirement savior. View public equities as only one retirement engine out of hopefully four or more.
Your other engines should include real estate, alternatives, Social Security and your own business where you can really make a killing if you get things right. But if all you can manage is investing in stocks and bonds, then so be it. It's still better than just hoarding cash all your life.
To get a free analysis of your investment portfolio(s), link your investment account(s) and then click Investment Checkup under the Advisor Tools tab in the Empower app.
You'll see where your portfolio stands on the Efficient Frontier and how your current allocation matches up with your target allocation recommendation.
The next 10 years likely won't be as good as the previous 10 years. Track your finances like a hawk!
Invest In Private Growth Companies
Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out Fundrise Venture, which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 65% of Fundrise Venture is in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. You can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
Fundrise is a long-time sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.
Hi Sam, I am considering signing up for personal capital service in which they would manage all of my money. My concerns are:
1. Is the fees worth it?
2. They are recommend stocks and I am not sure about that?
I am currently invested in mutual funds with a 60% bond and 40% stock allocation. They claim that I need to be at 50/50% and get me better returns and lower standard deviation.
Any guidance please.
Thanks!
Sam,
Where is gold, silver, and commodities in general, in your asset classification mix? Are commodities intended to be part of “alternatives”? And do you personally own gold or silver? What is position on them? I know they don’t provide any interest or dividend return, only potential appreciation return… but I see them more as a hedge against erosion of the US dollar or an insurance policy. With 4.5 trillion in QE printed since the financial crisis and 20 trillion in overall debt, this certainly has to have a negative impact at some point.
Dang, so much to think about here. Not going to lie, haven’t though seriously about investments until three years ago. I was too busy traveling the world (no regrets, still have about $150k net worth). Right now it’s freelancing, blogging, getting back into teaching (I have to get my paperwork since I moved to the US from Canada) and looking at real estate (I have $20k to invest).
I hope you don’t take this the wrong way, but your blog is a black hole. I’ve already spent an hour on here and there is no sign of me getting out, ha!
I retired in 2010 and I’m now 63. Live in the Central Coast of California, home mortgage less than 900 a month. Been an aggressive investor all my life, have enough income (about 90k) inflation adjusted to meet all living expenses along with travel money. I take about 1% ($12k) from my portfolio a year (less than the dividend yield) for fun money. I’m 100% invested in equities for my retirement portfolio and have significant cash (short term TIPS fund) for any emergencies. Is there any reason I should be more conservative? I project that I will continue withdrawing 12k a year until RMDs start.
Cool..which stocks you are long on for the next few years?
Netflix has been a 10 bagger in 4 short years! Same with Tesla but it’s fading right now.
I’ve got $ in Facebook and Amazon which both have been 4x too, but I got in late.
Funny how the US market seemed to surge after Trump got elected. people were expecting things to tank…but it’s been the bond market that’s been crushed.
You’re playing it smart, with only 5% of your portfolio even if you lose it all it won’t make a dent.
Knowing when to sell is half the battle. Apple’s been on a roller coaster ride with big ups and downs, people lost alot when it crashed almost 50% a few yrs back.
hey Sam, do you invest in individual stocks still or mainly indexes? With your net worth and risk tolerance now you probably aren’t looking for 10 baggers like when you were in your early 20’s!
Hi Joe,
I do with about 5% of my investable assets. I like to hunt for unicorns, because a unicorn is what helped boost my net worth early on to parlay the proceeds into SF property.
I’ve also built a Motif portfolio of about 23 individual positions as well. It’s outperforming the market, but nothing spectacular.
Sam
Great post, it was very interesting to read. Could you explain what cash represents in the various portfolio strategies? Is it cash waiting to be invested or more like a cash cushion to be used for personal expenses in unexpected situations?
Hi Samurai,
This article was great. I am 36 I own a home with my fiancé we have about $100k in equity there, I have $20k cash for an emergency fund. My investment portfolio is $100k with 82% us stocks, 12% international stocks, bonds only 2%, and the rest alternatives or cash. I know that is aggressive personal capital says I’m one notch too aggressive. So I will slowly invest more in bonds. Also within the us stocks I am working on a dividend portfolio for an income stream just started a year ago. I am currently maxing out my 401k and I have a rental home I’ve had for 10 years it’s not making much just enough to sustain itself hoping that I will see the rewards in the next 5-10 years. My goals this year are to up that emergency fund and start a cd ladder and in the next two years max out my traditional Ira.
