The role that an investing strategy fills is a very personal one, which depends on your own circumstances. For many people it’s to fill a void post retirement. For others it’s too have a back up plan for a rainy day. For much of the early FI crowd it’s to provide a way out to escape the rat race early.
Now exactly how you construct that plan is going to be a function of individual risk appetite, ability to handle volatility and whether you want to rely on income and growth, Significantly, age is also mentioned as a factor which should be taken into account as well. Why?
The theory goes that younger folks have more time to ride out volatility in the market and would be well served with more aggressive growth stocks that may have the tendency to move all over the place in the short term, but which can generate sustainable wealth in the long term.
For someone that’s a little older, you may run into a spot of bother if the time when you want to cash in those growth stocks is the exact time you want to retire. In a down market that volatility could cripple your nest egg.
So having a fairly safe portfolio which trends up in a stable way, year in year out is a good way to mitigate against significant market fluctuations. The trade off is that you may not get the growth, because you have to be a little more conservative given the situation.
While this principle is pretty well accepted in the case of age, could this be something that could apply in the case of your core job and income as well?. Here’s my thinking.
Let’s say I was in a high risk profession in terms of job security, say auto manufacturing for instance, where jobs have been slashed left and right . I’d likely be very nervous to build up assets that have long term debt commitments attached to them for fear that a new round of layoffs may be just around the corner.
It would probably also make me fairly nervous to hold any kind of equities because I may have to draw down on my nest egg at a moments notice and get into cash pretty quickly. In this situation, I’m probably going to want to have cash or cash like holdings like bonds rather than equities given how risky my core underlying income is.
My core job and industry serves as a bit of an inhibitor for taking more risk. Unfortunately, actually taking that risk may also ultimately pay off significantly down the line.
Let’s say you’re on the reverse end of the spectrum. In a government job, or working for an energy company with a history of stability and security. While no job is ever truly secure these days, being a government worker or someone in a major utility with regulated pricing increases at least holds some measure of safety. There’s pretty good dependability as far as the safety of your pay check is concerned.
I’d argue here that because your day job and your core pay is pretty secure you’re in a much better position as far as generating long term wealth. You can make use of significant “good debt” to build up asset balances, without being in fear of your core income source being cut at the knees. You can build up positions in growth stocks because it’s less likely that you’ll need to quickly convert to cash in the event of a layoff, given your probability of a layoff is that much less likely.
In my view, our investment habits are very much influenced by our psychological perceptions of risk that we face in our lives. Whether it’s health related, employment related or otherwise. If I’m in poor health or in a risky job, I’m just not going to want to take on the risks that go along with building up growth assets, because my situation is uncertain.
Conversely, if I’m in good health, with a long term outlook, and a stable job, I probably could, and likely should feel a measure of confidence to pursue assets that could move around a lot in the near term but generate strong wealth long term.
So next time that flashy new job comes around that offers considerably more pay or a compelling exit at the end of the tunnel, but with considerably more risk, take the time to work out whether you’ll actually be doing your long term wealth creation more damage. Not to mention the possible impacts on your mental and physical well being
Even moving from a more boring, yet stable job to one that offers comparable pay but with more excitement in a more volatile industry should make you think twice.
That sexy start up role with mega options could actually be harming your ability to create meaningful wealth by making your more risk averse about your core investments. Not only may it not have the generous 401k matching elements that you see in more established, well funded company’s, but if there’s a risk that your company’s may fold tomorrow, you’re less likely to take actions that could greatly help with wealth building, such as taking on some modest level of debt or chasing more aggressive growth assets.
While it’s not always possible or easy to control the job or industry that we find ourselves in, sometimes it’s easy to take things for granted. Boring but stable in your work life, as much as in your investing, can lead to significant wealth creation by not making you think twice about taking on debt or investing in growth assets. If you are content and happy in a stable but unglamorous job, you may be doing your investing a world of good, more than you even realize.