How to Become A HNWI: High-Net Worth Individual

[chenda]

Actually, we're currently living in a pretty solidly gilded age once more. The GDP of Amazon is greater than that of South Korea and Netflix has larger GDP than Bangladesh. Warren Buffett's wealth is approximately the same as the entire nation of Bolivia.

That's true actually, Thomas Piketty has written much about this. Although on the other hand Victorian industrialists didn't enjoy things like reliable anesthetics and antibiotics so you could argue from a certain perspective they were poorer than some chump earning minimum wage in 2023.

[7Wannabe5]

@chenda:

Yes, that would be the perspective offered by the rational optimists at Level Orange in books such as "Capitalism in America: A History" by Greenspan and Woolridge. The more pessimistic perspective of some rationalists at Level Yellow is presented in other books such as "Energy and the Wealth of Nations: Understanding the Biophysical Economy" by Hall. The pessimistic rationalists might argue that the chump earning minimum wage today is less wealthy than the chump earning minimum wage in early industrialist era, because the planet's inherent capital in the form of natural resources base has been burnt through like the proceeds of a lottery ticket over last 200 years. It really comes down to how much you believe that further innovation will allow us to continue along the economic growth path, perhaps even to the point of breaking through planetary boundaries. A further complication would be the demographic shift which is lowering fertility rates for all but the VLNWI and the VHNWI. As Picketty made clear in "Capital in the Twenty-First Century" one of the major factors influencing GINI ratio in affluent realms is assortative mating (tendency to only marry men with similarly high income) and low fertility of educated females. The upper middle-class is now largely comprised of couples each having relatively high income and few children.

[Sclass]

@Veronica have you factored in the risk of return being -15% when you most need the cash and must sell?

I keep one to two years of expenses in cash.

After I stopped getting a paycheck it was really important to have this expense buffer in place. I’m invested in individual stocks with overweights in tech and industrials.

A year or two is usually enough air reserve.

[chenda]

The pessimistic rationalists might argue that the chump earning minimum wage today is less wealthy than the chump earning minimum wage in early industrialist era, because the planet's inherent capital in the form of natural resources base has been burnt through like the proceeds of a lottery ticket over last 200 years. It really comes down to how much you believe that further innovation will allow us to continue along the economic growth path, perhaps even to the point of breaking through planetary boundaries.

Yes thats very true. I recall Jacob made the point that 3 'new planets' have thus far been discovered; the discovery of the new world in the 15th century, the industrial economy in the 18th and the agricultural revolution of the 20th (think I've got those right ?)

[Veronica]

@Veronica have you factored in the risk of return being -15% when you most need the cash and must sell?

I'm going to be perfectly honest and answer this question as "no".

I had an experience recently which has radically changed my thinking and relationship with money. Currently, my view is that money is essentially only real when it is exchanged for real world goods. So the only utility money provides to me is an ability to acquire goods that I can't acquire or produce myself. Sorry, but I'm not about to start learning to make my own shoes

For me, there is no "risk of return being -15%". Because the underlying assumption behind that sentence is that I have a list of things I would like to purchase, and that a 15% loss will prevent me from executing on that plan.
If this 15% loss occurs in a retirement account that I can't access anyway... I haven't really lost anything. I lost the minute I contributed the money into it, locking away my purchasing power until a ripe old retirement age.

[7Wannabe5]

Yes thats very true. I recall Jacob made the point that 3 'new planets' have thus far been discovered; the discovery of the new world in the 15th century, the industrial economy in the 18th and the agricultural revolution of the 20th (think I've got those right ?)

Yes, but the original move from hunter/gatherer towards any form of large scale agriculture would also have to be taken into account. A human hunter/gatherer lifestyle requires around 160 acres per individual, which is the size of the agricultural allotments per adult under the Homestead Act in the U.S. The birth-rate in Colonial America was 50% higher than in already-over-crowded-by-conventional-agriculture-standards England. This was likely for the most part due to the same basic mechanism that has greatly lowered birth rates in the 21st century. Late marriage due to inability to afford adequate "nest" in accordance with semi-conscious societal/cultural/economic standards. For example, if you are a thoughtful female at Level Yellow, how much "acreage" will you need to provide more than two children with lifestyle in which they will be able to support themselves someday by trading in "ideas." Please include the depreciation of your own education in the calculation if you plan on educating them yourself.

The industrial revolution and the scientific/industrial farming revolutions were dependent upon the utilization of fossil fuel reserves, which are approximately 50% depleted at this juncture, and increasingly difficult to access. Scientific/industrial farming has provided enough calories that we are now at 8 billion humans or approximately 1 human per 2 acres of land-that-could-possibly-be-farmed. Obviously, the waste products from burning fossil fuels are also creating severe environmental pressures. So, interesting times ahead!

