How the Ultra-Wealthy Actually Invest (It's Not 60/40)

Sean Weisbrot: You've spent a long time working with people who have made a lot of money, whether it's first generation, second gen, third generation, and I am really curious to understand.

Sean Weisbrot: Not only how they've made the money, but more importantly how they've kept the money and how they've grown the money.

Sean Weisbrot: Because it's something that a lot of people happened, uh, have this happened to them where they have this liquidity event where before that they were poor, basically they didn't have any experience with a lot of money.

Sean Weisbrot: And then all of a sudden this money is dumped into their lap and they just dunno what to do with it.

Sean Weisbrot: And unfortunately, especially in lottery and athletes, a lot of people they.

Sean Weisbrot: End up blowing all of the money that they've made and we want to inspire people to become financially literate.

Sean Weisbrot: And so I would love to spend some time talking with you about that.

Sean Weisbrot: Uh, so I'd love to know more about what you've learned and if you have a framework or a structure for that, then you know, we could go through that.

Tad Fallows: Yeah, that's a fantastic question. And I would say, I do think it depends to some degree, how you came into the money.

Tad Fallows: How much of a concern this is? I think there is this widespread conception of, okay, you know, lottery winners are five years later, much more likely to be bankrupt in the general population.

Tad Fallows: And that probably is true, but I think to some degree, if you look at lottery winners, or if you look at people who become pro athletes at the age of 23, you kind of have a selection bias there toward the people who are probably least prepared to handle a sudden windfall.

Tad Fallows: You have somebody either who just, you know, 22, 23.

Tad Fallows: Any one of us, our brains aren't fully mature, uh, by that point.

Tad Fallows: And, you know, you've had very little life experience and you have, you've never paid your own bills.

Tad Fallows: So I think there, you're just coming in with. You're, you know, going, there's no training wheel session, then lottery winners, you know, by definition it's people who are buying lottery tickets, the ones who are suddenly getting this.

Tad Fallows: So they probably don't have the most rational, um, economic framework to begin with.

Tad Fallows: So I think, you know, if you, if you're coming from a background at, which is significantly more common for somebody who generates significant wealth as, let's say, an entrepreneur.

Tad Fallows: Maybe you are a high paid employee at a tech firm, you're a high paid employee at a hedge fund.

Tad Fallows: Those people have a, have a leg up there. Both have probably a little bit longer in their career and have more of this exposure to basic financial concepts.

Tad Fallows: So the first thing is, I would say, I wouldn't panic if you're in this situation saying, oh, by default I'm gonna blow it.

Tad Fallows: And now I have to go hire Goldman Sachs and pay them 1% of my money every year just to prevent me from my being my own worst enemy.

Tad Fallows: It's perfectly fine if you wanna do that, but if you talk to the.

Tad Fallows: Wealth management industry, that's the only option. Whereas I would say that is a reasonable option and perfectly fine for those who want it.

Tad Fallows: But also people are very capable of managing their own money, even if it has two more zeros than it used to have.

Tad Fallows: Um, that said, I think in terms of, hey, what are the basics that people ought to do, um, to protect from mistakes?

Tad Fallows: I'd say there's a few things. Um, and maybe I'll start with some of the ones that are a bit less obvious, maybe less sexy.

Tad Fallows: One is to think about your insurance plan. Um. One of the last things people wanna think about next to perhaps estate planning, which I can cover next, but if you think about your insurance plan, you know, um, there are a set of what they call very high net, high net worth, or very high net worth carriers.

Tad Fallows: If you've heard names like Chubb, pure Berkeley, one a IG, and they are really designed for people whose liabilities might be okay.

Tad Fallows: I own a $5 million house, not a $500,000 house.

Tad Fallows: Or if I am getting sued by somebody, they see me as deep pockets.

Tad Fallows: And so as a $10 million judgment, and you're gonna have a different kind of, uh, liability there.

Tad Fallows: And this insurance is a bit more expensive, but we're not talking 10 times more expensive.

Tad Fallows: You're maybe gonna spend twice as much as going with a mainline carrier, like an Allstate or a State Farm.

Tad Fallows: Um, but really one thing I think you'd wanna do is find a broker who doesn't work for any one company.

Tad Fallows: Not a so-called captive broker, but somebody who will.

Tad Fallows: Rate shop across all of them, but who is specifically focused on high net worth clients and just say, Hey, I need a basic insurance package.

