The Art and Science of Getting and Staying “On a Roll”
I love adapting engineering and physics concepts to solve common financial problems many people, even financially savvy people, encounter all the time. That’s why I’m so excited about my latest invention, the Wealth Allocation Wheel.
The challenge, in simple terms, is “staying on a roll.” There is an art and science to staying on a roll with your wealth. This means having enough inertia with your wealth to successfully navigate the Stages of Financial Freedom (see Illustration 1). The clear aim I have written about extensively is how to achieve controlled growth while avoiding short or long periods of stagnation or depletion.
A Common Problem
A common problem I see in the high and ultra-high net worth circles I’m in as a wealth advisor and in the world as a concerned human being who hates to see any person struggling with money, is “imbalance” causing some form of financial instability that, in turn, frustrates results.
I started reading about engineering and physics topics related to motion, inertia, torque and related topics and began making correlations to wealth. This led to examining familiar concepts—center of gravity, velocity, pivot, Newton’s Second Law. Likewise, I learned about many more concepts for the first time—hunting oscillation, directional stability, differentials, adhesion and others.
The Root Cause
Cutting to the chase, I determined that the root problem of being or staying on a roll with wealth is an out-of-balance or deflated wheel. This results in stability, friction, velocity or torque issues. Furthermore, I discovered numerous compensating tendencies can cause a host of other problems. Such “wealth wobbling” aggravates results further. But, there is good news! Solving the root of this problem has great potential. It can instantly transform the lives of people receiving relief from it. This is so exciting to me!
A New Approach
I realized that a new structure organizing wealth into three categories, Safety, Market and Aspirational, under special definitions I created and fine-tuned for these categories* and combining them in a wheel diagram is a simple way to illustrate, diagnose and optimize any client’s resources for their unique circumstances and for ever-changing external (economic) circumstances.
Below, Illustration 2 shows how Safety category assets pivot off the axis with ease to a point, but then can hit a harsh, flat sticking point that is problematic. Anyone who had literally all of their assets in Safety category holdings (bank accounts and short-term CDs and Treasuries) during the last five to ten years, as an example, would have recent first-hand experience of this sticking point. If a person now in their 90’s followed this limited tactic their whole lifetime, they would have had a life-long wealth traction issue – akin to traveling the world on a severely flat or disfigured tire – especially when inflation is factored in.
Illustration 3 shows a similar example of someone with a combination of Safety and Aspirational assets, but no or extremely limited Market category assets. This is a fairly common example of what we might see with entrepreneurs who trust the Safety category, trust their own judgement and control of the Aspirational category (business or real estate ventures) but greatly misunderstand and/or distrust the Market category.
As illustrated, the duo of Safety and Aspirational assets can have a nice, long period of stability pivoting off the axis with ease but can hit a sticking point either with concentrated/leveraged Aspirational category assets hitting a long, potentially catastrophic rough spot, and no/limited diversified wealth in the Market category in place to keep the torque, velocity and momentum going. By the way, this same problem can occur with only Safety and Market (no Aspirational), or only Market and Aspirational (no Safety) category assets.
Finally, Illustration 4 shows a full Wealth Allocation Wheel with adequate funding of all three categories, Safety, Market and Aspirational, and the resulting hypothetical synergistic, balanced motion possible with an optimally tailored mix. Keep in mind that the proportion of the wheel dedicated to each category (one-third each in the graphic) is not meant to suggest such a proportion as optimal for you. The right proportion of Safety, Market and Aspirational assets for each person or family unit is something we will customize for clients based upon a variety of inputs unique to them (internal considerations) and unique to broad economic, geopolitical and wealth creation conditions (external considerations). Clients of Janiczek Wealth Management gain access to a variety of proprietary analysis, research and tools designed to help answer these questions.
Safety, Market & Aspirational Assets
You might be wondering how I defined these three categories of assets. First, I should note that the category titles are not new. In our industry, there is a concept called Wealth Allocation Framework that already uses these category names. However, I found the definitions clunky for my purposes for the Wealth Allocation Wheel, so I made my own. Here they are:
Safety assets are defined as highly liquid, highly stable (even in extreme economic situations) valuation assets such as bank accounts, money market accounts, FDIC insured CDs, and U.S. Treasuries.
Market assets are defined as a globally diversified portfolio of semi-liquid securities issued by largest publicly traded institutions to smallest publicly traded institutions. This is “investing in capitalism” worldwide owning the securities of organizations with varying value-added capabilities, talents, brands, assets across many industries, all priced in highly transparent way with risk/reward premiums built in and concentrated risk, to the extent possible, engineered out.
Aspirational assets are defined as concentrated (as compared to market category) holdings in publicly traded or private markets that may or may not use debt as leverage to potentially enhance returns. This category can include investment in all cash or leveraged real estate of all forms, private business ownership, concentrated public stock/stock option portfolio (such as concentration in public employer or in a desired niche such as FANG stocks) private debt instruments, hedge funds, private equity, venture capital, angel investments and so on. Notice this list has items that may have risk similar to market assets to risk magnitudes above and returns possibilities across the gamut as well.
Your Ideal Wheel
Now that you have a basic understanding, I want to make sure you are aware of this key takeaway. There is an ideal Wealth Allocation Wheel mix for you. Getting this right, with the proper review and analysis, can lead to a breakthrough in how you grow, protect and manage wealth.
Too often, for example, I see people exerting aspirational ambitions in the Market category (trying to perfectly time the market, for instance or giving up on diversification and instead concentrating such assets making them Aspirational category instead of Market) and making huge mistakes (see our work and numerous studies on the Investor Behavior Penalty). I’ve also seen people make huge unforced error mistakes in the Safety and Aspirational categories. I believe the Wealth Allocation Wheel tool, used as a core foundational part of someone’s wealth management regimen can provide the guidance and discipline needed to get and stay on a roll.
For clients interested in us further reviewing and incorporating this core concept and tool into your plans, along with our Strength Based Wealth Management® and Evidence Based Investing disciplines, we look forward to reviewing it with you in our next review meeting. If you’d like to discuss it earlier, just call us at 303-721-7000.
For those not yet clients, this is another great reason to begin the conversation with us to explore numerous ways we may be able to assist you. Simply call my colleague Cathy Wegner at 303-339-4482 to begin the conversation.
*The safety, market and aspirational categories are used in the wealth management field in other ways, including Wealth Allocation Framework, which inspired some of my thinking on this topic. My work led to different category definitions due in part to us having already established Strength-Based Wealth Management®, Elastic Limit of Wealth and Elastic Limit of Wealth Threshold concepts and other proprietary innovations.**
**Joseph J. Janiczek holds the patent on Systems and Methods for Optimizing Wealth. For more information call 303-721-7000.