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What happens when you hit your number?

July 01, 2023

What happens when you hit your number?

All of you have a number. It's a number that's specific to you and your particular situation. It's a number that will allow you to reach your goal of financial independence. In other words, enough money to live the life you've dreamed about.   

Now, what that amount is varies for all of us. For some, it could be $100,000. More than $1 million or even $10 million would be needed for others. But let's say you hit your number.  

Now what? 

How does one change their strategy of increasing wealth to protecting it? How might your portfolio change?  

Let me introduce you to Mr. Eike Batista. 

He teaches us an important lesson that a portfolio that helps you get rich isn't necessarily the portfolio that keeps you rich.  

In 2012 Eike Batista had an estimated worth of more than $35 billion. 

The self-made Brazilian billionaire created an empire from mining to oil to public works. He was hailed as a financial genius. 

Barely two years later, he had lost all $35 billion and owed another $1.2 billion to creditors.

What the (bleep) happened? 

His confusion between getting rich and staying rich is at the heart of his collapse. He failed to diversify the wealth he created and then compounded his mistake by taking on massive amounts of leverage (if there ever was a double death of investing – concentration, and leverage are it).

Mr. Batista failed to recognize that when he reached his number, he neglected to review his investments, so "staying rich" became part of the equation. 

But what might “staying rich” look like for the average investor?  

Firstly, the phrase "staying rich" is, at best subjective. Staying rich in terms of what? Account value? Purchasing power (i.e., the ability to keep pace with rising costs)? Investments that are absent of volatility? The concept of staying rich has to be considered with the framework of these questions because the answer will likely differ in terms of how to construct your portfolio.  

The primary issue with “staying rich” is that investors associate it with owning safe investments.  

And what do safe investments usually mean for investors? It means using CDs, savings accounts, money market accounts, and maybe even US Government Treasury Bills.  

Given that the financial media is notorious for preaching safety (usually at the bottom of bear of markets, which is arguably the worst time to seek safety), it’s easy to see why investors associate staying rich with safety. 

I would suggest, dear reader, that a portfolio developed with an eye on asset allocation and steeped with diversification that helped you build wealth is just as equipped to maintain it, regardless of your definition of "staying rich." 

The one caution in moving your portfolio to a “staying rich” strategy is forgetting the immediate challenge in doing so – Inflation. 

You're likely to face a multi-decade retirement, in which every year, inflation looks to rob you of your purchasing power so that one day, you discover that while your account value has been preserved, you can’t buy the same amount of goods and services that you once did. 

Inflation is real and can pose significant problems for your "staying rich" strategy:

The bottom line is that when you finally reach your number, it doesn't necessarily mean a different portfolio is required. Many factors will determine the best course of action. 

Just understand that you potentially face a multi-decade retirement that requires a superior, inflation-killing rate of return, which you may find already in your current portfolio.  

Stay the course my friends.