Tad Fallows: Again, this is nothing crazy. It's the stuff you're familiar with in terms of home insurance, auto insurance, et cetera.

Tad Fallows: Although one key thing being umbrella insurance, a lot of people would not historically have umbrella, and basically what that means is your normal insurance goes up to, let's say half a million of liability.

Tad Fallows: It kicks in for literally another five or $10 million of liability above that, and it's shockingly cheap.

Tad Fallows: We're talking maybe a thousand dollars a year, $2,000 a year to get five or $10 million of extra coverage.

Tad Fallows: So very unlikely you'll actually have this problem. But in that circumstance where something terrible does happen and you have a $5 million judgment, you'll be very glad you spent a thousand dollars a year to be covered against that.

Tad Fallows: So insurance is one piece.

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Sean Weisbrot: I want to ask you about this 'cause this is something that's relevant for me now.

Sean Weisbrot: Apparently my parents took out an insurance, a life insurance policy, a 20 year term life insurance policy on me 12 years ago when I was living in China.

Sean Weisbrot: Yeah, because they were concerned about, you know, if I, something happened to me, if I got really ill or if I died, they'd have to cover the funeral costs and the, you know, going there and taking my body and all of this stuff.

Sean Weisbrot: And they want me to take over the policy now that I'm married.

Sean Weisbrot: And so I'm looking at this and I'm like, what am I supposed to do with this policy?

Sean Weisbrot: It's got six years after that. Like I'll be 40 soon.

Sean Weisbrot: You know, so I, I'm like, do do people have these life insurance policy?

Sean Weisbrot: Like do you hear these ultra high net worth individuals talking about life insurance?

Sean Weisbrot: And like, do they put them into trust? Do they put beneficiaries, individuals? Like that stuff is super confusing.

Tad Fallows: It's a fantastic question. I'd say the first thing, and if somebody takes away one thing from this, do not buy whole life insurance.

Tad Fallows: The only person who is trying to sell you whole life insurance is someone who's getting a commission on whole life insurance.

Tad Fallows: So you mentioned term that's of course a different beast from, uh, whether they call it whole life variable life index, universal life.

Tad Fallows: All fancy ways of saying that you're gonna pay a whole lot of commission and get something you don't really need.

Tad Fallows: But wi within the term world, I think that really comes down.

Tad Fallows: And this again, should be quite cheap if you're, if you're 40 and you want, I don't know, let's say a million dollars of coverage, we are not looking at 5,000 a year or 10,000 a year.

Tad Fallows: You're, you're looking at, yeah, more like a thousand or 2000 a year for that coverage.

Tad Fallows: And that really just comes down to, do you have, if you were to get hit by a bus tomorrow.

Tad Fallows: Is that gonna be a problem for someone else? Clearly it's a problem for Sean, but do you have enough money that your wife will be fine with just what's in your brokerage account?

Tad Fallows: Or do you have little kids and now you know your wife needs to raise those little kids and you're gonna need an extra $4 million in order to get them through high school and college.

Tad Fallows: That's really the way to think about it is what time horizon will it be a problem for somebody that you care about if you pass away?

Tad Fallows: And what is the gap between the assets that you're gonna leave and the assets that are required?

Tad Fallows: So it could well be somebody with a lot of money, maybe if somebody has five or $10 million, but now they've bought three houses and they've got four kids and they've got, you know, a set of people who are counting on them.

Tad Fallows: Maybe they really do need until their kids get through college or something like that.

Tad Fallows: Um, a significant policy, but I would say. If you are single or if you have enough money that.

Tad Fallows: When you pass away that that estate by itself is enough, then at that point you don't really need term insurance.

Tad Fallows: Um, and you know, I was not this idea of quote permanent insurance.

Tad Fallows: I don't, you know, there's plenty of podcasts out there that really go down a rabbit hole on it, so you, we probably don't need to cover that too much more here.

Tad Fallows: But what, what I will say by way of a data point is in our community of about 7,000 people who are either very high or ultra high net worth and, you know, pretty sophisticated in these things, pretty much nobody carries.

Tad Fallows: One of these permanent life insurance. There's a very special exception to that, something called private placement life insurance, which is really more of a tax planning vehicle than it is an insurance policy.

Tad Fallows: But, um, you know. We're talking a million dollar minimum for something like that.

Tad Fallows: So if, if you haven't been thinking about it, it's probably not relevant to you.

