Wealth restructuring is a way for you to enjoy the flexibility of your net worth and overcome the fear of being locked into a particular investment.
In this post I want to talk about wealth restructuring. By this I mean, you can design your net worth any way you like. You can be invested in any of the following or a mix of them and switch back and forth readily:
- mutual funds
- individual stocks
- real estate
- intellectual property
Then there are those who don’t care for any of that, they spend most of what comes their way and instead rely on generating income in perpetuity to cover their spending. This is a viable solution but it requires the foresight that one will not burn out of their work and that the said income will always be available.
You might have a lot of investment properties but getting tired of managing them. The good news is that you can restructure those assets by selling out of these properties and parking the money in index funds. Or vice versa.
A fellow internist had rental properties in San Diego and Hawaii which he was managing for the past 20 years. He told me that he had zero in retirement accounts because he didn’t believe in them. In the next 2-3 years he was going to sell each property and take that money and put it in bonds. The liquidity of his investments and his auspicious market timing allows for such wealth restructuring.
Alternatively, a person might have mostly cash in a savings account but getting tired of the low returns. This person can restructure this wealth from cash into a mixture of stocks and bonds or passive mutual funds. I’ll discuss timing tactics below.
Making the switch is ideally done strategically and not emotionally. It wouldn’t make sense to sell your investment properties in a weak real estate market and use the money to buy inflated securities investments.
It normally wouldn’t make sense to take your securities which are performing poorly and buying a couple of franchises. Locking in such a loss might hurt your immediate net worth. But it still might make sense if the move will help you have future net worth growth.
A healthcare professional who is positioned mostly in cash seems to do best to dollar-cost-average their way into securities investments. Yes, even if the market is highly inflated as it is in 2017, one can buy a set dollar-amount of securities every month until the wealth restructuring is completed.
Timing tactics also involve our age, not just how a particular investment is during a financial period. I’m not going to want to manage rental income properties at age 80. I also don’t want to be mostly invested in something like CD’s for the next 40 years, knowing that CD’s will outpace inflation by a tiny margin, at best.
Wealth restructuring can only be done if you maintain a liquid stance. I view investment liquidity in the following order of decreasing liquidity:
- investment income real estate
- peer-to-peer lending
- primary residence equity
- hard money lending
- real estate crowdfunding
Liquidity involves the following factors:
- existence of secondary market
- potential buyer availability
- market risk
- how long it takes to sell the asset
- amount of loss due to fees
- healthy of the economy
Having the option to restructure wealth should help overcome the fear aspect of getting started in investing. If your investments have liquidity then it means that it’s fairly easy to buy them, trade them, and sell them.
Stocks and bonds have a secondary market which means that I can buy them and then sell them if I no longer want them or if I want to (need to) lock in a gain (loss).
Investment real estate can be renovated to increase its value. Or it can be turned into a rental. It can be sold on the real estate market or it can be sold through owner financing should the mortgage industry be a hindrance.
However, your primary residence is minimally liquid. You live in it, you valuables are stored in it, it’s tied to your work location, and it often appreciates at a time when buying an alternative primary residence is equally inflated.
Business & Liquidity
Some businesses also have liquidity, especially if they can continue to make money even when the owner is taken out of the equation. A well-run franchise is such an example. However, even a franchise can be a shit investment if the owner has to be on-site for it to run well.
A family medicine office with the owner-physician as the only clinician may not be worth all that much and hence may have very little liquidity. However, one that has multiple employees and has systems in place will likely have quite a bit of equity & liquidity.
Certain whole life (universal life) insurance policies might advertise themselves to be liquid but that liquidity might be a pain in the ass to extract. Other entities such as SPIA’s will have no liquidity at all. The same goes for pensions and income from trusts.
Wealth Restructuring For Income
The whole point of this post is to demonstrate that if you pick your investments wisely then you can restructure it later to your lifestyle.
Wealth Accumulation Phase
In your wealth accumulation phase you will likely have the energy and desire to work and generate more income. During this time you will want your income invested in assets that have the potential of growing your net worth.
Later in life you may be done with wealth accumulation and want a steady income stream so that you can spend your time pursuing passions which might generate little or no income.
During this semi-retirement phase you would sell your real estate to capture the equity and move your money into dividend producing securities. This might be mostly broad equity index funds, focusing more on larger cap and with less emphasis on small cap funds which generally have no dividend yields.
Here is the general idea behind different types of stocks or stock index funds:
- blue chip stocks = steady stock prices, minimal growth potential
- income stocks = large dividend yields
- value stocks = potential future growth; decent dividend income
- growth stocks = rapid growth potential, volatile
- small cap = more risk, more growth, no dividend income
Fixed Income Phase
A time will come when you not only need a steady income but you also are either to frail or too tired to generate any more income through work.
During this time you would want to restructure your net worth into investments or vehicles which will generate that steady income with minimal fluctuations. This could be a bond portfolio or a SPIA.
Wealth Restructuring For Future Growth
Most of us are familiar with the concept of investing in order to grow our money’s future value. This is why we invest more in stock funds and less in bond fund. The former is likely to grow more and less likely to be hit by inflation.
On a more granular level, you might tilt your portfolio more towards small cap funds because they are more likely to grow to sizable companies in the future.
As for real estate, an investor would buy properties closer to desirable coastal cities or in more popular metropolitan areas. These properties will have higher ongoing expenses but also have the potential of outpacing traditional real estate growth.
When it comes to a business, the entrepreneur will put more money into it and automate as much as possible so that the business has a higher future resale value. This might mean that they would forgo some immediate income by investing in the infrastructure.
Start Investing Now
I don’t think it’s careless advice to recommend that most healthcare professional should start investing. That initial learning curve can be overcome easily. Most investment techniques are then applicable to other investment niches.
It is perfectly possible to have one investment strategy from day 1 until you die. This would of course have to be a little on the more conservative side or your risk tolerance has to be upped slightly.
Start now, Make The Switch Later
Once you get started and have overcome the initiation hurdle, you can slowly change your investments from one niche to another.
You can change stocks for bonds.
You can sell real estate and buy CD’s.
You can put the majority of your money into retirement accounts.
Or you can sell out of your retirement accounts to put more in dividend producing investments.
Keep liquidity in mind. If you invest in P2P lending or real estate crowdfunding, you might have less liquidity to restructure your net worth in the future.