[frugaldoc]

@Veronica have you factored in the risk of return being -15% when you most need the cash and must sell?

While I believe in having liquid cash on hand, rarely do you need to sell assets in a down market if you need cash, assuming you have built a sizeable base of assets to begin with. Some people use margin loans but I find that has too many unknown variables. If I need a slug of cash quickly and don't want to sell assets, I'll simply sell short an SPX box spread at whatever maturity gives me the most favorable rates. Some might consider this advanced but I don't think it is that complicated. Only in extreme circumstances should you need to sell assets to access cash.

[fiby41]

@7Wannabe5 What is Level Yellow, does that have something to do with spiral dynamics?

@frugaldoc that's interesting. One more way would be pledging mutual funds as collateral to get a loan. Volt is one company here that lets you do that. They used to charge 9% when I signed up but have since made the interest rate variable upto 11%. Its like setting up a line of credit equal to 90% of the MFs you hold and paying interest only on the credit you use, all the while preventing redemption/selling.

[frugaldoc]

@fiby41: What I do is much easier and with much more favorable rates (usually 25bps above prevailing treasury rate for that maturity). For example earlier this year I sold to open a SPX box spread maturing in Dec 2027 with a $100k notional value and received the proceeds of 85760 which equals borrowing at 3.6%. Now rates have risen so I could actually close that position for ~83k. In essence, if I closed the position now I would have profited from borrowing the money for 6 months. Also, it is a 1256 contract so subject to favorable 60/40 ST/LT tax treatment. You should consult your tax adviser but any "interest" you pay is potentially tax deductible as a capital loss.

[frugaldoc]

Sorry, I meant 60/40 long term/ short term capital gain/loss.

[7Wannabe5]

What is Level Yellow, does that have something to do with spiral dynamics?

Yes, sorry. The level of systems thinking.

@frugaldoc:

The tactic you utilize is very much like the one described by financial economists looking at the Trinity Study as a means to not overpay for steady income from volatile asset base. I am getting more than a bit over my head here, but one question might be why this tactic has not already been packaged as financial product? Or has it?

[frugaldoc]

I don't know how one would package it as a financial product. It is just a simple options strategy (albeit with very specific parameters so you don't screw it up). Institutions use box spreads for cash management which is probably why 100k contracts are the most common. To me it is much superior when compared to a margin loan.

[7Wannabe5]

@frugaldoc:

I don't know either. I was just thinking about this article:

https://web.stanford.edu/~wfsharpe/retecon/4percent.pdf

What investments should our retiree make to get the least cost? Because the shape of
Figure 2 is approximately flat-ramp-flat, a financial engineer would suggest a strategy of
buying and selling 30-year, European call options on the market portfolio. Our retiree
would purchase a set of calls with an exercise price equal to the right-most value for
which the payouts are zero. Simultaneously, he would sell a set of calls with an exercise
price equal to the left-most value for which the payouts equal $4.46. By adjusting the
numbers of calls purchased and sold, a payoff diagram very similar to that shown in
Figure 2 would be obtained.14 Further, if our asset-pricing model is correct, the net cost
should be approximately 69¢. It is, of course, possible that no counterparty would offer
these options. If not, it is still possible to replicate the least cost strategy by following a
dynamic strategy using the riskless bond and the market portfolio. Further, if enough
retirees wanted a particular spending distribution, and the least cost investment strategy
was sufficiently below other readily available investment options, then financial
institutions would be enticed to offer products that replicated the spending distribution for
a cheaper, but profitable, price.

[Henry]

Save money, live a long time.

[chenda]

Very interesting. I wonder what the optimum global population would be ?

The Idea of an techno-agrarian society where everyone could be mostly self sufficient in everything with minimal work is very appealing to me.

[7Wannabe5]

@chenda:

Well, the population density of the county where I hope to retire, which includes one small city and a whole lot of wilderness, is less than 70 humans per square mile. So, that would work out to around 2 billion global population or roughly 1920s global population.

In theory, this century's 10 or 11 billion peak of human population could be supported as techno-agrarian-egalitarian economy/society, but pretty unlikely it will happen that way. For instance, the county where I hope to retire is one of the few predicted to experience zero wet-bulb temperature danger days in 2050. So, one threat to the maintenance of my retirement plan would likely be the invasion of the UHNWIs to my region.

[chenda]

@7w5 - right, it still blows my mind to think the world's population has almost doubled in my lifetime.

Its currently 10.30 pm and I'm sweltering in 22C at 85% humidity in September, it's horrendous...