Tad Fallows: But you probably will have at some point a broker come and talk to you about whole life insurance.

Tad Fallows: And um, you know, I can tell you that 90 well north of 90% of people in the situation decide that's not a good trade off for them.

Sean Weisbrot: Okay. So then in the interest of time, uh, I guess let's go on to the next thing that you were thinking about.

Tad Fallows: Yeah. Yeah. I mean, I would say estate planning is another one that nobody wants to think about, but you should at least do the basics on and, and.

Tad Fallows: There simplistically, there's a few documents, there's your will. Okay, what's gonna happen to my kids?

Tad Fallows: Most importantly, and some other things like that, if you pass away.

Tad Fallows: And then there's things, um, there's something called a revocable trust, which really just simplifies the estate process.

Tad Fallows: Um, if you pass away, there's some more complicated things where you get into things like irrevocable trusts, which if you're in a situation, at least for your US listeners, there's a $30 million estate tax limit.

Tad Fallows: Um, more people will probably end up going over that than they think.

Tad Fallows: 'cause someone with $10 million today, if they're age 40, they're probably gonna have more than $30 million by the time they pass away.

Tad Fallows: 'cause they have a lot of compounding in front of them.

Tad Fallows: So you don't have to have more than 30 million today.

Tad Fallows: But if you just do the math and say, okay, over 30 years, I might have 10 times the money.

Tad Fallows: If you have 5 million today, you might actually get there. So think about it.

Tad Fallows: Um, and that I'm not gonna walk through a, Hey, here's the exact playbook.

Tad Fallows: But of course it depends on the person. But I think making a point.

Tad Fallows: Of talking to a, a lawyer who specializes this and they'll have a pretty straightforward playbook.

Tad Fallows: Unless you're trying to get really fancy and put bells and whistles on it, you're not gonna rack up a massive bill for doing this.

Tad Fallows: But it's something that's always better to be done earlier and you wanna just go ahead and, and work with a lawyer to set a basic practice there.

Tad Fallows: So I would say that's kind of your infrastructure and logistics.

Tad Fallows: We could talk a little bit more about the investments, which are probably, you know, the sexier thing to talk about, um, to begin with.

Tad Fallows: But, sorry, I think you had a question there, Sean.

Sean Weisbrot: I was just gonna say in like. One sentence for each. Yeah.

Sean Weisbrot: Type. Can you explain the difference between a revocable and ir?

Sean Weisbrot: Obviously the term irrevocable and irrevocable are obvious, but what's the difference in the reasons why you would do one versus the other, like in a few sentences?

Tad Fallows: So a revocable trust does not really do anything or come into play until you pass away.

Tad Fallows: All it does is that in some states, when you pass away, if you don't have anything, then a judge goes through this probate process and you're just paying a bunch of legal fees and you're taking six or 12 months where assets where you wanted them to end up.

Tad Fallows: If you have a revocable trust when you pass away, it kind of comes to life and simplifies that process.

Tad Fallows: An irrevocable trust, as it sounds like it's irrevocable, but it's a much more significant document where, you know, you, Sean, are actually giving money away today.

Tad Fallows: You're putting this trust. You can't control it the same way you used to.

Tad Fallows: You can't get it back the same way you used to. And that might sound terrible.

Tad Fallows: And you know, people don't like that aspect. What they do like is from a liability perspective.

Tad Fallows: If you suddenly defraud me and I sue you, that's not actually your money anymore.

Tad Fallows: So I can't get that money from you because it's in this trust.

Tad Fallows: And from estate planning purposes, that money is out of your estate today.

Tad Fallows: So if you put an Nvidia share in there today, and it's worth $1, and then 10 years from now it's worth a hundred dollars, you're not, your estate doesn't get taxed in that appreciation.

Tad Fallows: It just, um, gets taxed. Or the value that you put in that.

Sean Weisbrot: Okay. So another question about infrastructure before talking about investments, domestic versus foreign companies, trusts, bank accounts, um, especially there's a lot of Americans I imagine in your community.

Sean Weisbrot: Some of them may be living in the us, some of them may not be.

Sean Weisbrot: How are they on average thinking about this for tax purposes, for liability, uh, for, you know, for legal purposes and whatnot?

Tad Fallows: Yeah, I think there is some, there's some set of advisors who will advise you get really cute and be like, oh, Seth, this trust in the Cook Islands, because nobody can ever, ever, ever come after you there.

