Getting comfortable with larger sums

[ERICOPOLY]

Strangely, I actually feel like I am less risk-averse than I used to be even though I am older. Basically after you have a certain cash cushion, say, a few years worth of living expenses, even if you took a 50% loss, hopefully temporarily, is basically has next to zero impact on your near to middle future.

 

 

Yes, larger sums make investing far less stressful.

 

Suppose you have $10,000,000 saved for your retirement.  It's invested in blue chips yielding 3%.

 

You've got a $300,000 dividend income stream that doesn't fluctuate with market ups and downs.  You don't have to ever worry about whether the stocks are up or down, you only have to think about your income stream.

 

The reason why the stock market scares most people is that they invest their retirement savings in the stock market but they don't have nearly enough money to live on the dividend stream alone.  They are held hostage by the market prices of their securities because they must sell off the shares in order to spend down their accumulated savings.  So market crashes are especially painful because it has a direct impact on their "income" stream.

 

 

 

[ERICOPOLY]

Although, if you have a 3% income stream of $300,000 and you have it invested in large actively managed mutual funds that merely match the market, that could be stressful.  Paying somebody 1% is like giving up a full 1/3 of your income stream. 

 

That could be stressful if you think about how much you are paying them for basically generating the same returns you could get from an index fund.

[alwaysinvert]

And that's why I think consciously not aiming for maximum dividends has a high likelihood of being a market-beating strategy. Not that you necessarily need to beat the market with $10 million.

 

Much of my portfolio is allocated to companies that are "underyielders" compared to both their market price and their available funds.

[tombgrt]

This is a great conversation and great to hear everybody's thoughts. I have certainly struggled with this through the years as well. I remember years ago seeing my portfolio fluctuate by a couple of thousand dollars a day sometimes, while on the other hand I would deny myself buying a new laptop for example for a year or two or more (or decide to buy the cheaper option at lunch which might save me $2 to $5). Making the connection between what you do in your portfolio and how much that really buys in the real world has always been a bit tough psychologically. I don't think I have much advice to provide on top of what people have already sent, but I will share a few experiences.

 

Strangely, I actually feel like I am less risk-averse than I used to be even though I am older. Basically after you have a certain cash cushion, say, a few years worth of living expenses, even if you took a 50% loss, hopefully temporarily, is basically has next to zero impact on your near to middle future.

 

One day I looked at my portfolio and I realized that I had double as much money as I had a few years ago, but my lifestyle really hadn't changed and other than an added sense of security, that much money, which was several years worth of living expenses/ annual salary, was having next zero impact on my day to day life.

 

One of the other things that you also start to appreciate is the power of compounding, and inertia.  I put a small amount of money into a high growth compounder about 15 years ago, and now it's one of my biggest positions.  Even though it may not be the correct financial thing to do, I find it's easier to hold stocks and not sell, when you acquire them for a pittance of their current value.  So basically in some areas inertia has taken hold, and I just don't touch anything so I don't have to worry about the problem.

 

I'm not sure if that helps much.  :)

 

Great stuff. Thanks for sharing.

 

I can totally related to the disconnect between the sums I invest and what I spend on my daily life. I'll sometimes hesitate and agonize on whether I should be ordering a few more books or upgrading a computer and then turn around and invest 2 years' worth of expenses into a company...

 

 

+++

 

This feels especially stupid if you just made a few thousand on a stock that you just bought and made a quick gain on by nothing more than pure luck (that it appreciated so quickly thus the much higher CAGR). On the other hand it's probably sensible to review all expenses versus what you make in your day job and not versus temporary portfolio successes or drawdowns.

[coc]

One of the other things that you also start to appreciate is the power of compounding, and inertia.  I put a small amount of money into a high growth compounder about 15 years ago, and now it's one of my biggest positions.  Even though it may not be the correct financial thing to do, I find it's easier to hold stocks and not sell, when you acquire them for a pittance of their current value.

 

Can I ask what the stock is? Purely out of curiosity.

[Jurgis]

I can totally related to the disconnect between the sums I invest and what I spend on my daily life. I'll sometimes hesitate and agonize on whether I should be ordering a few more books or upgrading a computer and then turn around and invest 2 years' worth of expenses into a company...

This feels especially stupid if you just made a few thousand on a stock that you just bought and made a quick gain on by nothing more than pure luck (that it appreciated so quickly thus the much higher CAGR). On the other hand it's probably sensible to review all expenses versus what you make in your day job and not versus temporary portfolio successes or drawdowns.

