Distracted

Many investors are distracted.

Make no mistake, market dislocations from the virus have been astounding for seemingly everyone outside of big tech. But this setback in itself will not break many retirement plans or wealth building processes. Recessions and bad markets are a feature, not a bug, of investing. It is to be expected.

Effective investing is the proper alignment of a portfolio with future spending. For individuals, future spending may be in the form of a vacation home in two years or a three decade long retirement or multi generational legacy planning. For pensions, future spending comes in the form of providing current and future retiree's with a paycheck. And while pension fund investment performance is important, the concern has always been around the liabilities not being sustainable. Superior investment performance will not overcome an unsustainable burn rate.

Do you know how much it costs to be you, right now? If you can't answer this question, it becomes nearly impossible to identify and align with any future spending targets. It's nonsense to think about buying that vacation home or funding retirement spending if spending cannot be effectively managed on a month-to-month basis.

Scott Galloway describes this best:

"His household (speaking of his father), pre-divorce, pre-fourth divorce made about $52k a year from his pension, Social Security, fourth wife's Social Security, and they spent around $45k a year. They are rich - passive income greater than their burn. And it creates a certain peace and dignity and relaxation.

Another household, a good friend of mine runs a large division of about 700 people at a bulge bracket investment bank, makes between 3 and 10 million dollars a year depending on the markets that year. He is poor. Between his ex-wife, alimony, his master of the universe lifestyle, his NetJets card, his house in the Hamptons, he spends all of it.

Now you say well just save money. And that takes a certain what I would call leadership and recognition and discipline in your own lifestyle, because the tendency is as you grow older you believe that your trajectory of making more money each year which people manage to do is going to maintain that trajectory. And you have all this temptation around you in terms of your friends living larger and wanting to signal to other people that you're successful, and to spend more.

When you're young, be competitive, make more money. But how do you stop howling in the money storm? How do you show some grace and some dignity and live below your means, and start investing?"

Managing burn provides a margin of safety that no investment or amount of salary can. In the grand scheme of things, current market conditions are largely overrated. It's a distraction. Spending decisions are way more within our control, and way more effective. Spend more time here.

Thanks to the Prof for a great show.

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^Sources:

^{(Examine Your Burn) The Prof G Show}

^{(Massachusetts Pension Overview) Pioneer Institute}