Create A Formula To Help Reduce Risk and Simplify Your Finances

My name is Brian Scribonia, and on this episode of the Common Sense Financial podcast, an experienced rock climber has less risk climbing a mountain than someone who has never climbed a mountain. The truth is, how much risk you carry when investing your money can be a bit subjective because depending on whether the investment pans out, you never really know the true level of risk you're carrying. See if this sounds familiar. You're faced with a decision to make an investment, and after searching the Internet, posting on Reddit, asking friends their opinions, and looking at returns and fees, you choose where to invest your money. If that's you, I hate to say it, but that's not a formula.

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Opportunities are still there. The attempt at passing down wealth from generation to generation. Consider the outcome, not just popular opinion. And the whole teaching there is about.

Preparedness and being ready.

There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host Brian Scribonian. Thanks for tuning in and let's get into today's topic. If you're like many people, you're making financial decisions. You're investing money and doing things in hopes of a successful future. Whether you've been on this journey for years or just getting started, it all begins with your first dollar invested and ends when you leave this earth, with many transitions along the way. One common misconception is that the journey ends at retirement, thinking this is the destination. However, retirement is really a point of transition. It's not a point of completion, though the transition does come with a high degree of complexity. If you're like many who follow the wide path of saving money in tax Deferred Accounts and IRAs, without a real framework for how to actually use money, I see retirement like halftime in a game. You pause to review what was done, map out the strategy for the second half and return to the field to finish the rest of the game. The first half either sets you up for needing a better defense or a better offense, depending on how that first half went and dictates what comes next. I'm explaining this to frame the discussion we're having today and offer you a reference of time, because you're either growing wealth, using wealth, or handing it off. We are talking decades of work here when you view what you're doing in this manner and you begin to see that the path you choose to take is so critical for the results you're looking for. What I mean by choosing the right path is some people do struggle their entire life to make ends meet, while others seem to be able to just print billions of dollars on demand. We see those types of folks on the news quite regularly. It is the difference of knowing what to do to recreate a result repeatedly versus leaving the results to chance with no formula or system or framework to create the desired outcome. I read a book recently by Brad Jacobs. It's titled how to Make a Few Billion Dollars. This title caught my attention and it was enough to make me curious. But what he explained in the book is exactly what I'm discussing with you now. Not his system necessarily. You can buy his book if you want to know a story. I'm highlighting the fact that he has a system for creating billions of dollars. The question is, do you have a system? Do you have a worn path that you're following to get predictable results? I would be slow to answer the question because many people view Investing in a 401k and searching the Internet or subscribing to a newsletter as a system. But that's far from what I'm talking about here. In Brad Jacobs book, he states that to create billions of dollars, you must rearrange your brain. And that is so true when you think about any stage of life where you've had to make changes. I've had many epiphanies over the years that rearrange my thinking. As a matter of fact, I've gotten to a point where if I don't have at least one in any given year, I feel as though I'm a little stagnant. I've shared in other shows that I'm just a lifelong learner. I love it when I'm in a room of people who are all smarter or more successful than I am because I know it will expand my thinking. It'll challenge my precepts of how to do things. We can accomplish bigger things in the future, using the same thinking or applying the same processes and expecting a different result or achieving more. The challenge is that there are many paths to choose from, and as you experience life's transitions, learn new things and deal with various situations, you're going to realize how much you don't know. And to me, that is the secret to having success, learning new things, and rearranging my brain. My hope with the show is to help expand your thinking a bit around some of the decisions you're making and how you define risk and how you do your investing and how you think about success. I'll hopefully be able to offer some insights that you can use to help you accelerate your progress, but you're going to have to open your mind a little bit, perhaps rearrange how you think to make this all work. I was in a business consulting session recently and the group was challenged to define risk. Of course, the definition was looked up and Webster's Dictionary defines risk as the possibility of loss or injury or peril. But when you have a group of entrepreneurs in a room discussing any topic, you find that nothing's simple or taken at face value. There are countless opinions shared and then debating begins, which is what followed when the definition of risk was presented to us for discussion. Believe it or not, we spent a few hours discussing this, but there was a lot I took away from the time I spent there. But I'm not going to provide everything