Tad Fallows: Things like that. I think that's a pretty dangerous thing to do.

Tad Fallows: The only reason that's relevant, if you are doing something really shady and any proper legal system would come after your assets and now you've parked them in the Cook Islands, but you know one that's probably not ethical to begin with.

Tad Fallows: Second, you're then trusting the Cook Islands legal system to protect your millions of dollars.

Tad Fallows: And I think the risk that you did something really shady is probably smaller than that.

Tad Fallows: Something shady happens in one of these shady countries, and now you don't have the recourse to a first world developed legal system, um, to, to protect yourself.

Tad Fallows: So I think that is a bit, um, I, I, I don't know many people who actually follow that.

Tad Fallows: Within, let, let's just talk about the US for a second. Within there, there's different states that have different rules.

Tad Fallows: There's a sub in, you talk to any lawyer, they'll tell you, okay, you know, Nevada, South Dakota, Alaska, there's a Delaware, there's a few of these that are sort of better than, uh, structured than others.

Tad Fallows: If you're working within a US state, it's basically the same thing. Um, and you're having a very reputable framework.

Tad Fallows: So I would just follow my lawyer's advice there. I think I have trust in Alaska and Nevada. Um.

Tad Fallows: In terms of, uh, you know, outside the us that's really something where it's probably gonna be dangerous for, you know, me to be giving advice.

Tad Fallows: I think if you live in Portugal and you have certain Portuguese implications, it depends on citizenship and a bunch of stuff, which is probably universal advice is more likely to, to lead someone astray.

Sean Weisbrot: Okay. I guess I was coming at it from the point of view of what have you heard of your community members doing, even if it's not legal advice.

Tad Fallows: So I would say most of them keep their stuff within us and.

Tad Fallows: Within the place where they, the jurisdiction, where they live, if they're in the us they keep their stuff in the us they're not taking advantage of, um, you know, foreign legal regimes.

Tad Fallows: I think if you're in Europe, it's probably a a little bit more specialized, partly because they don't have the global taxation.

Tad Fallows: So as a US citizen, if I move to Mon, I'm still paying US taxes.

Tad Fallows: We are really the outlier there. If a French citizen moves to Monaco, they're no longer paying French taxes, they're just paying Mons taxes, which is nothing.

Tad Fallows: Um, so I think there, there is more playing around with those things amongst, um, people outside the us but I would say even they tend to stay within relatively established, developed countries.

Tad Fallows: Maybe if you're going to Switzerland or Monaco or Luxembourg, but they're not going to your jurisdictions of convenience like.

Tad Fallows: You know, Tuvalu or, or, uh, Micronesia, something like that.

Tad Fallows: I think that's different a bit from if you are investing, there's, which is probably way too much detail investing in certain, uh, private equity vehicles.

Tad Fallows: They're often domiciled in something like the Cayman Islands to avoid certain tax treatment.

Tad Fallows: That's different from really like your own estate. That's more of a corporate thing for particular investments.

Tad Fallows: That's not your holistic estate. Moving to the Caymans.

Sean Weisbrot: Okay. And so what have you seen from your community members on average in how they structure their portfolio to, so I guess are, are they on average thinking about growth or preservation?

Sean Weisbrot: Like what, what's more important to them? Growth or preservation right now?

Tad Fallows: Yeah, fantastic question because I think anyone rational could look at this in one of two ways.

Tad Fallows: You could say, alright, if I've been fortunate enough. That I have, let's say, five times as much money as I need, you could either say, well, there's no need to take risks today.

Tad Fallows: I can put it all in muni bonds. I can clip a 2% coupon and that's gonna cover myself, you know, for the next 40 years.

Tad Fallows: And I'm done here. I never, I sleep well at night.

Tad Fallows: Or you could say, Hey, I have enough money that I could put it all in a triple never Nasdaq, NASDAQ fund.

Tad Fallows: And even if it drops two thirds, I still have plenty of money.

Tad Fallows: And I think my expected value 30 years from now is much higher by doing that.

Tad Fallows: And so I'm gonna go highly risk on. I'm gonna accept the volatility and basically get paid for that volatility in the form of, of high returns at the end.

Tad Fallows: I don't think there's a right answer to that. I think that is largely a personality question.

Tad Fallows: Now to your question, Hey, what do people do in practice?

