Don’t Risk What You Have and Need for What You Don’t Have and Don’t Need

Game theory exhibits again and again that people are risk-averse to their detriment. We value a bird in the hand rather than two in the bush, beyond what makes mathematical sense. The common theories associated with this conclusion typically adhere to a Darwinian explanation whereby excessively daredevil-minded forefathers hurt themselves in rash adventures, did not survive, and so were not around to pass along that sort of genomic identity.

The title of this article is an old adage that, when stated, generally will be met with a series of knowing nods.

Don’t Risk What You Have and Need for What You Don’t Have and Don’t Need.

How astute and erudite the speaker must be! Most wise!

I write here to dispel, in a fashion, the conclusions one might easily make from this oh-so-adult mindset. An understanding of human capital is crucial in recognizing my vision of a truth.

To make my point, I first need to establish the term “human capital”. Human capital represents the value of you. Not what you have in the bank or the value of your car. Not what assets you can list or how much is in your 401k.

Human capital represents how much you will make in your lifetime, moving forward. That is essentially what you are worth in terms of human capital. What you make now and what you will produce in future earnings.

You have great value- probably much more than you give yourself credit for.

For those in their 20’s, 30’s and maybe 40’s, the value of their human capital will exceed their liquid possessions. As we age, our human capital decreases given our reduced earnings potential with fewer years left in the workforce. As well, as we age we hopefully have aggregated more assets, and so that balance between the value of our human capital and what we own swings. I hope this makes sense as I delve into the topic.

So back to the title; don’t risk what you have and need for what you don’t have and don’t need.  When you are youngish, all you really need is you. As long as you have you, you have the wherewithal to take care of yourself, throw yourself at your career and thus pay your bills. So anything you have in assets would fall into the category of want. Not need. You want to keep everything you have of course, but you do not truly need them. It would be frightening to think that you could lose, as an example, the past six years of your 401k contribution, but it would not be ruinous. You would make it, and probably make out just fine.

Granted, I’ve taken a scenic route to get to my point, but we have now arrived.

You should be aggressive, and I mean aggressive with a capital A, when it comes to your money when you are young. By aggressive I mean save a respectable amount of your take home pay, and insist that this money work harder than you do. It should never be on vacation. Money sitting in a savings account is loafing. Money in a fixed return option in your 401k is lazy.

Too many people equate investing with gambling. I suppose similarities exist, but at its root investing in equity markets equates with being the owner, albeit in a fractional manner, in various businesses. When you own shares of a company, you are a partial owner. Ergo when you invest in the market, lets say with shares of QQQ, you are a partial owner of Apple and American Airlines and ADP and Amazon and Amgen……. that is just some of the A’s. 100 of our top companies in total comprise the ticker symbol QQQ. Called Cubes on Wall Street, the biggest 100 companies in the NASDAQ make up QQQ.

If you buy that stock and that one only, you are diversified. You will never beat the market, but you’ll never have to worry about some Ponzi scheme wiping you out or losing to the market or having frictional costs like a mutual fund manager running ads online or trading costs or heavy taxes from portfolio churning. All these concerns evaporate with such an investment. If you are in a 401k you likely cannot buy QQQ but there will be an index fund that tracks the S&P 500. Just put 100% of your money there or spread it among other offered index funds. No actively managed funds or for goodness sake none of those offerings tied to your retirement age. With those, if you subtract your age from 100, you will know what percentage of your 401k is stashed in cash or bonds. That is money working part-time.

If you want to work part time at some point, then your money cannot.

In this passive investing scenario (buying QQQ), whenever Jeff Bezos works to build Amazon’s business, he is working in your interest. Pushing for drone delivery? Yep, Jeff as your employee is making that push. When Tim Cook of Apple is driving his team for progress in driverless automobile technology, he is building your business.

The NASDAQ closed over 6000 today. An all time high. For the moment, there is no one who has ever invested in the NASDAQ as a total market who has ever lost a penny…. admittedly if the average goes down tomorrow that will not be true anymore. Still, over time it is going higher. As long as consumption grows, the economy grows and the companies that constitute that economy grow.

Let’s throw a bit of historical perspective in here.

If you are over 35, then you were an adult when the internet bubble popped. The NASDAQ was just over 5000 before it cratered- dropped in half.  Yet now it sits above 6000. So someone who bought at the VERY TOP of the internet bubble is up about 20% since then. Not too swell over 17 years. In fact, a lousy return. But still in the ballpark of those who had money in a savings account that whole time.

But who truly bought at the very top? Almost no one. How about if you bought a year or five before the top? Well, someone who bought in five years before that vertical phenomenon, now seen as the dotcom bubble, is up 500%. Yes, the NASDAQ was around 1000 five years before the dotcom bubble burst. So in less than 25 years $1000 invested in the NASDAQ is now $6,000.