here. But the thought was that the level of education, experiences and understanding you have about something translates to the level of risk you are taking on and accepting. For instance, an experienced rock climber has less risk climbing a mountain than someone who has never climbed a mountain. The same risk of death exists for both people, but the risk of death is much higher for one than the other. And money is really no different. The level of risk an investor takes will vary from one person to the next depending on their level of education, experience and understanding of the situation. But it can be very difficult to quantify risk because people will inherently tell themselves they understand things more than they really do, which of course skews their perception of what is happening. It's a form of recency bias. A lot of times when a person makes an investment and happens to be in the right place at the right time time and they experience a profitable outcome, they may mistake their win as having a skill while having no control over the circumstances, or really possessing the skills to navigate the result. And even though the profit may not have had anything to do with their skills, that experience often will inflate confidence and leaves them believing that they have cracked a code of some sort. I spoke with a gentleman earlier in the year who said that he expected a 12% return on his money year over year and I asked him how he arrived at this percentage and he told me that 12% has been his experience. Well, come to find out he inherited money in 2020, none of which he accumulated on his own. And with his brief stint in the market he formed an unrealistic view of his circumstances and what that path forward looks like for him. What I find is that second generation business owners or heirs to an estate often struggle with their newfound wealth and their responsibilities. The original founder of a business or the person that creates the we wealth. They had a journey. They developed a set of skills that isn't easily transferable to the heirs. The grit, the tenacity, the risk management, the thinking, the mindset was all part of their formula for not just building the wealth, but it's also their knowledge for how to keep and use it. The next generation doesn't necessarily have that same experience and that's why they struggle. Brad Jacobs for instance, and many others have a system. It's a way of thinking. It's a formula they apply when making decisions. They have a framework for getting to their desired results. Taking blind risks in business or passively investing in the stock market is simply not a formula. Buying Nvidia before it ran up is not a formula. Inheriting money and making investment decisions without the framework is not a formula. The reason it's not a formula is because the result of this approach is outside of your control and unpredictable. Amongst many other things. A formula is a framework. It's an overlay, a template, a checklist, a system, a process you repeatedly apply to manage risk and get a desired outcome. Here's my point. There are those who have truly figured out a formula that can help themselves lower their personal exposure to risk because they have learned some rules of money. They have learned how to navigate taxes, and they've developed the skills to know how to critically think through opportunities. It's not just that they are able to remove the inherent risk associated with making an investment. All investments carry risk. You can lose money. It just means when their formula is applied, it can help them see what needs to be done to navigate through the risk because of their understanding of what they're doing and what is happening. Again, an experienced rock climber has less risk climbing a mountain than someone who has never climbed a mountain. The truth is how much risk you carry when Investing your money can be a bit subjective because depending on whether the investment pans out, you never really know the true level of risk you're carrying. See if this sounds familiar for a second here. You're faced with a decision to make an investment, and after searching the Internet, posting on Reddit, asking friends their opinions, and looking at returns and fees, you choose where to invest your money. If that's you, I hate to say it, but that's not a formula. This is a default action to a decision for people who don't have a formula. I'm not saying you don't investigate a decision, but a formula is a checklist or list of rules that has little to do with past performance in the stock market or other people's opinions. Because building wealth is not a function random choices or chances. It's more of a function of following a formula that was engineered to produce the desired result. I'm a longevity and healthcare junkie, I guess you can call me. I'm enthralled with cutting edge medicine, but I can say that when I'm listening to a podcast or reading medical documents, it could be a lot like reading another language. It can get confusing at times, but I never let my confusion discourage me from following the framework my doctors helped me develop for myself. Much like health, building wealth is not linear, it's a dynamic process, and knowing your risk is important to understand. So a framework to me is a formula, much like a recipe. Okay, so my wife loves to cook, and when she's cooking, if she follows the recipe, she can follow that recipe time and time again to get a similar result. There are still variables that can cause inconsistencies with a recipe, like cookware or altitude, quality of ingredients, et cetera. But the framework or recipe is the same and is already in place. So if you randomly attempt to prepare a dish each time, not only do you waste a lot of time and energy, but you also get unpredictable