Tad Fallows: In practice, they take a much more risk on approach.

Tad Fallows: I, we do a, um, annual asset allocation benchmarking survey and ask, Hey, between.

Tad Fallows: Stocks, bonds, cash, crypto, private credit, private equity, oil and gas, et cetera. Where do you keep your money?

Tad Fallows: And I would say the bond allocation is well south of 10%.

Tad Fallows: So if you hear of a quote, typical portfolio being 60 40 in practice, I'll call equity like so instruments with a high expected return, but higher expected volatility are more like, um.

Tad Fallows: Real estate's, maybe a quarter or a third of the portfolio, and then equities are almost the entire rest in just a sliver in cash and bonds.

Tad Fallows: The flip side is, it's not what I just said of, hey, a triple levered NASDAQ thing that's just, you know, uh, volatility to the moon.

Tad Fallows: People actually are quite conservative on taking out debt and leverage.

Tad Fallows: So your typical member, if they have a net worth of a hundred dollars.

Tad Fallows: They'll maybe have $5 in bonds, but they'll also have under $10 in borrowing.

Tad Fallows: So half our members don't have a mortgage at all on their house.

Tad Fallows: Um, they basically say, Hey, what money I do have, I'm gonna put in a high return instrument and I'm gonna be okay with the volatility, but I'm not gonna risk the money I have for money I don't need.

Tad Fallows: So they're not gonna take out, you know, debt that is total their net worth to double their exposure and take the risk that a down market actually could cause them to go bust and set back to zero.

Tad Fallows: Which I think is a pretty rational approach. Um, because if you put your money in stocks, maybe they drop 50%, but if you can handle that and you're not levered, you'll be fine.

Tad Fallows: They'll come back from that 50% over the next decade.

Tad Fallows: Whereas if you borrowed 50% and they dropped 50%, you'll get a margin call and you're left with nothing and you can never come back from nothing.

Sean Weisbrot: Something that's interesting to me, I've heard of only recently is like, basically let's say you've got 5 million in, in, uh, in your portfolio and someone is willing to give you a one and a half million dollars loan or a $2 million loan.

Sean Weisbrot: You kind of mentioned it, but basically. Let's say the cost is 5% a year, and you know that you can put all of that money into an eight to 12%, you know, high dividend ETF, would, would people do that or would they avoid that?

Tad Fallows: Some people do it. I would say a key thing you said there is they're borrowing the amount.

Tad Fallows: They're borrowing, I think borrowing 10 or 20% of your portfolio.

Tad Fallows: Is perfectly fine because the way these loans work is, let's say you have for simple math, a million dollar portfolio, you are allowed to have debt depending on the brokerage you're working with of, let's call it 50, 60% of that.

Tad Fallows: Um, so let's say it's 60%, you can have 600,000.

Tad Fallows: Now if your portfolio falls by half, the amount you're allowed to borrow will fall from 600,000 to 300,000.

Tad Fallows: 'cause a consistent ratio. So if you borrowed half in the beginning, you're at a high risk of getting this margin call.

Tad Fallows: If it, if it falls, if you only borrowed 10% to start with, so you only borrowed a hundred dollars, the market would have to drop from a million all the way down to just 150,000.

Tad Fallows: If you get margin called and you know, even the Great Depression, that would be a sort of surprising scenario.

Tad Fallows: So I think the 10 to 20%, there's plenty of people who do that, and that's not particularly aggressive.

Tad Fallows: I think if you get over that for any sustained period of time, people in general don't do that because there's just too much risk from the volatility.

Tad Fallows: In terms of how they use it. Some people use it just to juice their returns by a little bit, as you said.

Tad Fallows: Okay, I'll borrow 10% and I'll put 10% more into, maybe it's just a broad index fund.

Tad Fallows: Maybe it's a dividend stock. Philip Morris or Altria is paying 7% and I'm borrowing it 5%, so I can clip that coupon over time, I'll do fine.

Tad Fallows: I think that's reasonable. What's probably more common is to see that as an emergency fund, because you could say, Hey, I need to have 10% of my money in cash at all times.

Tad Fallows: For opportunistic investments, for risk of, you know, a medical problem for something I want to buy, et cetera.

Tad Fallows: But if you have that perpetual 10% in cash, that's going to drag down your long-term returns quite significantly over a long period of time.

