Staying Wealthy - Paranoia

I’m in the middle of a short series discussing important investment virtues necessary for accumulating and retaining wealth that can be used to purchase financial freedom—the end goal. In the first article, I discussed how to get wealthy by utilizing patience, and I showcased Warren Buffet as a prime example. In this next article, I’ll explain how to maintain wealth with paranoia.

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While I'm an optimistic person, the true way to become wealthy and stay wealthy is to develop a healthy balance between frugality, paranoia, and optimism. I touched on frugality in the last article with emphasis on the patience of a saver. Currently, savers are being rewarded; interest rates are high, and people are reaping the benefits in accounts like CDs and fixed annuities. If you haven't yet taken advantage of this opportunity to refinance your lower-yielding, long-term safety net investments, you need to get on the stick, as the chance will soon pass off the scene. The Feds will lower rates again, and the reward for savers will gradually trickle away.

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In addition to frugality, there's the concept of paranoia, which helps you become financially unbreakable. This doesn't mean you are impervious to an “asteroid-hitting scenario,” but we can effectively place you in a position to thrive under normal and abnormal circumstances. If you become financially unbreakable under a Lord and Richards financial plan, you will not reduce or give up opportunities. We will find a unique balance that helps you achieve safety, growth, and opportunity. I'm not referring to the classic 60/40 portfolio of stocks and bonds based on risk tolerance. This strategy has proven ineffective for most people over the long haul and reduces the amount you can safely live on in retirement; this isn’t financial independence, but fear.

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When I reference “paranoia,” I'm talking about developing a plan that takes into account the likelihood of negative events occurring, which my clients are always interested in discussing. What will happen because of the election? What will happen because of wars? What will happen because of supply chain issues? What if we have another pandemic?

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Remember this: Planning is essential, but the most important part of any plan is to plan on things not going according to plan. As Mike Tyson put it more simply, “Everyone has a plan until they get punched in the face.” The reality is that your plan must include the likelihood of things going wrong. Being overly optimistic is a problem I notice with work done by individuals and other professionals. I’m an optimist, and I want you to be confident about the future and opportunities, but I also want you to be paranoid about what could?go wrong. In Morgan Housel’s book, The Psychology of Money, he calls it a “barbell mindset.”

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On one side of your barbell, you have safety and are guarded against potential losses; you use specific financial tools that can still grow but provide tremendous, rock-solid principal protection. How do you achieve safety and security at the same time? You must forfeit some liquidity in exchange for long-term assets that can protect and guarantee your principal while providing solid growth and potential future income. We can still be optimistic about the United States, the world, and investing, as there are wonderful opportunities available. If you allow paranoia to consume you, your returns will be diminished, and you'll be flattened out by periods of high inflation and attempting to maintain your lifestyle through retirement. Developing a barbell portfolio allows you to use paranoia to your advantage by using awareness of what could go wrong to create safe, protected guarantees. With a proper plan, income should be the least of your worries, as it will come from guaranteed sources, as opposed to dividends, bonds, or other unstable and unreliable sources.

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Once stability is in place, the other side of the barbell can be used to develop a more aggressive stock- and equity-based portfolio with some protective measures built in. At Lord and Richards, we use institutional risk management by implementing tools and strategies typically unseen in the ordinary investor’s portfolios and widely used by institutions such as colleges, hospitals, endowments, foundations, etc. Hedging is one strategy we utilize for our clients to reduce volatility and the degree to which that side of the barbell can drop; we want to contain the inevitable rise and fall of the market. Here is where patience comes in. If we’re going to invest more aggressively on that side of the barbell, we must let things ride through—even things like bear market cycles. Insistence on avoiding bear markets will force you to make certain compromises. Alternatively, I would suggest a balanced portfolio with a barbell composition and checks and balances.

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Staying wealthy requires the patience of getting wealthy and the paranoia of ensuring you have an unbreakable plan and portfolio. At Lord and Richards, we help you do exactly this by performing a Financial Independence Review?. My team and I would love to help you obtain financial freedom in retirement. It begins with a simple phone call.

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Investment Advisory Services offered through Lord and Richards Wealth Management, LLC, a Registered Investment Adviser.