I guess I am not getting this about bonds (according to many charts, I should be 30-40% in bonds). Currently, the real return on bonds is negative in real term. Furthermore, these bonds will probably take a big hit when the interest rate starts going up. I think I will take my chance with high quality dividend stocks. Am I missing something fundamental?
Yes. Check out TLT, ETF bond fund. It is up about 20% over the past year versus 5% for the S&P 500.
I’m not sure where you are getting that the real return of bonds is negative.
Can you elaborate and share with us your age and investing experience? Thx!
I will be mid 50’s in a couple of year.
I am looking at US treasury bond yield.
My understanding is that currently, the 10-year treasury yield is around 2%.
Inflation is around 3% a year (it feels much higher personally), so doesn’t this come out to be negative 1% in real return?
I have some CA tax-exempt mini-bonds and they are also yielding around 2%.
Perhaps, you guys are talking about corporate bonds?
My experience with investing is pretty clueless.
I have been contributing to 401K regularly since around 1989 (with a gap in contribution of one year around 2000). However, my balance last checked was around $800K. (few years ago, I read in some CNN column profiling a guy who was similar to my situation but perhaps a couple of years older and his balance was in 1.2M range). I did a spreadsheet and this comes out to be about 6.1% compound return which is rather pathetic consider that I live through one of the greatest periods of stock market boom.
It seems a lot of these “lazy portfolios” and ray dalio all season portfolio are measuring their past risk reward results based on a multi decade bull market in bonds as yields have dropped so they all have higher bond exposure…..I would be concerned about bond asset class performance in next 10 years if rates ever move bonds can drop exponentially for such small interest rate increase…..what do you think?
What do you think ?
We are at 60/40 and it’s working out great for us! Only fell 1.5% on Brexit day and then came ROARING back as the markets rallied. And today, we just got paid some sweet sweet dividends and I’m doing my “happy dividends day” dance!
Since we’ve only been retired for 1 year, the portfolio is more on the conservative side, but we may want to move to 75/25 as we get more comfortable with it and build a stable side income (we already have some income from coding but it’s not consistent yet).
Totally geeked out over your mention of “Modern Portfolio Theory” and Harry Markowitz. I had no idea he was on the board of advisors for Personal Capital! I wish we had that option here, but Personal Capital is mostly for Americans. I’m not sure what the Canadian version is…I guess Mint? I’m pretty suspicious of Mint as you have to put in your banking passwords, and the banks have a clause that say they are excused from any security hacks if you give your password away to third party tools. Oh well.
I think it’s because I have too much cash allocation. It’s like at 15%. Don’t trust the markets at the current time and looking/waiting for better places to stash the cash.
My spending is OK, runs about $8-9k a month.
I hope Personal Capital is wrong about the 5% chance, because I already left the workforce a few years ago. Haha…
You’re doomed! :) I have 24% cash in the portfolios PC tracks, but they say I’m in “great shape.” Not sure what’s going on behind your kimono.
Personal Capital sent me an email stating
Take Action: You only have a 5% chance of meeting your retirement goals
With an 8 figure portfolio, I find it hard to trust their analysis.
That is hilarious! And it shows the weakness of purely digital wealth advisors. The robots only know what is inputted to come up with their extrapolations. It is up to us to decide whether what they say makes sense or not. I’ve got a new post using myself as a guinea pig to highlight the errors in their output versus my thinking.
But with a 5% chance of meeting your retirement goals, there must be some kind of nugget to take away from that email or retirement planning calculation. Perhaps you are spending way too much per month?
The only way robo advisors can make money is based off of a fee on your assets under management. Therefore, along with the bias of an upward moving stock market, there is incentive for Robo advisers to have a bullish viewpoint and a push towards investors investing more of their cash. The good thing is that Personal Capital has these free tools which allow us to analyze and decide for ourselves what we want to do. we can blindly trust what the computer says. But we can utilize software developed by people who thought of many variables to help us with our finances.
Sam, I think most people would benefit from developing a portfolio of a handful of dividend paying individual stocks, sizing each share count based upon volatility of each stock as it relates to their account size. An easy calculation is (account value X .02)/ (Average True Range of the stock)= share count. What is your opinion on this formula and approach rather than potentially high fee mutual funds offering dividends?
Hi Sam.
I was wondering how you determined
“Finally, the remaining 25% of my net worth is made up of my online business.”