$10,000 invested then would now be $60,000. And $100,000 invested back then would now be over half a mil. If only the wise investor can close his ears to the short term moves and trust that successful businesses will do what successful business do, said investor can amass wealth.

Wall Street climbs a wall of worry. Long term, the market seemingly has one direction, and that direction is up.

So if you still have significant human capital, you have all that you need for the present. If you can live below your means, aggressively invest the balance, then you can amass wealth.  I like that term, can you tell?

Save ten bucks a day, invest it in the ticker symbol QQQ, and you have the likelihood to have over $3,000,000 in forty years.

If you are thirty years old, you have an extremely high likelihood to live into your 80’s. All the actuarial stats reflect this. You could have such a grand time in your retirement.

Any money you are allocating to take care of you twenty or forty years from now should be put to strenuous purposes. Don’t let your money be lazy. It should be working 24/7.

An account with any bank or Fidelity or Schwab or TD Ameritrade- the list goes on- will enable you to create an account, deposit money and then using just a couple drop down boxes, buy the number of shares of ticker symbol QQQ you want.

Divide how much money you have in your account by the share price (as I write this, a share of QQQ costs $135.13) and you then know the number of shares you can buy. There will be a quote box that tells you it’s price no matter what site you use. Remember, QQQ tracks the top 100 companies in the NASDAQ. There are plenty of other ETF’s which also can be used to track various markets, whether the S&P 500, the Dow or many others. Rational cases could be made to purchase other market tracking options. I use QQQ as a high quality option.

I repeat; the younger of our generations’ human capital is all they truly need for the present. Ergo the inference you make from the phrase “Don’t Risk What You Have and Need for What You Don’t Have and Don’t Need” may be quite different than what you’d initially consider.

I’ve made my point about the wisdom of ensuring your money works hard at all times and for the balance of this article I am going to review some terms you might hear when it comes to the investing world. Yet for the foreseeable future the type of passive investing I’ve suggested should mean you don’t need to do a deep dive into these terms.

ETF- An exchange traded fund, which is what QQQ is, tracks a basket of stocks with some semblance of continuity. Could be a market basket or it could be focused on a country or an industry. DIA tracks the Dow. SPY tracks the S&P 500. They are otherwise known as Diamonds and Spiders.

P/E- The price earning ratio basically tells you how much profit the company makes for each share of stock. So a P/E of 20 means that the company makes a buck a year for every 20 dollars of the share price. A case could be made that the P/E is the actual cost of a share, rather than what you pay. It tells you how much you are paying for every dollar of profit.

PEG- this refers to price earnings growth, and at the risk of confusing this too could be seen as the price. The PEG factors in how much growth the analysts expect in future earnings. If one trusts the concept that share prices represent a forward thinking mechanism, then PEG is the price of a share stock.

Dividend- this is he portion of earnings that the company pays out to shareholders. Companies that pay dividends do so each quarter though there are exceptions. Companies that pay significant dividends are often categorized as value stocks, though that is a gross generalization.

Growth Stock- A growth stock, as opposed to a value stock, is purchased with the expectation of capital appreciation, which is a pedantic way of expressing a higher share price.

Market cap- Cap stands for Capitalization and this number equates to the number of shares times the price of a share. It expresses how much the company is valued on Wall Street.

Bonds- when you buy a bond, you are loaning money, with a promised repayment plus interest. When you buy a government bond, you know the government can tax people and so should be able to pay back the bond. When you buy a bond from a company, the expectation is that they will be able to pay you back with the money they make. Since the perception is that governments are less likely to be unable to repay, the rate of return they promise is less than for most companies. The rating on a bond, like AAA or B- , is based on how likely it is that your money will be repaid. A higher credit rating means that you will get less interest paid to you but a higher likelihood to be repaid. Not always true as anyone who has bought Argentina bonds has discovered, to their financial dismay. In any event, I’m not a subject matter expert on bonds. I know there are some laddering techniques that generate nice income streams, but I prefer the equity markets for long term amassing of wealth.

I could go on. I am an uber-competitive person, perhaps to a point being off-putting to some. Everything is a contest in my world. If you knew what decisions I make in terms of personal investments, you’d be justified in saying, Physician Heal Thyself. I have a compulsion to be a stock picker and try to beat the market, and sometimes it is hazardous to my wealth. I am busy selling covered calls in tax protected accounts, purchasing LEAPS looking for that four bagger, and generally ignoring my own advice.

Please. Put your money to work for you so that you can make future decisions unencumbered by pecuniary anxieties. Amass Wealth.

The Power of Compound Interest is the most powerful force in the universe.

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