STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
In case you missed the backstory or haven’t heard of the company, WeWork rents office space in prime real estate areas such as their location currently in downtown San Francisco, and then rents them out to startups, freelancers, entrepreneurs, and even established companies as community working spaces.
On the positive side, it’s a smart business model because it meets a well-known and widespread need for flexible office space. Many people and small businesses are in situations where signing a long term, costly, and risky lease makes no sense.
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WeWork solves that problem, and has differentiated itself by investing smartly in the community benefit of using a shared working space. So WeWork may yet turn into a profitable and respectable company. But that’s not the lesson for today.
The lesson for today is about how company and stock valuations rise and fall based not on reality, but on speculation, and that if huge investor banks like Softbank (you can replace the name Softbank with many other names, from Goldman Sachs to Merrill Lynch to Schwab) can be so wrong, what chances does a do-it-yourself high net worth investor have? And, how can you trust that your advisor will properly guide you in choosing the best investments?
What Went Wrong When WeWork Attempted Its IPO
On one hand, things seem to be looking good for WeWork. Their revenue doubled from 2017 to 2018, increasing to $1.8 billion. However their net loss also doubled to more than $1.9 billion, mostly due to their enormous real estate debt wrapped up in all their lease agreements.
But with over 425 locations and 400,000 members, with plans to grow worldwide, there does seem to be some upside to WeWork’s ascent. So what’s the problem?
The problem is, WeWork has been treated like it’s another tech company startup. But in reality, it’s a real estate company. And as a real estate company, it is subject to the same risks as the rest of that industry. If a recession were to arrive and hit the real estate sector hard (as recessions are known to do), WeWork would have a tough time paying its real estate debt.
A single economic downturn could sink the company. In fact, this already happened to a similar company, Regus, which went bankrupt as a result of the 2000 dot-com crash. According to that article, Regus does basically the same thing as WeWork, but hasn’t been able to find a buyer for a price of $3.68 billion.
Well-known NYU professor of finance Aswath Damodaran analyzed WeWork, and found its valuation to be around $14 billion. Again, what’s the problem? The problem is, Softbank, one of WeWork’s primary venture capital backers, had been touting the valuation at $47 billion.
Even more recently, the estimated valuation has now been reduced even lower, to somewhere between $10-12 billion. What does all this mean? In short, WeWork is overvalued. By about $37 billion.
Your Investments: What This Would Mean if WeWork Launched Its IPO
This is one example of why Pillar refuses to use investment strategies that depend on picking winners and losers in the stock market. Stock picking doesn’t work.
If WeWork follows through and launches its IPO, it will become a publicly traded equity. If it had been valued at $47 billion, which Softbank previously said it was worth, all the people buying shares of WeWork would have been greatly disappointed not long afterward when the value of their shares plummeted back to reality.
Sound familiar? Other companies like Uber and Lyft have also launched IPOs, but have yet to make a dime in net profits.
What happens if we base our future financial security on the hopes that a few ‘hot buys’ and startup investment opportunities will become the next Amazon? Sure, you might win a few. But you’re going to lose a few too. For every Amazon, there are half a dozen WeWorks.
Learn the Lessons of History from Other Overvalued Startup Failures
Theranos is gone. Once valued at $9 billion for developing a blood test that only required a pin prick, Theranos was found to have falsified its primary product.
MoviePass is gone. Though part of a larger company, MoviePass was supposed to upend the movie-ticket industry, and at one point boasted over 3 million members. But when its unsustainable business model finally caught up with it, they imploded.
Now under investigation for allegedly misleading investors, MoviePass closed in September 2019. In their own words, “Efforts to recapitalize MoviePass have not been successful to date.” No kidding.
Let us be clear. We are in no way questioning the validity of startups or any particular business models. And again, WeWork may still turn out to be well-performing company. Just not anywhere close to a $47 billion valuation.
The point in sharing these stories is, while everyone is talking about companies like these, market-watchers start drooling about their potential valuations and what this will mean for investors like you when they go public.
And you can’t listen to that noise. Not if you want to achieve all your long term financial goals and have peace of mind throughout your life.
What’s more important to you? Gambling on the hope of a huge payoff by investing in startups, or securing your long term future at the lifestyle you now enjoy? If you hit it big, well of course everyone will feel great.
But what if you make a bad bet? What if you sink $5 million into a venture capital investment and the company fizzles instead of sizzles? If you have $100 million to play with, maybe $5 million seems like a worthy gamble.
But consider your lifestyle. History is riddled with former members of the billionaire class. A surprisingly large number of previously ultra-wealthy individuals have had to downsize their dreams and settle for less.
Almost every company’s very survival entails a measure of risk. Even the biggest and most “stable” companies can make bad decisions that implode their value. Economic, technological, and social winds can blow any ‘bedrock’ company’s house to the ground. Just ask Kmart and Sears.
To base your investment decisions on what you think will happen to specific companies is, in our view, extremely risky and not commensurate with sound long term retirement investment planning.
We don’t do it that way. So how can you beat this risky system of equities, public offerings, and questionable valuations?
Answer: That’s the wrong question.
The solution is to optimize your investment plan around your lifestyle goals. With that as the foundation, you can then use a wealth management process that does two things:
1) Avoids unnecessary risk, such as investing half your eggs in the WeWork basket
2) Assures you with as much confidence and security as possible that you can maintain life at your standard of living indefinitely
How Pillar’s Wealth Management Process Delivers Financial Serenity
Below you’ll find a quick rundown of how you can achieve lifelong financial serenity without being torn by uncertainty or swayed by sirens luring you with the latest venture capital ‘can’t-miss’ opportunity. The truth is, most of the time, you can miss it, and you’ll feel more relaxed and free all the while.