That must be over a million dollar valuation you are giving your website. When you are in a business like yours that has a key employee & founder and isn’t capital intensive, how do you value your future cash flows? I don’t think Financial Samurai would be the same if you quit working or sold the business.
Sure, if your book sales are still strong you might have some cash flow coming from that. If that is the major contributor, then well done! You’d have to really crank out the copies to make it there.
Hi Chris – You can value a business based off a multiple of revenue or operating profits usually. It’s up to you to decide how much you are willing to sell your business for e.g. how much would you sell a business generating $1,000,000 in operating profits a year when it takes $50,000,000 at 2% to generate $1,000,000 a year?
See: Your Income Producing Properties Are Much More Valuable Than You Realize
A net worth figure is nice, but it doesn’t mean much if you don’t plan to sell any of your assets. It’s a vanity metric that can be used to see how diverse you are. Focus on cash flow, building assets, and growing your net worth.
The great thing about having your own website is that it can produce many different income streams. My book sales is just one of over 10 income streams online. Think BIGGER.
Do you have a business you’ve started or are considering evaluating for sale?
Sam
Sam, I spent some time looking at businesses to buy, if you are interested in benchmarks. You can get a good old-fashioned bricks and mortar business for around 2.5 times cash flow plus inventory if applicable. A good e-commerce site might go as high as 4-5 times cash flow. A bricks and mortag business you can finance with an SBA loan, but an online business needs to be all cash!
Could be good, but I will never buy an old-fashioned bricks and mortar business after running an online business. Upside is so much greater online, and the costs are so much less.
Risky to finance a business too, especially when you can launch a website for $5!
I agree. That’s why I ultimately gave up on the idea of buying a business. Bricks and mortar was too capital intensive and e-commerce was too high a multiple.
Decided to go back to global mega-corp and start my side hustle online!
I already have a business. I do contract QA and writing. In general, I love what I do and make good money. But my “business” is worthless. Here’s why:
There are only three ways I can cash out from my business; I could keep working, but any money I get from that is more like wages than cash flow from a business; I can stop working and let any remaining cash flow come in; and I can sell my business. Those are the three main ways any business owner makes money.
But there is a problem with each of these valuation methods for my business and I think for yours as well. The first issue is that continuing to work is like wages, which is hardly something you can value with discounted cash flows. Doing so would be like saying that a college degree is an asset that should be on a balance sheet because it makes your future work worth more.
For the second issue, I know you have some passive income from your book and from click ad revenue. But, I’d be shocked if that all exceeded a million dollars! Without your continuing contribution to your site, I think this cash flow would dry up quickly. I love your site btw.
Finally, the third issue is that no one could replace you without some extensive training and recruitment. Could you really sell your company? If your business was more capital-intensive, then that would be easier to value. If you had impressive networks of employees and extensive intellectual property, then that could also be worth something to a buyer. Ultimately, a buyer you would put a large goodwill adjustment on their accounting sheets, and I don’t think there will be a lot of assets behind that value.
I am a key employee & founder working in a non-capital intensive industry, but I know that my business has negative net worth. If I stopped working today, I have accounts payable that I will need to close up before moving on to the next project and that my intellectual property is probably not enough to cover that charge.
John gave us some great data on e-commerce sites, but Financial Samurai isn’t like a conventional e-commerce site like Amazon.
Chris – These are good points. Have you created a website for someone to actually buy your business? Or is your business your service? A website must be created, b/c that is what can be bought. Build the BRAND, and build the product on the website.
Thanks for saying I’m irreplaceable. But the reality is I know MANY sites that hire ghost writers to replace the voice and brand that has already been established. That’s an easy solution for keeping the business going.
Point 2: Look at big online media companies. They just hire plenty of different writers under the brand. They drive traffic to their website, and have sold their website for big bucks e.g. BusinessInsider. Consumers have been brainwashed into thinking anything written by a big media company is legit b/c they’ve built a BRAND. You can have a 24 yo writing about retirement on Forbes, and it would be taken seriously b/c it is Forbes.
It is VERY easy for me to hire several staff writers and fill up the editorial calendar. I’ve also got endless amounts of inquiries for guest posts. They would write under some Financial Samurai brand guidelines, and I think the posts will do well. Here is a guest post called, Confessions Of A Spoiled Rich Kid that went viral for example. Look at the ridiculous amount of social shares.
