An interesting question posed to me recently: “What’s the magic formula?”
I couldn’t help but laugh, if it were only that easy. My 90’s hip hop brain immediately started queueing up Dr. Dre’s voice over in The D.O.C.’s biggest hit…”Yo man that’s the formula.”
I also began to picture one of those 10 foot wall to wall chalkboards you might find Einstein scribbling on.
That’s exactly what my “formula” would look like, a lifetime of corrections and modifications until someone (or something) washed my board clean while I was away and I was forced to start over.
Once I finally and fully embraced the concept of anything can happen I began to appreciate risk.
I recall owning some oil drillers and a few ETF’s (possibly leveraged, don’t judge) at one point back in the day. The market was very irrational, very mispriced, very busy and very dangerous.
Turns out at some point over the next few trading days oil would go negative bid. Negative. I didn’t say “No bid”, I said negative!
Not possible right? Could never happen? The market willing to pay me to buy a barrel of oil? Wrong. It did happen!
Anything can happen.
Imagine driving by your local gas station one afternoon and seeing minus -$3.00/gal. on the sign. You slow down and see the owner running across the road in your direction…
“Please, please come in and fill your tank, here is $30 cash if you will fill ‘er up, please I have too much I need you to take some.”
You do as he asks, why wouldn’t you? You then run home to grab the Yukon Denali XL hitched to the 22′ SeaRay and head back grinning from ear to ear to get more. Lots more!
By the time you arrive though the updated sign says $3.00/gal. The subdued owner now sitting behind the counter shrugs it off…
“Oh, I don’t know what I was thinking earlier or exactly what happened, it just happened, everything is back to normal now.”
As ludicrous as that sounds, in market terms, it happened that day. If you were on the wrong side of that trade (I was) you had a Wile-E-Coyote moment and got introduced to a little something called GRAVITY.
Next thing you know you’re on the desert floor in a cloud of dust.
Anything can happen.
These all turn out to be “learning opportunities” (of course!), but at some point not all of us want to be Einstein at his chalkboard trying to solve the equation forever.
Trading adventures aside, when it comes to longer-term investing, retirement, dare I say…Solvency…We just want the answer.
We just want the formula.
So here it is.
f(t) = S + C(t) + E
f(t)➡️Function of Time
Let’s start at the beginning and let’s start slow. This my friends will be a function of time. Whether you start the process at age 20 or age 40, it will need time.
There are no viable shortcuts or magic accelerants. If you start to get enamored by ETF’s that feature 2x or 3x in the title, it’s time to take a few steps back and regroup.
Time either works in your favor or against it, each individual will slot uniquely inside that spectrum and no two are the same.
As the famous quote goes: “It’s not timing the market, it’s time in the market.”
S➡️Strategy
Gotta have a plan, know what you are doing and why you are doing it. If you can’t define it, then get help.
This is very age dependent, I cannot stress than enough.
If you are young, 100% in stocks with large, mid, small, international, emerging exposure will do the trick for a long time. Put the old Schwab “Core and Explore” to work and carve out 10% or so for some fringe ideas.
If time is not on your side, something more conservative with bond and cash exposure will fit the bill. 80/20 60/40?
Once again, if you can’t make those decisions get some help.
C(t)➡️Consistency (over time)
Max out contributions to the absolute extent of your ability, no questions asked. 401(k). Roth. HSA. Taxable account.
Once you start, don’t stop. Every December you should be figuring out what the new max is for next year and plan accordingly.
Margin is key to making this work and not the borrowing kind! Living well within and preferably well below your means to allow space. The larger your margin (i.e. space and flexibility) the less likely unforeseen events are to derail your consistency.
That consistency will take care of itself…you guessed it…over time.
This allows you to focus on more important things. Family? Career? You have a plan on the numbers, so don’t stress over that. Use that mental freedom to focus your attention on the present. Life. Living.
E➡️Evaluation
Nothing can be on auto-pilot forever. You will need to look under the hood every once in a while.
It could be as simple as a yearly, semi-yearly, quarterly rebalance in your accounts. It could be much more involved, like a weekly Saturday morning sit down over coffee to check status.
There will be a need for some tweaking. Plan on it.
Part of this evaluation process as you get closer to retirement will be defining your solvency. You will need to determine when the music stops.
At this point you have worked to create an asset base, you have managed it and tweaked it along the way.
Now it’s time to fully square up that asset base with your projected income and expenses to see where you stand going forward.
Math doesn’t lie.
Strategy. Consistency. Evaluation.
All equal parts of a Function of Time.
f(t) = S + C(t) + E
That’s The Fomula.
The Finance Stance 