Patient Capital and my 2018 asset allocation
Financial Samurai, one of my favorite personal finance blogs just posted about "Patient Capital" i.e. illiquid investments that incentivize investors to take a long term view, tends to have a higher returns compared to liquid assets that are publicly traded on the stock market where prices fluctuate day to day and executives must show quarterly growth and profits to keep investors happy.
This should resonate with start up employees and founders in the bay area: the stock portion of your compensation is illiquid, so the built in incentive for this compensation structure is to build long term value for the business.
Unlike most employees in mature publicly traded companies where investors can buy and sell your company stock based on the daily news cycle, the start up environment provides a strong incentive to make your asset more valuable for the long term without the distraction of daily price movements.
I happen to work at a pre-IPO company today and Sams post at Financial Samurai got me thinking about my overall capital allocation in terms of patient or impatient capital, so I pulled up Personal Capital and a google sheet and started adding up my allocations.
|Stocks & Bonds||31.42%|
|Retirement (stocks & bonds)||13.23%|
|Education for children||0.33%|
|Real Estate Equity||9.92%|
|Real Estate Crowd funding||2.22%|
The first 5 types of assets are what I consider impatient capital.
I have 12 month of expenses in cash for daily spending and emergencies. This is more conservative than what many advisors would recommend because I have an expensive mortgage to pay, a young child and older parents that may need cash if they get sick. You can keep cash much lower (3 - 6 month) if you're young, single, no kids, no mortgage or and no responsibilities
Stocks & Bonds
Looking at our stock and bond allocation in taxable accounts, we have quite a bit of single stock exposure due to Mrs. CouchFI's stock compensation from employment over the years. It would be wise for us to strategically sell most of it and diversify into other assets. It's hard to do this when our income is high and selling shares now will incur 20% capital gains tax plus over 10% Califorina income tax, so we're looking for ways to defer this tax hit as long as possible.
Retirement (stocks & bonds)
This is our most "diversified" portfolio in the traditional stocks/bonds sense that you hear from financial advisors. We have around a 80/20 stock/bond split with some riskier or dividend generating stocks mixed in for tax efficiency. Even though our retirement accounts are locked up until Mr. & Mrs. CouchFI are 62 or older, they are not "patient capital" in that while we're incentivized to invest them for the long term, we're not actively managing it and since the stocks and bonds are publicly traded, they can be bought and sold like other "impatient capital" so it will perform like the rest of the stock market whether it's in a retirement account or not.
Education for Children
This year, we started a 529 college savings plan for tax deferred investing until they go to college. This category will grow over the next few years until we have enough and the rest of our networth grows ahead of it.
I bought a tiny amount of Bitcoin several years ago and kept it in Coinbase I checked recently and it has grown to almost 1% of my portfolio and peaked at 5% during the 2017/2018 bubble, sure I could have sold and kept the gains, but I've been in it long enough and believe Bitcoin will be a major asset class like gold decades from now, so I'm not actively trading it. It's been such a low part of my networth that the down side risk is minimal with high potential upside. I like this asymmetrical risk profile and I continue to look out for more examples of this. Bootstraping your own business has a similar risk profile, but that takes a lot more sweat equity, and maybe not as asymmetrical if you factor in opportunity cost as a high income earner.
The last 3 are "Patient Capital" -- none of those things are assets I can sell, and those managing the assets have aligned incentive to get the best returns without day to day price distractions.
I work in a pre-IPO company where my vested stocks have grown to a significant portion of my networth at its 409A valuation. This will become liquid in the next 2 years as the company I work for is expected to IPO, which will turn this into impatient capital. I plan on liquidating a large portion of this and reinvesting in a mix of diversified stocks and bonds, as well as real estate for more "patient capital", at which point I will consider joining another promising startup or possibly founding my own business.
Real Estate Equity
Mrs. CouchFI and I own a rental property that account for nearly 10% of our networth thanks to some equity appreciation since we bought it. It's generating enough rent to pay for itself, plus putting some money in a maintenance fund, but it's not cash flow positive in the taxable income sense, so we may sell it in the next year or two and find other properties to invest in. This was our first investment property and for the market we were in, we were targeting asset appreciation rather than cash flow. It definitely worked for that purpose.
Real Estate Crowd funding
Lastly, I recently started investing in real estate crowd funding platforms such as EquityMultiple and PeerStreet. I expect to get some passive interest income as well as equity appreciation from this that results in better than most publicly traded REITs.
At just over 50% of my portfolio, I have much more "patient equity" than I thought thanks to having joined a promising start up company a few years ago, and thanks to Sam at Financial Samurai, the idea of patient capital will be part of my toolbox for investing future investment moves.