See: Is “Fake It Til You Make It” The Reason Why We Are So Screwed?
Point 3: Organic search traffic is 70% of traffic to FS. It’s completely passive. When you can figure out how to generate automatic recurring traffic and recurring revenue, that is a GOLDEN business model.
Always think about Scale, Recurring Revenue, and Branding. I’d love to check out your site/business if you want to share.
Don’t be fixated on just the severance negotiation book as a way for a site like FS to make money. Start a website to leverage 3 billion+ people online.
Do you think people would be interested in an ebook from me about scaling up online and branding? There are tons out there already, but perhaps I can be more insightful.
I don’t have a website yet. I only have two clients right now and they take up 90% of my time. But, I admit that I should be taking your advice and building my website. One thing I’m always wondering about is if I risk pigeonholing myself if I build too strong of a brand. I could have never predicted that I’d land a client in technology; my education and background was far away from the skill set they are usually looking for. But now, it’s the best paying gig I have ever had. But, no, I’m way too small at this point to sell my business. You on the other hand certainly could.
I think the ghost writer idea is good. If you built a quality network of employees, you’d be managing and engineering your business, not just working for yourself. Adding a good workforce (with good labor relations) to your portfolio of intellectual property and the brand would close up a hole in your business plan. Then, if you managed to simplify your own role to the level where you could train an interested buyer, you’d be in a position to sell and could boast about a high business value. You cited some situations where you have progress in this direction, and you have talented editors like your Dad working for you.
Your Forbes point is well taken. You are hardly big media, though. People work hard to be able to slap a brand like “Forbes” or “Trump” on a product and be able to sell it, and then they develop the idea to the point that they can prove it. Maybe you are in a position where you could consider the direction your brand will take. Could you be the next Forbes?
It is great how you have so many organic search traffic. Is your SEO strategy expensive? Regardless, it has been effective. But if you went 5 years without a new post then I think your SEO will be harder and your posts probably depreciate in value over time. Do your posts get fewer clicks over time? If they do, then projecting their cashflows further than a couple of years is risky. Would your sponsors jump ship if they heard you were quitting? Before you sold, you’d have to make sure your sponsor relations were excellent or your couldn’t include them in your FCF projections.
I don’t know if a new book would sell. I think the major critique of your first book was the high price, but I’d need more information & research time. But this highlights two of the critical contributions you make to your business: first, deciding what to write; and then, actually writing it. Now, if you employed an editor that contracted the writing to a ghost writer, that would be impressive. You’d be a publisher! Then, I’d say that your business is worth 3x or 5x or some other multiple of forward looking earnings and that any executive that would buy you out could probably do your job.
I liked Jon’s post. He listed two traditional industries and multipliers for them. I suppose we’d need to look at your competitors to find an industry multiplier for FS, but I’d estimate it’s under 1x right now.
Chris – I know running a business is hard. But I really encourage to focus on an Abundance Mentality instead. It’s OK to put me down to say that I’m not worth more than 1X revenues when other sites my size have sold for 3X+. But that thinking is not going to help you get ahead. I’m already happy with what I have. Focus on bringing yourself UP!
Related: What’s It Like To Be Financially Independent?
Best, Sam
I’m not putting you down, Sam. Like you said before, you are indispensable. I do like your work. Just saying you are overvaluing yourself, a common mistake and a minor one at that.
Best wishes.
Chris, it really is OK. I just don’t understand why if many sites like mine (traffic, history, genre) have sold for and are selling for 3X revenue, why would you think mine would sell for 70% less? There’s no overestimation of the value of my business. I have rejected three offers already for 2 to 4 times annual revenue because I think the multiples are way too cheap given where public companies trade for and how low interest rates are. Would it help if I forward you the offer details to help you believe?
It is much harder to make a sustainable living as a freelancer. You’ve got to always work to make money. But if you develop a platform, you can go to Europe for a month, do nothing and still make a lot of passive income if you establish your brand.
Study the various income streams from the charts in this post. It should give you a better idea.
https://www.financialsamurai.com/blogging-for-a-living-how-much-can-you-really-make-online/
Don’t sell yourself short!
Oh, if you have offers, then that makes sense. That is a very easy way to value cash flows. I wasn’t aware there was an such an active market for sites like this. You do have an impressive collection of intellectual property and very nice demographics, so I totally believe it if you say it. Congrats again on the stellar work.