Another way to say it: If you were already living with complete confidence that your money, lifestyle, goals, and dreams were secured for life, would you risk that on a questionable bet about an unproven company?
This is Pillar’s financial planning process in brief, exclusively for high net worth and ultra-high net worth investors.
Note: There is a lot more to learn about each of these topics. If you want to talk to an expert financial advisor for high net worth investors and get answers to questions you’ve been wrestling with, schedule a free call with Pillar today.
Here is our financial planning process:
1) Build Your Financial Plan around Your Goals
Shooting for the moon, the highest possible investment growth, entails great risk. That’s the nature of the market. You’ll get 40% one year, but then 5% the next and -30% after that. If you bet on equities or venture capital opportunities like WeWork, that’s what you’ll get.
It is not a secure approach. Your investment goal should not be the highest possible returns. Your goal should be the very best performance that assures you that every one of your financial and lifestyle goals will be met. And there IS a vast difference between those two approaches.
We call this optimized performance. We create truly customized plans around each high net worth investor’s specific needs. Put simply, for one person, we might recommend 80% equities and 10% in cash and bonds. For someone else, we might recommend 45% equities, 35% bonds, and 20% cash.
We do not recommend the same approach to every investor, regardless of age or life situation. What is best for you will not be best for someone else. You must wrap your mind around that principle. It’s the foundation of everything that comes next.
2) Use Historical Market Performance to Test Your Plan
Your portfolio cannot be measured based on future projections. It also cannot be measured by what has happened the last ten years. Past performance has no bearing on future earnings, as every financial planner is required to tell you. Those tell you nothing about how it will perform against severe economic, political, and global forces.
Using a data-driven process that utilizes market performance data over the last 100 years, we can observe how your portfolio would have performed in real historical situations that produced real data.
See why it’s so critical to use 100 years of data, and nothing less.
3) Perform 1000 Stress Tests on Your Portfolio
Based on the last 100 years of real data, Pillar has developed a process for testing your performance against 1000 theoretical high-stress scenarios. For instance, what happens if automation causes massive job losses, inciting a recession, and during that time an earthquake causes a catastrophic tsunami in an economically strong nation?
That would be a bad year. We have created 1000 scenarios like that, some more extreme than others. We use that data from how the market performed during real crises from history to simulate how your portfolio would perform in each of our theoretical ones. Why?
Because if your portfolio exceeds all your short and long-term financial goals in 75-90% of those scenarios, we declare your portfolio to be in the Comfort Zone, and your financial future secure.
Think about that for a moment. You are exceeding all your financial goals. Not just meeting them. And you’re doing it in 75-90% of 1000 extremely stressful scenarios. If your investment plan can do that, it will be secure, and you can relax. No matter what WeWork is doing.
4) Re-Run the 1000 Stress Tests Each Quarter
Comfort zones and exceeding goals is great, but what happens when your goals change? What happens if your grown children all have three kids each during your early retirement years, and you want to be involved in their lives?
Your life will change, and your goals will change with it. Thus, your plan also must change and adapt along with you. By proactively adjusting your plan according to what’s happening in your life, we keep it relevant.
And by re-running it through the 1000 stress tests every quarter, you will be continually reassured of your long term financial security.
Get that? There is no better approach to wealth management than this. And we’ve been working in the wealth management industry for over 30 years. But it doesn’t stop there.
5) Keep Costs Low
Having an optimized investment plan that’s in the Comfort Zone should be quite appealing to you. But optimizing your performance requires more than that. Pillar’s approach includes a borderline obsession about minimizing your investment costs.
Nothing pokes more holes in strong investment growth than hidden and avoidable costs, taxes, and fees. Many financial advisors don’t pay much attention to this. Some actually are the cause of higher costs, especially if they’re a non-fiduciary. See 6 hidden and avoidable costs you’re probably paying now We do everything possible to minimize your investment-related costs.
6) Focus on the 5 Things You Can Control
What happens if your portfolio falls outside the Comfort Zone?
In that case, you must adjust one or more of the five things within your control. These are:
- Your spending
- Your savings
- How much you leave to your heirs
- Timing of planned major expenses
- Risk tolerance
You have control of these five things and nothing more when it comes to investment planning. By adjusting those in particular ways, with our help, you can steer your long term portfolio projections back into the Comfort Zone.
For instance, you may find that reducing monthly spending by a certain amount might be all you need to do. Or perhaps you can restore Comfort by reducing what you plan to leave your heirs. Small adjustments made smartly at the right time help preserve your long term security and the achievement of all your biggest plans.
7) Plan Ahead for Major Distributions and Life Events
We incorporate these into your plan. We don’t just hope you have enough to fulfill your biggest hopes and dreams. We assure it by building it into your plan. Learn more about planning for major life events
8) Plan for Unplanned Events like Large Medical Costs
We don’t know what will happen. But we have a pretty good idea of what could happen. And that means we can plan for it. Nowhere does this apply more than with regard to medical costs. Here’s a resource helping high net worth households plan for unexpected medical costs
9) Prioritize a Strategic Investment Planning Philosophy
We utilize an approach we call strategic financial planning. It is not purely passive, though it veers more toward that end of the spectrum. It does not rely on active investments and trading either. The WeWork example again reveals why we stay away from that approach.
You can learn much more about what these approaches entail in our free eBook, The Ultimate Guide for Choosing the Best Financial Advisor for Investors with $3 million to $70 Million Liquid Assets.
When your portfolio plan gets built using a process that involves as little emotion as possible, that will maximize the likelihood it will exceed your goals.
Again, there is a lot more to be said about strategic financial planning. But now you have an overview of how wealth management looks if you are truly serious about optimizing your performance and eliminating worry, anxiety, and uncertainty about your finances – for the rest of your life.