Tad Fallows: If instead you say, Hey, I have the ability to access literally the same day, half a million dollars outta my million dollar brokerage account, I don't need to keep cash anymore.

Tad Fallows: I can just wire myself the money if I need it, and then I'll pay it back on my own schedule.

Tad Fallows: That's actually a pretty common usage.

Tad Fallows: And part of the reason I think that you see such a low allocation to cash is that cash is not a good long-term investment.

Tad Fallows: You are almost always losing money relative to inflation, or if you are making money, it's di minimis compared to what you could make elsewhere.

Tad Fallows: So they avoid that cash drag, but keep the flexibility, which that, that's the way that I use my, uh, portfolio line of credit.

Sean Weisbrot: So when these people are thinking about this risk on type investment, as you were saying, they, they tend to be more aggressive.

Sean Weisbrot: What are they looking for? What are they investing in?

Tad Fallows: Um, a lot of that is gonna come down to, you know, personal nature broadly.

Tad Fallows: I would say there's two ways that people approach this.

Tad Fallows: One, and this might be your, you know, classic engineer mindset is, I'm gonna look at this in a really rigorous way.

Tad Fallows: I'm gonna do research and say these 10 assets have this 10 historical returns, and they have this correlation to each other.

Tad Fallows: I'm willing to accept, you know, there's the so-called efficient frontier for every extra percentage point of volatility that you're willing to accept.

Tad Fallows: How much extra return are you expecting to get? And they'll have a very strategic, I'm gonna reallocate my portfolio every quarter to keep each percentage in line and this much in domestic stocks, as much in international, this much in precious metals, et cetera.

Tad Fallows: Um. That in theory, I think is a great practice and in practice, maybe a quarter of people do it that way.

Tad Fallows: What I think is more common if you're really talking to people is they take a little bit less strategic and a little bit more opportunistic approach of, okay.

Tad Fallows: I heard about a great private equity investment. I'm gonna put 1% of my money or 3% of my money that p investment, and then maybe next month I see this other opportunity here.

Tad Fallows: Or I really like, you know, Bitcoin's falling 80% and I'm a believer in Bitcoin.

Tad Fallows: I'm gonna, you know, add, put one or two or 3% of my money into Bitcoin.

Tad Fallows: Um, and so they will look at it more from a ground up level of individual investments they like and as long as their portfolio.

Tad Fallows: Aggregate is somewhat reasonable.

Tad Fallows: Let's say they put a bunch of money into Bitcoin, that 10 x, they're probably gonna trim that position to, you know, keep it at a allocation, uh, that lets them sleep at night, but not, you know, consistently rebalancing toward these, um, optimal dynamics.

Tad Fallows: Uh, I would say that's probably the more common one in terms of the kinds of investments that, the specific things that people are investing in.

Tad Fallows: Um, public equities for everybody or almost everybody, is gonna be the biggest piece of their portfolio.

Tad Fallows: I think if you are somebody who's not very high net worth, so let's say if you have a hundred thousand portfolio, really public stocks are the best way to do that.

Tad Fallows: 'cause you can get in at any minimum price and you're gonna get very good returns in the long term.

Tad Fallows: If you start to get into a seven or an eight figure portfolio, people, we, you do find that there are so-called alternative asset or their private market exposure goes up in correlation with their net worth.

Tad Fallows: So whereas your average person with a million dollars may have, I don't know, five or 10% alternatives.

Tad Fallows: As they get to maybe being a 10 million or 20 million or 50 million portfolio, their private equity, um, allocation is gonna go up significantly.

Tad Fallows: And basically it's the, what private equity versus public equity mean is right there in the name.

Tad Fallows: Public equity means that you own a share of a public company like Apple or like Microsoft, whereas private equity is you own a share of a private company.

Tad Fallows: So you can't go to the New York Stock Exchange and actually buy and sell that.

Tad Fallows: It's a lot more illiquid. But if you look, you know, we could get into a debate about this, but I think it's fair to say that on average, historically the returns of private equity have been somewhat higher than public equity.

Tad Fallows: Um, not three or four times as high, but if public equity is delivering eight to 10%, maybe private equity is delivering 10 to 12%.

Tad Fallows: It may sound di minimis, but if you say, Hey, an extra 2% a year on a million dollars for 20 years, that actually compounds to, to being real money.

Tad Fallows: So

Sean Weisbrot: are. Are they holding an asset?