And you’re totally right about public sector valuations, they are much higher than anything we’ve discussed so far. Maybe both me and your lower offers need to rebenchmark. :-)
Check out Empire Flippers. Lots of activity there as they are a website broker.
44 yo, (wife, 3 kids) no debt (military for college, recent move to arbitrage home price differences, so no mortgage, 529s funded to 75% of instate undergrad cost) and have had an impossible time trying to find an advisor that can comprehend our ‘plan’……we have harvested our ‘nut’. 60% of our net worth is split between TSP G fund (32%) and equities (28%) portion so that the total package of equities / bonds closely resembles your ‘conservative’ portfolio. Our real estate / alternative investment is a large tract of vacant land we bought at a steep discount from a distressed seller. At the low end we will do very well (30% of net worth). At the high end we may double or triple our net worth. We consider this a risky investment. Additionally, we keep 10% cash for ‘other opportunities’ and believe that a more conservative (equity/ bond) portfolio is warranted considering how our net worth is diversified.
In the past, we have met with an advisor every 3-5 years depending on life events for an overall assessment and managed the details on our own. This time around we have tried 3 different advisors (USAA, Personal Capital and a local firm) and all have recommended more aggressive approaches with significantly higher equity percentages. I was beginning to feel we were crazy and way out of line, but your article adds some credence to our plan (confirmation bias?).
The problem we have is two fold. How do you stay calm and stick with a plan that you have rationally chosen? and is it even worth working with an advisor? Of course, there is the very real possibility we are very wrong and the advisors are correct. Or we may be right and we are ready for a long winter. Either way, keep writing! I enjoy your blog immensely and have used your articles as starters for many family chit chats.
Great to hear you’ve leveraged my articles to have family financial discussions! Those are so important and aren’t done enough!
You may enjoy these articles:
https://www.financialsamurai.com/questions-to-ask-think-before-hiring-a-financial-advisor/
https://www.financialsamurai.com/should-your-financial-adviser-be-smarter-and-wealthier-than-you/
Advisors don’t have perfect info, unless you give it to them. They also may not be as experienced as you would like unless you get to the $5M in assets or higher and go with private wealth managers at bigger firms.
Sam
Hey Sam, since many of your readers here are probably ahead of the whole age/allocation curve you put up I think it would be good to make some sort of hybrid chart to help people. Basically your % of desired financial nut achieved vs. allocation (regardless of age). Maybe for example if you are 35 years old but 80% of your way to your goal to be what you considered FI you probably should be closer to the 60/40 split vs. the 80/20 that’s in the chart above. Maybe its a little too complicated way to think about it, but that is just how I think about it. You allude to it in the text but some people just go right to the fancy charts and graphs : )
It’s the right way to think about it. If you are 40, but have found your “enough money” then move to a 50/50 allocation as a 65+ yo person would. Let me think about how to graphically portray it.
I’m 92% stocks and 8% cash and other vehicles currently, but I am 32 and just now starting to invest. My timeline is necessarily long. I’m also building up my own business so I can leave my W2 job and devote my energies where I desire.
This is very timely Sam. I’m currently at 73/27 equities to bonds/stable value fund (401k). My job within IT was recently surplussed and I’m getting a severance for six months pay (30 yrs at Megacorp).
My question about asset allocation is upon “retirement” (I’m 55) my pension will provide 60% of my needed income stream.
Would you throttle back on equities if you were me? Knock on wood my health is good and I get retiree medical. Have about $785K in 401K referenced above.
Sorry about getting let go from Megacorp. Is it too late to go back and negotiate a severance? If I worked with you, I would have argued for at least ONE YEAR’s worth of severance pay PLUS your mandatory WARN Act salary for 2-3 months. These kind of things is the whole reason why I wrote a book on negotiating a severance. Real money is at stake.
To answer your question: YES. I would absolutely throttle back to a 60/40 or 50/50 weighting in equities/bonds at age 55 w/ a 60% pension.
May I ask you another question? Was the layoff a surprise? Or did Megacorp show signs of impending uncertainty?
Regards,
Sam
I decided to have the 45-minute portfolio review with my Personal Capital adviser. I had between 5% and 10% bonds at age 39, and said I wanted to be retired by 50.
The advisor’s model suggested I was too heavy in bonds. I found that odd. The advisor could tell I knew what I was doing, and knew his odds of selling me on the management service were nil, but we went through the whole spiel. I still manage my own investments, but appreciate the free service they provide.