results. The framework for your money is no different. Having a formula helps with consistency and builds confidence in making important money decisions. It's incredibly powerful. Now, unlike a lot of financial entertainers who promote a one size fits all mantra to sell their systems and their books, I can't necessarily in good conscience oversimplify this. In a few simple steps or actions, one person's situation can be different from another. But I can share a few things to help you get started. The first thing I would suggest would be adding a framework for diversification and commit to following it. It's worth thinking about this for a moment what does diversification mean exactly? Some may say it's spreading out risk using a mix of stocks and bonds, but that's not really a framework. Most people get the premise and realize the importance of diversification. But I really do think some really understand or know what it means. And when there is limited understanding of something, people will inherently default to what they do know. And that for most people is returns and fees. Okay, that's at the top of the list. But these are all influenced by opinions and circumstances and markets and the economy, which isn't a recipe that can easily be followed. The truth is that diversification is often associated with investing. But diversification is much more than picking stocks. It's much. It's a much broader term. Having a diversification framework would have actually have very little to do with picking individual investments. Not that it's not a component, but it's really more about allocating assets. So think of it like taxable tax deferred. Tax free is an example of diversification requires a framework. Public, private and fixed assets is another example of diversification that requires a framework. Growth income and banking is another. There are also frameworks for managing cash flow, mitigating taxes and handling estate. There should be a framework for everything, but these take time to work through. But it's. But let's be honest. People want to things. They want them simple, they want them fast, and don't really want to take the time to do it right until something breaks or it becomes a big enough problem. In my experience, the more money a person has, the more they desire to apply an actual framework, a formula to address the complexities of their situation. They come to a point of realization that there's simply too much at stake for random decisions. This epiphany usually follows like a market decline or receiving a large tax bill. Which leads me to my first point. Tax deferred isn't tax free. When you build most of your wealth in a 401k, you're not saving taxes, you're deferring them. When you consider that you're growing a problem with each deposit. That isn't a framework that addresses taxes, but is you slowly becoming a shining star with the irs. Nvidia and Bitcoin are things a lot of people wish they would have bought sooner. But opportunistic investments like this are not a framework. There's nothing wrong with owning them. Having a win feels really good. But timing and investment isn't a framework. The bottom line with what I'm discussing is if you don't have frameworks for making decisions with your money, then now is the time to get this done. What is your framework for tax allocation? Ideally, money's tax free. So will you want to develop a specific strategy around how to do this beyond just Roth contributions and conversions? What is your framework for asset allocation? So ideally your money is spread amongst banking, public, private and fixed assets. You really should learn what this means beyond simply holding cash in a bank and having some stocks and bonds. What is your framework for what I'll call purpose allocation? Ideally, you identify what money is used for, banking activities, income to live on, growth for the future, and things like that. You should really not shortcut this or even overstate returns because this is a framework that can make or break you. When you're thinking through developing these frameworks, you need to begin with having clear objectives, articulating the framework's purpose, and identifying the problems it solves or the values it provides. It's usually a good idea to begin studying existing frameworks or learning from a professional like our team to identify opportunities for building off something that already is established, outline the core components and establish guideline principles that align with your objectives and then design a step by step process that includes stages, milestones to guide implementation and develop templates or checklists to aid in its application. Hoping for a good future is much different than mapping out your future. Having frameworks built for these areas of your finances helps avoid common mistakes and more importantly, helps to prevent repeating those mistakes. Anyone who successfully builds wealth will inevitably face challenges that they wish they would have addressed sooner. And I know this because I hear from people nearly every day saying they wish they would have done these things sooner. So if you're serious about working through this, if you're an accredited investor who wants help developing these frameworks, you can always reach out to our team@scriboney financial.com if you're not ready to get your framework built out with the money you have right now, the question to ask yourself is if not now, when? Because there's a framework for that too. That concludes today's show. I am Brian Scribonia and thank you for listening to the Common Sense Financial Podcast. Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release release new episodes. I'm Brian Scribonia and this is the Common Sense Financial Podcast.

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