Sean Weisbrot: Like you said, when they see that the profit looks nice, they'll take it out, and then are, are they taking it out because they have conviction and there's another investment they wanna move that money into?

Sean Weisbrot: Or are they taking it out and then looking for an opportunity and sitting on the cash or moving it into something safer while they're looking for that opportunity?

Sean Weisbrot: Like how do, how do they manage that portfolio?

Tad Fallows: Yeah. Again, you know, different people, different approaches.

Tad Fallows: But if I took the median or the modal person.

Tad Fallows: They are probably more trimming a position when it has been too successful and just become an a, a element of their portfolio that's making them nervous.

Tad Fallows: They say, okay, I made this great beta Nvidia, but is now half my net worth is in Nvidia.

Tad Fallows: I still like the company, but I just don't feel comfortable with half my net worth being there.

Tad Fallows: There could be some Black swan event tomorrow that causes that to fall by 50%.

Tad Fallows: I'm gonna be really unhappy if that happens.

Tad Fallows: I think that's the more common thing of people say, Hey, this is just too big.

Tad Fallows: I'm gonna trim it and I'll look for somewhere else to put it.

Tad Fallows: Um, your most strategic person who's probably not me, but you know, there, there are these people out there, is gonna take a little bit more of that disciplined, okay?

Tad Fallows: I now found opportunity number four, which is more attractive than opportunities one, two, and three.

Tad Fallows: So I'm gonna sell a little bit of one, two, and three and rebalance into four.

Tad Fallows: And, you know, uh, again, improve my kind of, uh, total portfolio composition there.

Tad Fallows: I just wouldn't hold yourself to that standard. It, you know, maybe you, that's sort of a journey.

Tad Fallows: You try and get there over time. But I think a lot of people are more in that just, I'm gonna sell something when either I lose convict, it becomes too big, or I lose conviction in the stock.

Tad Fallows: They might say, Hey, I was a big believer in Apple, but now Steve Jobs passed away and I don't like this Tim Cook character.

Tad Fallows: Now, in retrospect, that was a terrible choice. Tim Cook was great, but you know, stuff can change.

Tad Fallows: Or maybe you say, Hey, I, I don't, I've got a bunch of Altria stock I inherited, but I think cigarettes hurt people, so I'm gonna sell that Altria stock just because I don't feel good owning it.

Tad Fallows: There could be a lot of reasons to do that.

Tad Fallows: Um, now one thing that's interesting is especially if you're in this concentrated position, which is fairly common in our community of somebody either started a company or they've been an employee at a company that's done very well for a long time, so now they have a huge amount of any of the names you think of, Google, Microsoft, Facebook, Nvidia, et cetera, where that was most of their compensation is now they have this stock that represents too much of their portfolio.

Tad Fallows: And then the challenge with that is you could say, okay, it's clear I should trim this, I should sell some.

Tad Fallows: But I'm gonna incur a huge tax bill if I do this.

Tad Fallows: How do I trim this position without paying a million dollars of taxes here?

Tad Fallows: And there are a couple of ways to do that simplistically, um, basically three things you could do.

Tad Fallows: One is if you're charitably inclined, you can give that money away.

Tad Fallows: And so if you donate a million dollars of Apple stock, you'll get full tax credits for having donated a million dollars.

Tad Fallows: But you don't have to pay for the appreciation that went from you paid.

Tad Fallows: A thousand to buy it and it's now worth a million.

Tad Fallows: You never pay the kind of tax on the gain, but you get a tax benefit on the donation part.

Tad Fallows: So you still have less money you had before to be clear, you gave away the money, you don't have it.

Tad Fallows: But if you wanted to support a cause anyway, that's a much more efficient way to rebalance your portfolio and provide that charitable sort support you want.

Tad Fallows: Um, so that's a fantastic thing to do. Um, and a donor advised fund is often a good way to do that.

Tad Fallows: So one is to give away the appreciate stock. A second one is what's called an exchange fund.

Tad Fallows: What that looks like is, let's say I've worked at Exxon, you've worked at Apple and a third person over here has been working at Bank of America, and all three of those stocks have gone up.

Tad Fallows: Each of us is over allocate to our own stock, but we basically form a pool.

Tad Fallows: I put in a million dollars of Exxon. You put in a million of Microsoft, he puts in a million of Bank of America, and then we each own a third of this now diversified portfolio of stocks and actually the way the laws work, at least in the US after a certain number of years, I believe it's five or seven years.

