How Do the Rich Really Get Rich?

Today we cover a subject that nearly everyone is interested in and that is getting rich. And more specifically, how that process happens. I provide the “Cliff Notes” version of the actual mechanism on how wealth is generated.

Podcast Details

Podcast Title:  How Do the Rich Really Get Rich?

Podcast Series: Financial Literacy Boot Camp

Link to Show Episode

What is Systematic Risk?
So there is a term called systematic risk. And I have to cover this because it will give context on “how you get rich”. Systematic risk is the risk inherent to a “system”. Think of investing in the stock market and the risk that comes with investing in equities.  There are risks inherent to that type of investment that are unavoidable and non-diversifiable. This would be defined as the uncertainty associated with investing in this system.

This is not to be confused with “systemic” risk which is risk similar to the collapse of 2009 where subprime mortgages almost took down the entire financial system. So if you invest in a system (e.g. commodity, stock, bonds, Bitcoin, etc.) you will have systematic risk. Lowering your total systematic risk will be a function of you accessing the types of risk, isolating them, and attempting to mitigate each individual risk. This is nearly impossible which is why it is inherent to the system.

What is Nonsystematic Risk?
Which now brings me to non-systematic or unsystematic risk. This is risk not inherent to the system but instead is very specific and is able to be diversified.  If you were an Enron employee in the early 2000s and most or all of your 401(k) was in Enron stock you have both systematic and nonsystematic risk, the latter due to the lack of diversification in your portfolio.  Nonsystematic risk can always be reduced or eliminated by spreading your investment dollars across multiple asset classes.

So How Do the Rich Rreally Get Rich?
Well, in short, they have a lot of nonsystematic risk in their portfolio. They have very concentrated positions in their portfolios. They usually use leverage to magnify their concentrated bet also.

Is this safe…?   It totally depends on the person.

In Ashvin Chhabra’s book, The Aspirational Investor, he has a chapter entitled: “How Do People Become Very Wealthy?” he talks about the Forbes 400 list and the 4 categories of wealth that comprise the list.

1) Business Owners comprise 60% of the list
2) Financiers comprise 20% of the list
3) Inheritors comprise 12% of the list
4) Real Estate Veterans comprise 8% of the list

#financialliteracy #financialadvice #financialplanning #forbes400 #wealth #rich #money #episode54

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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Strategies to Maximize Executive Compensation

In the parable of the two business executives, I reveal 3 strategies to maximize wealth with employer benefits.

Podcast Details:

Podcast Title:  Strategies to Maximize Executive Compensation
Podcast Series: Financial Literacy Boot Camp
(Video and illustrations available on our YouTube channel here.)

Powerpoint Slides

In my previous positions and just through a lot of reading on executive compensation, we’ve developed an expertise.  So any of you listening out there that have executive compensation like RSUs, restricted stock, NSOs or ISOs, you want to give us a call so we can evaluate whether not you are maximizing your wealth potential and saving yourself money in tax liability.  Today, I’m going to share a little parable that gives a high-level overview of how we help our clients.

In previous articles, we’ve have mentioned the importance of having a specific strategy to maximize your wealth building potential through executive compensation program.  In our practice, we notice many highly-skilled and hard-working professionals don’t maximize their executive compensation programs either due to lack of knowledge or lack of time.  This article will focus on some of the strategies that can be utilized in order to not incur unnecessarily high taxable income in any given year that awards are given, exercised or vested.  To illustrate a specific strategy we will use the parable of Ron Smith.

 

The Parable of the Two Business Executives (6:00)
Ron Smith is the vice president of sales for MegaPharma, Inc. a thriving pharmaceutical company based in the US.  Ron has been with the company for nearly fifteen years and has experienced great success.  Such success he is now contemplating hiring a financial professional to help him manage his finances.  Before this time he had managed pretty well he thought, at least according to his peers, but the events of the past six months have caught his attention.  About seven months ago, his close friend and fellow colleague, Bruce Davis, who works for AlphaBioTech was laid off after serving his company for ten consecutive years.  That was bad news indeed, but Bruce was a great saver and his wife works also so they would be fine financially.  The real problem was what Bruce shared with Ron during a pharma conference they attended together.

