The Faster Car
When I purchased solar panels for my house, I had them put extra panels on my roof in preparation for my next vehicle, which would be completely self-driving and long-distance electric. In this process, I have begun looking at the differences between what I want and what I need.
I am specifically focused on the Tesla models and have researched them as they’ve come to market. There is a significant difference between Model S and Model Y. The Model S has a top speed of 200 mph and can accelerate from 0-60 mph in 1.99 seconds. The Model Y is still fast, but not as fast as the Model S. The Model Y provides maximum versatility and can carry seven passengers plus cargo, unlike the Model S. These are two very good cars but built with different purposes. One is built for speed. One is built for versatility and comfort.
This has parallels in investing. The portfolios we build at Potentia are created for individuals– each with unique circumstances, time horizons of income generation, tolerance for risk and cash needs. Because every client is different, each portfolio is versatile and customized as needed. A person with decades until retirement may be able to withstand a portfolio with more risk, with a higher potential for return, and they will likely be invested through multiple market cycles. This person’s portfolio may be more aggressive. If a person is about to retire, a portfolio should be built for wealth preservation, conservatively allocated, ready to provide stable returns when income stops and liquidity is needed.
To create a portfolio, we consider many aspects, including risk/return, life goals, tax implications and estate objectives – besides just going fast. Our portfolios can be compared to the Tesla Model Y: family-friendly, safety first, and versatility focused. Our “aggressive” portfolios are fast, but are still constructed to preserve wealth and manage risk, to grow over multiple cycles, and do well by losing less in the downturns. For our clients who desire the speed of Model S portfolio and have the assets to do so, we will set up separate accounts in which they can drive as fast as they wish without risking the safety and versatility of their investment core.
You may be thinking – what’s wrong with a “fast” portfolio? A portfolio built to aggressively capture returns is also typically exposed to significant losses during a market downturn. Those losses are deeply harmful to your wealth and can take years to recover.
We believe that creating portfolios with the goal of outperforming the markets is unwise. Rather, we build them to provide our clients a path towards achieving their financial goals. My ego says I want to drive at “Ludicrous+” speed going from 0-60mph in 1.99 seconds. However, that is not what I need to make sure my granddaughter makes it to daycare. My ego also wants to make 45% returns every year in my portfolio; but that is not what will provide me the highest probability of achieving my financial goals. We have seen from decades of managing wealth that investment decisions made from emotions like fear and greed rarely turn out to be good ones.