 

But what Liberty does is totally normal. The fact that your account went up (or down) $20K a week does not mean that you should suddenly buy a new car or eat caviar at the restaurant.

 

If fact, there is a known psychological bias to "spend" any "bonus" money multiple times. "Oh, I got this money, so I can buy a computer" and then couple days ago "I can get a vacation", and so on where in the end the money spent is larger than the money received. So it's good to go against it.

[tombgrt]

Of course it's good to go against it. But there is a difference between buying a new car and spending a few bucks on a few books or an upgrade for your computer that you would have bought anyway. Investing returns shouldn't affect spending habits (especially in the short run) but you shouldn't agonize over every dollar either, especially when doing well! I just agree that it can feel somewhat annoying to hoard every dollar when you made a lot of money recently. In a way it's absurd but it's sensible to guard against falling in the trap of overspending like you said.

[Guest longinvestor]

The problem of a growing reserve relative to need is perhaps best dealt with in the human mind by giving more away. How much I give away is inexorably linked to the intangible line between have-need . My mind  is seeking clarity around "is that enough?". The nominal Billion used by the Giving Pledge is informative to draw my own mental line a bit thicker. I have a model template where the giving increases disproportionately with any ror>my target. I have started on this path but perhaps need to tweak it over the next few years.

 

I would be interested in hearing from others on their own approach.

[Jurgis]

Let me start another thread about giving away. :)

[Liberty]

I can totally related to the disconnect between the sums I invest and what I spend on my daily life. I'll sometimes hesitate and agonize on whether I should be ordering a few more books or upgrading a computer and then turn around and invest 2 years' worth of expenses into a company...

This feels especially stupid if you just made a few thousand on a stock that you just bought and made a quick gain on by nothing more than pure luck (that it appreciated so quickly thus the much higher CAGR). On the other hand it's probably sensible to review all expenses versus what you make in your day job and not versus temporary portfolio successes or drawdowns.

 

But what Liberty does is totally normal. The fact that your account went up (or down) $20K a week does not mean that you should suddenly buy a new car or eat caviar at the restaurant.

 

If fact, there is a known psychological bias to "spend" any "bonus" money multiple times. "Oh, I got this money, so I can buy a computer" and then couple days ago "I can get a vacation", and so on where in the end the money spent is larger than the money received. So it's good to go against it.

 

That's true, but that's not what I was talking about. I wasn't even talking about spending money because my portfolio went up, just saying that it's weird that a hundred bucks can make me hesitate because it can feel like a lot, and then I turn around and invest 50k in a company that I like. Somehow the amounts feel different psychologically, and I understand why, but it still feels strange (it's like cognitive biases -- even when you know about them, you can't be free from them, like knowing how an optical illusion works yet still having your eyes-brain fooled by it).

[rpadebet]

I can totally related to the disconnect between the sums I invest and what I spend on my daily life. I'll sometimes hesitate and agonize on whether I should be ordering a few more books or upgrading a computer and then turn around and invest 2 years' worth of expenses into a company...

This feels especially stupid if you just made a few thousand on a stock that you just bought and made a quick gain on by nothing more than pure luck (that it appreciated so quickly thus the much higher CAGR). On the other hand it's probably sensible to review all expenses versus what you make in your day job and not versus temporary portfolio successes or drawdowns.

 

But what Liberty does is totally normal. The fact that your account went up (or down) $20K a week does not mean that you should suddenly buy a new car or eat caviar at the restaurant.

 

If fact, there is a known psychological bias to "spend" any "bonus" money multiple times. "Oh, I got this money, so I can buy a computer" and then couple days ago "I can get a vacation", and so on where in the end the money spent is larger than the money received. So it's good to go against it.

 

That's true, but that's not what I was talking about. I wasn't even talking about spending money because my portfolio went up, just saying that it's weird that a hundred bucks can make me hesitate because it can feel like a lot, and then I turn around and invest 50k in a company that I like. Somehow the amounts feel different psychologically, and I understand why, but it still feels strange (it's like cognitive biases -- even when you know about them, you can't be free from them, like knowing how an optical illusion works yet still having your eyes-brain fooled by it).

 

It could be because you have compartmentalized "spending" and "investing" in your brain completely.

I am much the same...agonize over even $10 stuff sometimes (buy the kindle book or look for a free pdf somewhere) because I know it's not coming back, but invest with a totally different magnitude, because i know there is chance of keeping it or growing it.

[merkhet]

I do the same ting about spending vs investing. It's a good problem to have.

