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Should my Investment Strategy Change as my Wealth Grows?

My journey in the financial advice industry began primarily working with retirees and near-retirees. The experience of working with older generations provided me with a unique perspective when it comes to the advice I give younger generations, whom I primarily work with now. One thing I’ve learned is wealth can be built in many different ways. A question I’ve pondered is; as people progress in their careers, as their portfolios accumulate more assets, and/or as their real estate portfolio starts to grow, should the way they invest change? This article will explore various ways people build wealth and whether it makes sense to change their strategy as it continues to grow.

Lifelong Savers

I distinctly remember an individual I met while working at my previous financial advisory job prior to starting Millennial Wealth. This individual had worked at Costco for 25+ years and currently worked as the man reviewing receipts as customers walked out of the store wishing them a good day. As you can imagine, he didn’t have the highest-of-paying jobs, but when we got to discussing his retirement goals and therefore assets, he caught me off guard when he told me how large his 401(k) was. In the subsequent years that have followed and the positive stock market returns, I imagine it being somewhere around 700-800k in assets. Just his 401(k)!

A modest earning potential and modest lifestyle with great savings/investing habits is a recipe for creating wealth. In his case, it was likely more than he’d need to live the life he wanted to in retirement. Saving and investing early often allows your money to benefit from compound interest and time. A recipe that Albert Einstein claimed was the eighth wonder of the world.

As his wealth began to grow, he stuck to his strategy. As his income grew, so did his savings and investing rate. He wasn’t a stock picker or market timer, he used primarily mutual funds and ETF’s in his portfolios, sticking to primarily a passive strategy that clearly paid off. In his case, there was no reason to change his investment strategy (other than changing his asset allocation to be more conservative) as his wealth grew, he could already accomplish everything he wanted once he retired.

High Earners with Substantial Investable Assets

On the other end of the spectrum, people who have high incomes while also sticking to strict savings and investing schedule have the opportunity to create significant wealth. As their wealth grows, it can create opportunities for investments outside of the traditional public marketplace of stocks and bonds or investment real estate. While maintaining a “core” portfolio of globally diversified public securities is a tried and true strategy, individuals with significant wealth may be interested in investing in potentially greater returning assets such as through private equity.

Private equity refers to businesses that aren’t available for public investment through traditional stock exchanges. They’ll gauge interest from accredited investors and get them to commit capital to a particular investment. For example, a private equity firm planning to buy old apartment buildings with high vacancy rates. Their goal is to remodel the buildings and lease them out at a higher price with a lower vacancy rate. In turn, creating significantly more cash flow from the apartment buildings and therefore for the investors. Of course, the process is much more detailed and nuanced, but this gives you an idea of how it works.

Private equity is hard to measure from a return standpoint because much of it isn’t public information. However, there is a consensus that returns are typically higher when compared to public equity markets. This can be attributed to a concentrated investment, tax advantages, use of leverage (debt), and the less strict regulations of private companies. Lastly, the SEC governs who can invest in private equity investments, and they refer to these people as accredited investors. Accredited investors are people who earn more than $200,000 individually or $300,000 or more jointly in each of the past two years, and a net worth of $1 million or more (excluding your home).

If you’ve built significant wealth, private investments could be an opportunity to diversify your portfolio and potentially increase your returns which could warrant a change in your investment strategy.

Mid 20’s to Mid 30’s High Income With Growing Assets

Many people fit this mold in the Seattle area. With the burgeoning tech scene, individuals and families have significantly higher incomes than the national average. Unfortunately, that goes hand in hand with the cost of living. However, that doesn’t mean you can’t be taking steps financially that will lead to success in the future.

This demographic should be focusing on two components, in particular, as it pertains to investment strategy: 1) Continuing to increase their savings/investment and/or their debt paydown rates, and 2) Maintaining a globally diversified, low-cost portfolio. Sounds simple right? We all know it’s not as cut and dry. However, if you get a plan in place and keep yourself accountable, it can be that simple.

As your career progresses, you’re earning more, and potentially being awarded more equity compensation through RSU’s or stock options. Your financial situation starts to become more complex. You have to balance decisions such as: should I be maxing out my 401(k) or should I be exercising my stock options? What are the tax implications of each? While these are complex decisions to make as your wealth continues to grow, it still remains true that you should always continue to increase savings/investments and maintain a “core” portfolio of globally diversified, low-cost investments.

Academic research has shown it’s nearly impossible to predict the best performing asset class in any given year (one reason why we diversify), and that low-cost passive investments tend to outperform their higher cost active counterparts over long periods of time.

The key point is,  as your wealth begins to grow, you don’t need to radically change your investment strategy just because you have more assets to invest. Five ETF’s or index funds that create a globally diversified portfolio worked when you had $10,000 and it will still continue to work when you have $500,000.

The Bottom Line

Regardless of where you are on your path to creating financial security, there remain proven investment strategies that work. Having great savings and investing habits- while MAINTAINING (not selling during corrections or recessions and controlling emotions) a globally diversified portfolio – is a tried and true strategy for building wealth over time. If you have questions regarding your investment portfolio, balancing complex financial decisions, or whether you’re on track towards financial independence, schedule a meeting with us today!

Levi Sanchez, CFP®, CPWA®, BFA™
Levi Sanchez, CFP®, CPWA®, BFA™
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, CERTIFIED PRIVATE WEALTH ADVISOR®, BEHAVIORAL FINANCIAL ADVISOR™ designee and Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!

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