 

Ron’s Situation(10:15)
Several weeks go by and Ron meets with Bruce’s financial advisor.  The financial advisor uncovers several things.
Ron has 4 wealth building tools that are offered to create retirement income:
  1. Defined Contribution Profit Sharing Plan or “401(k)”; The company matches up to 6% dollar for dollar (see episode 42)
  2. Defined Benefit Cash Balance Pension Plan; The company contributes 7% of Ron’s salary to the plan annually
  3. Restricted Stock Units; These have a 3-year vesting schedule
  4. Non-Qualified Stock Options; These have a 3-year vesting schedule and 10-year expiry
Observations (16:00)
  • The Advisor has also noticed a high concentration in MegaPharma’s stock across these 4 accounts
  • Ron is currently in the 33% tax bracket and concerned with his new salary and bonus he will be in the highest bracket of 39.6%
Three Planning Strategies (17:22)
After review, the financial advisor advised Ron to employ these three strategies to help Ron.
1) He recommended that Ron avoids exercising his options until after he had earned enough income year-to-date to avoid paying social security taxes and thereby reducing his take home pay.  This will put 6.2% back into his pocket.
2) After creating a schedule of all Ron’s RSUs and NSOs, an exercise schedule was created to incorporate a system to “average-out” selling company shares to diversify his retirement portfolio.  This minimized taxes while taking into consideration historical company share performance, Ron’s risk tolerance, and his financial goals.
3) Transfer property out of his estate by donating to a charity and use the subsequent tax deduction received to offset some of the W-2 income tax generated at exercise.

 

Addidtional Resources:

 

#executivecompensation #restrictedstock #stockoptions #taxsavings #retirementplanning #finlit #finance #financialadvisor #money #financialtips #financialadvice

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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Solutions to the Career Transition Problem with special guest Marques Ogden

Marques Ogden and I discuss the tools needed by young athletes to effectively transition from the gridiron to the boardroom!

Podcast Details:

Podcast Title:  Solutions to the Career Transition Problem with special guest Marques Ogden
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

 

Questions/Issues We’ll Address on this Episode:
A discussion of “Solutions to the Career Transition Problem”and the tools needed by young athletes to effectively transition from the gridiron to the boardroom!

Marques Ogden and I continue our conversation on “Solutions to the Career Transition Problem” by having a very candid discussion on the tools he used after leaving the NFL to begin his transition into the business world.  We discuss the development of his thought process, a strategic plan, and a business network to launch his next phase in life.  We also cover in the discussion practical examples on what business owners can do to boost their networks during the start-up phase of their business.  We also discuss ways that young professional athletes should be leveraging their brand with non-monetary “human capital” while still playing.  Last, we cover some statistics provided by the CFP Board on financial literacy and savings rates among Americans.  Don’t miss this exciting episode of “Solutions to the Career Transition Problem” brought you DJH Capital Management.

  • Develop a Strategic Plan (3:15)
  • Develop a Network and Talk to People (4:50)
  • Join your Chamber of Commerce (6:30)
  • Leverage Your Brand (20:30)
  • 80% of Americans concerned about not saving enough…what about athletes? (25:35)
  • How to get out of your “comfort zone”? (28:55)

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Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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FLBC 033: All You Ever Wanted To Know About Municipal Bonds

Podcast Details:

Podcast Title:  All You Ever Wanted To Know About Municipal Bonds
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.
***LISTENER BONUS****
To receive a complimentary review of your bond portfolio or see bond portfolio samples, click here!

 

Questions/Issues We’ll Address on this Episode:
-What are municipal bonds
-Why they are used in investment strategy or portfolios
-Things to be aware of when considering as an investment

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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FLBC 031: Solutions to the Career Transition Problem

Marques Ogden and I continue our conversation about: “The Career Transition Problem” and how to re-brand and financially empower yourself!

Podcast Details:

Podcast Title:  Solutions to the Career Transition Problem
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

 

Questions/Issues We’ll Address on this Episode:
Marques Ogden and I continue our conversation about:  “The Career Transition Problem” and how to re-brand and financially empower yourself!

Helpful Links:

Submit a “Boot Camp Listener” question

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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#FinancialLiteracyBootCamp

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Financial You – Part 1

Podcast Details:

Podcast Title:  Financial You–Part 1
Podcast Series: The Maven’s Keys to Financial Contentment

The Maven’s Keys to Financial Contentment is my idea that true financial contentment can be found when an overlap of money and beliefs occur.  Many people ask the question of how to be “financially content” and this is a discussion to uncover those answers.

What makes up financial you?  Is it your money?  How do you feel about it?  Are you happy?  Are you content?  If you are or aren’t content do you know what is making you feel that way?