[Liberty]

It could be because you have compartmentalized "spending" and "investing" in your brain completely.

I am much the same...agonize over even $10 stuff sometimes (buy the kindle book or look for a free pdf somewhere) because I know it's not coming back, but invest with a totally different magnitude, because i know there is chance of keeping it or growing it.

 

That's definitely a good part of why it feels so different. Investing doesn't feel like spending, and in fact, it can feel better than holding cash (with the right asset at the right price) because I feel like I own something productive, and while I'm sleeping and working, there are all these people out there working hard figuring ways to create value for me.

 

Another reason is more strategic; what I want in life is to have control of my time, do what I want, read my books, work on my projects, spend time with my family. Investing feels like it helps me move closer to that, why spending on most other things, even if it can be fun in the short term, feels like it's taking me away from that.

[racemize]

Before investing, I used to do a lot of music recording, and I would look forward to and enjoy buying new recording equipment. After investing, I scratched the same "new" itch and was buying an asset that appreciated. It felt like the best of both--buying and saving at the same time.

[Jurgis]

I think what Liberty wrote raises a number of topics (he may not have intended all of them though):

 

- Separating "investing" from "spending" that couple people commented on

- Spending X amount of time deciding whether to spend Y amount of dollars vs. spending Z amount of time deciding whether to invest W amount of dollars. I think we think that the rational thing would be if X was proportional to Y and Z was proportional to W, but perhaps not at the same ratio as X to Y. In reality, sometimes X is not proportional to Y and Z is not proportional to W. Which may be good: there's a tremendous bargain and there's no point to spend days on deciding whether to buy a huge amount of it. Or it could be bad: risky big bets in investing, spending large sums of money without thinking enough.

- Overspending time trying to optimize/decide insignificant amounts of money.

 

Anyway, it's good to be aware of these and figure out what works for you. :)

[Haasje]

You just have to pull the trigger and then you get used to it real fast.

[crastogi]

I have found that as my portfolio has become larger, it becomes harder to remain concentrated.  My number of positions has gone up, and the results suffer.  It is hard to buy a position that is a large percentage of your portfolio, esp when  a "large percentage" could be equivalent many years of your current income. 

[SharperDingaan]

A few things we have learned along the way ....

 

Think less in terms of %, & more in terms of ships on the sea. If you have to hold XYZ for 2-3 years, most would want a 7 digit value when its done - net of 15% off the assumed selling price; work that back to todays $, & you get the size of the required investment. After that it is all about how you manage the risk, or whether you need to scale it back.

 

Most of us will only be right 1/3 of the time, so to be reasonably sure of reaching the 7 digit value - we need 3-4 equal size & independent positions, made today, & each with about the same prospects. We then need to periodically rebalance our risk/return - as our position risks will evolve at different rates.

 

You only need 1 ship to come in, but you need many ships out there - and every success you have will usually spawn 3-4 new investments. Your systematic approach is essentially akin to spreading a virus - & the more successful infections, the richer you get. The problem is that the virus also infects the host, producing stupid decisions; this thread is evidence that many on this board are aware of this.

 

Successful casino players all systematically take $ off the table. There are various ways to do it, but ultimately the ship reinvestment goes into T-Bills - & not new equity (ie: new ships). Over time - total equity (ie: ship) investment fluctuates, but remains largely the same; at least one new ship reliably arrives every year, & the T-Bill investment continues to grow - steadily reducing the risk of the portfolio overall.

 

The basic principles are ancient and have been practiced by many a trade merchant, all over the world, across the centuries. We simply adapt them to fit our specific application.

 

SD

 

[bargainman]

One of the other things that you also start to appreciate is the power of compounding, and inertia.  I put a small amount of money into a high growth compounder about 15 years ago, and now it's one of my biggest positions.  Even though it may not be the correct financial thing to do, I find it's easier to hold stocks and not sell, when you acquire them for a pittance of their current value.

 

Can I ask what the stock is? Purely out of curiosity.

 

It's a monster...  literally :-)  I've held it for a decade give or take..  Sold a 3rd the first time it tripled so it's all 'house money'..  dumb move :-)

[MVP444300]

Although, if you have a 3% income stream of $300,000 and you have it invested in large actively managed mutual funds that merely match the market, that could be stressful.  Paying somebody 1% is like giving up a full 1/3 of your income stream. 

 

That could be stressful if you think about how much you are paying them for basically generating the same returns you could get from an index fund.

 

Most FAs are completely worthless.  I have yet to find a good one. 

[yadayada]