Your investment approach should also mature with your circumstances as you grow and mature on a professional and personal level and as your income increases.
Most recent college graduates starting in their careers are typically single, and many are restless and stricken with wanderlust – traveling in their spare time. They never stay in one place very long – jumping from apartment to apartment at the slightest impulse.
Like their personas, the investing mindset of these workforce newcomers is very unfocused and speculative. Like average retail investors, they speculate on the timing game – hoping to jump on the market by buying before a stock rises or liquidating before it bottoms. It’s not a productive game, as even the financial professionals who do it for a living have proven.
According to a 2020 report, over 15 years, nearly 90% of actively managed investment funds failed to beat the market.
Rosenberg, Eric (Jul 31, 2020): Most investment pros can’t beat the stock market, so why do everyday investors think they can win?
Since portfolio managers are often Ivy League-educated investors who spend their entire workday attempting to outperform the stock market, this should give pause to the average investor attempting to beat the market on their own.
As workers and professionals progress in their careers and as their jobs become more secure, they start to think about settling down. They think about laying down roots, starting families, and buying homes. As they grow on a personal and professional level – their incomes growing as well – many don’t realize that their old investment mindsets will no longer cut it.
As they start families and have children, many will think about taking care of their families in the long term and leaving a legacy. The speculative mindset no longer aligns with these long-term goals.
Speculating is hoping, right?
You’re pinning your fortunes on chance when you speculate on the stock market. You’re hoping that the market will bounce in one direction or another. This investment strategy is not conducive to your long-term goals. Suppose your long-term goals are to free yourself from the 9-5 grind, spend more time with your family, buy back time to do the things you love, and leave a multi-generational legacy of wealth and knowledge to your heirs. In that case, a speculative investment approach makes wealth planning very difficult because of its uncertain nature.
Savvy investors mature in their investment mindset along with their maturity on a personal and professional level. They switch gears from speculation to a more mature and measured approach. Instead of speculating and hoping to profit from the spread of timing the markets correctly, they pursue more reliable and consistent objectives: capital growth and preservation. They accomplish this by targeting assets with very specific benefits and criteria.
For capital growth, savvy investors seek assets possessing the following attributes:
Productive Tangible Asset.
Reliable and Measurable Appreciation.
For capital preservation, these same investors seek out assets meeting the following criteria:
Non-Correlated to Wall Street.
Long-Term Investment Windows.
Smart and mature investors seeking assets that offer dependable capital growth and preservation invariably gravitate towards the private markets to alternative assets like investments in private companies (private equity) and real assets.
For capital growth, private alternatives like private equity and real estate are ideal for building wealth if they offer cash flow and growth backed by a tangible asset. The engine that builds wealth behind the twin fuels of income and appreciation is compounding. Income from cash-flowing assets can be reinvested to compound returns and accelerate wealth.
Tangible assets with intrinsic value – value separate from what people are willing to pay for them on the open market – add another layer of compounding.
These assets appreciate faster over time because they outpace the natural appreciation of a tangible asset due to inflation. Think of a piece of land that does nothing. That piece of land will appreciate over time simply from inflation and the natural rise of the cost of goods. Now think of a building on that land that produces income from rents. That building will not only appreciate due to inflation, but it will also appreciate in value due to its cash flow benefits.
Combine cash flow with appreciation from a productive asset, and you have a lethal 1-2 punch for capital growth (i.e., wealth building).
Just as important as capital growth is capital preservation. If you can’t protect your wealth, growing your wealth will be futile. Private alternatives like private equity and private real estate are ideal for capital preservation.
Non-correlated to Wall Street, these private alternatives are illiquid – meaning they have long lock-up periods and are restricted from transfer or sale for several years. This illiquidity insulates these assets from mob mentality and downturns. So, even as the stock market falters, these assets hold steady because investors are prevented from running for the exits.
For preserving capital, nothing beats investing in tax-friendly assets that preserve more of what you make. Because private investments are typically structured as partnerships, and many involve tangible assets, the tax benefits are enormous and ideal for preserving capital.
Private investments in tangible assets structured as partnerships offer significant tax benefits, including deductions, exemptions, depreciation, long-term capital gains treatment, passthrough deductions, and avoidance of self-employment taxes. In an inflationary environment and during a recession, keeping more of what you make is a valuable investment tool.
Since I partner with many high-net-worth (HNW) individuals and high-income professionals, I often get involved in helping them transition from the high-risk speculative mindset to one that is more savvy and mature.
Wall Street and the latest shiny investment object get all the attention from CNBC, Bloomberg, talking heads, social media, financial apps, forums, and so on. Meme stocks, crypto, and NFTs get all the attention and buzz.
It’s interesting how the savvy ultra-wealthy investors ignore all the buzz. The investing public is playing the timing game. They’re looking to get in at the right time, ride the wave, and get out.
In my experience, HNWs are not interested in timing. They’re more focused on time and trust. They leverage time – and not timing – to analyze and engage in deals that will grow their wealth over time. As for trust, they don’t trust others to speculate for them. Instead, they would invest in partners they trust who have respect for their time and leverage time to grow their capital.
What about you?
Where is your investment mindset?
Are you a speculator, or do you value capital growth and preservation?
Ask yourself these questions, and the answer might become clearer regarding what type of investing mindset you possess:
How much time do I spend consuming investment media and tracking the markets?
Am I always looking for the next big investment?
Am I a patient investor?
Do my investments cash flow?
What am I investing in that preserves capital?
Are my assets insulated from stock market volatility?
Are my assets insulated from inflation?
What tax advantages do my investments offer?
Savvy investors – whether high-income earners earning $300,000+ annually or with a portfolio greater than $2.5MM – choose investments that grow and preserve capital. They ignore investment hype or what the financial news, social media, or the internet are buzzing about. They’re not constantly searching for the next trendy investment. They prefer boring investments with tried and true income and appreciation models, which will grow their wealth and protect them from volatility and the IRS.