I believe a lot of people ask these questions internally, everyday and don’t always have answers.  Here are 4 steps to uncovering answers to those type of questions.
ASSESS, ADDRESS, ADJUST, ACHIEVE

In assessing, you have to start with a real honest picture of just where you are versus where you want to be.  Any good assessment will identify gaps or holes that will prevent you from getting to where you want to be.  No matter what you use you have to get REAL about where you are.

  • What are the things holding you back?  Is it bad spending habits?  Overwhelming debt?  Or is it more mental in nature–in that you have mental framing that causes you to view money as good or bad?
  • Money is neither good or bad, it is just a means to achieve a purpose.  However, how you view something whether good or bad, will ultimately determine how you use that very thing.
  • In your assessment and identification of any gaps that are impeding your progress to becoming truly financially content, think about the causes of the way you think about things–money and finances in particular.

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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#FinancialLiteracyBootCamp

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FLBC 030: Financial Trends for 2017 & Beyond

Podcast Details:

Podcast Title:  Financial Trends for 2017 & Beyond
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

 

Questions/Issues We’ll Address on this Episode:
I  cover trends in investing, fintech, and regulation investors should be aware of.

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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#FinancialLiteracyBootCamp

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FLBC 029: Is the Market for Creating or Maintaining Wealth?

Podcast Details:

Podcast Title:  Is the Market for Creating or Maintaining Wealth?
Podcast Series: Financial Literacy Boot Camp
Video and illustrations available on our YouTube channel here.

 

Questions/Issues We’ll Address on this Episode:
Discussion around why the primary purpose of the market may be to preserve and not create wealth.

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About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

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#FinancialLiteracyBootCamp

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FLBC 026: The Fundamentals of Investing

Podcast Details:

Podcast Title:  The Fundamentals of Investing
Podcast Series: Financial Literacy Boot Camp
Full Illustrations available on YouTube Version here.

 

Questions/Issues We’ll Address on this Episode:

1) Review of 2016 Investment Performances
2) What is an asset class? How big are they? Which should l choose?
3) How to track your portfolio if you are managing it.

Helpful Links:

Link to 2016 Asset Class Performance

 

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Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams.

© 2017 DJH Capital Management, LLC.

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Post Election Portfolio Advice

“Which is more valuable–advice given in a noisy, crowded room or advice given in an empty forest? Neither, no one is listening…”

–The Maven of Financial Literacy

“Which is more valuable–advice given in a noisy, crowded room or advice given in an empty forest?  Neither, no one is listening…”
 –The Maven of Financial Literacy
I consistently read Howard Marks’ “On the Couch” memos as he is probably one of the best distressed investors of our time.  He and other investment sages have great wisdom that investors should heed.  The propensity to rush into a “buy or sell” decision in light of recent market volatility is compelling but not always rewarding.  Jason Zweig recently wrote about the post-election history of markets and how in some instances they were contrary to “conventional” wisdom. (It’s worth the read.)  Thus, setting the tone for this pre-Thanksgiving post about some things you should and should not do when it comes to your investment portfolio.

 

You SHOULD NOT react, but you SHOULD think…
If your investment strategy is long-term in nature, then there are probably no immediate adjustments that need to be made.  Stop and think about what investment goals you have for your entire portfolio of assets.  (See this post on Human Capital or this one on portfolio construction.) Long-term growth will likely be achieved regardless of current or interim political changes especially if your own a well-diversified portfolio.

 

You SHOULD NOT blow up your current plan, but you SHOULD strategize…

If you are working with a financial advisor, this is probably where your guy or gal really earns their fee. Many investors will do something in their portfolios they will regret (e.g. buy high and sell low) unless they are working with a financial professional that is giving good advice.  I’d highly recommend scheduling a strategy session with your person to work through different market scenarios.  Even if no action is ultimately taken, the meeting will likely give you peace of mind about your current plan that is in place.  (Shameless plug:  Get our free year-end tax planning guide here.)

You SHOULD NOT rush to a decision, but you SHOULD procrastinate…

This is likely the only time where advice to “procrastinate” is acceptable.  With the recent market volatility, it is probably good to sleep on what you feel is a good decision for a night or two.  Good ideas are usually good ideas two or three trading days later (especially in the case of long-term investors) and this allows time to consider any potentially impulsive, emotionally biased decisions.

Whatever your method for portfolio construction and investment, remember the wise words of Sir John Templeton:

“history shows that time, not timing, is the key to investment success.”

Invest Wisely!
#keystofinancialcontentment
#freeportfolioadvice