Good thought-provoking article and interesting comments so far. Really good point about robo-advisors or even a human financial advisor not having full picture or net worth and only investments. I think a lot of investors tend to overlook. My wife and I are very aggressive with stocks vs bonds as well currently but will be dipping our toes into some commercial real estate pretty soon.
I hadn’t heard about the Betterment shutdown after Brexit. I disagree with their approach if that is what they really did. I understand people tend to make decisions based on emotion rather than logic sometimes but that is truly the investors choice and not for Betterment to make. How are people ever going to learn how to best handle their money if Betterment or a financial adviser take away the options of being able to make a decision?
Exactly. Betterment and all wealth managers, banks, financial institutions need to keep their doors open at all times. Providing liquidity is one of the main tenets for financial institutions.
Think about this: why do banks close down during times of crisis? To protect you? Or to protect the BANK who lends out 90% of your money and won’t have money left to give if 100% of their clients come collecting.
Hi Sam,
This part you said is so true “we tend to invest in the places we know best. Never invest in what you comfortably don’t understand.”
Most of my after-tax investments are not only in companies I understand but also companies whose products and services I actually use. This way I’m not just reading their financial data, but seeing what other types of consumers purchase there products and services and see where they can improve their business.
I’m in my 20’s and am 100% in equities, I agree with your alternative portfolio allocation when it comes to stocks to bonds. I am also trying to heed your advice by diversifying my net worth. I love your comment that “because like most people, I have diverse interests. Life is not just about making money to invest in stocks and bonds!”. My goal is to develop my online business and to buy some real estate (to live in at first) in the next few years.
Additionally, because of FS, I have been using personal capital over the last year and it’s been a great means to managing my personal finances and tracking my portfolio.
Hi Chris,
I think you will really ENJOY living in your primary residence and getting neutral inflation. Nobody ever writes how amazing it is to finally land your own place to do what you will. The feeling of not being beholden to others (except for the bank!) feels good.
S
I’m a bit underweight on bonds in my portfolio now because I bought a decent chunk of stock the day after Brexit. I just ran my mid-year net worth figures recently and have about 16% cash, 55% in stock, bonds and alternative investments and 30% in real estate. So excluding cash/CDs, I feel pretty good that my net worth isn’t close to 100% investments.
One additional factor that contributes heavily to the riskiness (however you choose to define that word) of a portfolio is your recurring savings/investing cash flow situation. If you continue to 1. have consistent income that you can continue to save/invest (the norm for many people given their corporate jobs or side gigs) and 2. have the mental fortitude to continue investing in the face of significant downturns, then you can take a riskier position because you will be able to buy into the inevitable dips. I’m not saying this is easy… just straightforward. It is easier once you have a few major downturns (2000-2001 and 2008-2009 in my case) under your belt.
On a grander scale, this is what Berkshire Hathaway has built. Their cabal of operating companies generate ~$25B in annual cashflow in good times and especially bad which they constantly choose where best to deploy (e.g., invest in PP&E, public equities, private acquisitions, distressed situations, cash, etc…). They can afford to take a lot of risk because they constantly have substantial amounts of cash flowing to HQ.
Jamin: These are great points regarding savings/free-cash-flow to invest “always”, most importantly MORE $$ during such “dips” (or Black Swan events ? :-)
Steady/good income, decent career growth, “savings-and-investing discipline”, “save and start investment early in your career!”, “auto pilot” investing of most of your savings, diversified and aggressive portfolio until 30s-40s — will stand a good chance of taking you where you could aspire to!
Folks: do consider a side hustle or gig, and/or “second/multiple” sources of income — these will definitely “balance” or assist in a few dips/change-of-course in career. If you have multiple incomes or multiple streams of income like FS indicates, your appetite for bigger/better career moves increases. Also – if you have one steady income/paycheck from your spouse/partner to cover steadiness in paying bills and “group family health” coverage etc., one could consider doing “consulting” at typically 30-40% higher rater than “full-time/w2” job.
Thanks
SC
Good example on Berkshire. It also helps that the money managers are “one removed” from the money by setting up a corporation. I’ve found it’s easier to stay the course if it’s not directly your money.
For example, it’s harder for me to spend $200 on dinner for two on my personal account. But if it is on my business account, even if I own the business, it’s much easier to spend $200.
So the same goes for investing in a way.