Tad Fallows: You can take out a third of each of those shares and you never actually had to sell any of them.

Tad Fallows: So you become diversified without actually having a sales transaction.

Tad Fallows: Um, and if you look online, there's different, just look for exchange Fund, there's different providers that offer exchange funds.

Tad Fallows: Uh, a third option is what's called direct indexing.

Tad Fallows: And indexing, as I'm sure you're familiar, is basically if you want own the s and p 500, you're getting exposure to 500 companies.

Tad Fallows: This is in the name or the Fs E 100 in England's roughly a hundred companies.

Tad Fallows: Now direct indexing is, rather than buying just a a portfolio from Vanguard, you actually directly buy every one of those 500 shares.

Tad Fallows: I might say, well, that seems like a lot of complexity for no real point.

Tad Fallows: But the value of that becomes today I buy 500 shares, but then just the nature of the markets, some will go up and some will go down.

Tad Fallows: So let's say Exxon goes up and Chevron goes down. They're gonna be highly correlated.

Tad Fallows: But what happens is you can sell your Chevron shares and recognize a loss on Chevron and then buy Exxon shares in their place.

Tad Fallows: So your, your portfolio returns won't really change because in the future when Exxon goes up, Chevron's gonna go up at the same pace.

Tad Fallows: So you'll get the same long-term returns, but you're able, as you go to continually sort of recognize and lock in these gains and you can use that to then offset the.

Tad Fallows: The, uh, gains that you're making when you sell your concentrated position.

Tad Fallows: So over a course of several years, you're able to make those sales and deconcentrate your position and basically manufacture offsetting losses so you don't have a big tax bill along the way.

Tad Fallows: And again, if you look up direct indexing, for example, there's a company called Fre, um, who I've worked with a bit to, uh, to manage that.

Sean Weisbrot: Is there anything I haven't asked that you feel is really important to share?

Tad Fallows: Um, I would say the last thing is.

Tad Fallows: To, if you're in this position of having a significant wealth change or windfall to recognize two, recognize one, that nothing important is really going to change.

Tad Fallows: And what I mean by nothing important is let's say you have a.

Tad Fallows: Bad relationship with your kids. Adding a bunch of money to that is not gonna turn that into a good relationship.

Tad Fallows: Or hopefully you have a good relationship with your kids or a good relationship with your spouse.

Tad Fallows: Adding a bunch of money is not gonna change that good relationship. Same thing.

Tad Fallows: If you are healthy or unhealthy, adding a bunch of money.

Tad Fallows: If you're happy or unhappy, it's not gonna change that.

Tad Fallows: So I think that in some way, you know, if you look at all the things people in our community discuss, it's the same thing that they were discussing before.

Tad Fallows: How do I raise my kids? Well, you know, what, what are good? How do I stay healthy?

Tad Fallows: That kind of stuff.

Tad Fallows: You know, how do I find meaning in my life? It's not, um, you know, those fundamental changes.

Tad Fallows: And then, and so I'd say don't kind of put pressure on yourself in that way.

Tad Fallows: I would say the flip side is also don't feel a pressure to just do something quickly.

Tad Fallows: A lot of people will advocate taking a six or a 12 month cooling off period.

Tad Fallows: Don't make any major investments. Don't make any major purchases.

Tad Fallows: You often hear this advice after somebody's spouse passes away that, you know, widow shouldn't say, sell her house within the first 12 months.

Tad Fallows: Really see if she likes living there independently before deciding to sell it.

Tad Fallows: And I would say it's the same thing here.

Tad Fallows: I think there can be some temptation of, oh my goodness, now I'm managing $10 million.

Tad Fallows: I'll throw a million dollars here, a million dollars there at this cool venture capital fund or this cool private equity fund, and then after six months you've actually put half your money into stuff you didn't really research that well and aren't necessarily happy with those decisions.

Tad Fallows: So I would just start a little bit smaller. Put 1% or half a percent to position, not five or 10%.

Tad Fallows: So you get a little exposure and experience and, and decide what you'd like without having made huge investments or again, huge spending.

Tad Fallows: I wouldn't spend half my money buying a new house.

Tad Fallows: I would either take my time or make some smaller purchases, um, relative to whatever that amount of net worth is.

Sean Weisbrot: Thanks for watching. If you liked this insight, I've handpicked another video for you right here on the screen.

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