Chasin’ the Dream

A letter to my two sons…

Well done so far boys. You both seem to have strong relationships with friends and family. Only in your late 20s yet you’ve laid great foundations for career success. You’re well on your way to… well, what? That is the topic of this letter.

I know how I’ll reply to others over the years when I’m asked how you both are doing. But what’s really important to me is how I’ll answer a more personal version of that same question to myself over a cup of morning coffee 10 years from now. How are you going to chase the dream, and more importantly, just exactly what will the dream be?

I recommend you take a few minutes to read Ben Carlson’s recent post on his website A Wealth of Common Sense. It’s titled “The Business of Life is the Acquisition of Memories” and it’s a great read, particularly from my perspective. The loss of his younger brother last year certainly affected Ben’s perspective, too. Trust me, you might be impressed someday by looking at your personal asset spreadsheet, but it will never move you emotionally. Once you have enough to protect yourself and your family, the added “0s” won’t really mean that much.

I also want you to be aware of an important development taking shape. To understand it, I point you to Nick Maggiulli’s recent post at his site Of Dollars and Data. It’s titled “The Upper Middle Class Trap” and it’s a very important read. Turns out that despite all the gloom and doom in the media, the “upper middle class” (defined as those families with incomes between $133,000 and $400,000) is growing fast – from 10% of American families in 1979 to 31% now. But here’s the twist: That means there’s a lot more people ready, willing and able to drop meaningful money on status items like private schools, elite colleges, luxury homes and country clubs. The result is that all of those “status symbols” have gotten a lot more expensive to attain (bigger demand).

And just because something gets more expensive doesn’t mean it really increases in value. Here are some examples: In the last 10 years a new single-family home shrunk in average size by 11% while the price per square foot shot up by 74%. A few weeks ago, I walked through the airport and glanced at the “exclusive” premium lounge for high-end travelers. It was packed with people and a line of folks waited outside. A good friend of mine in Florida could not get us on his community’s private golf course because all the tee times were taken. He lives a stone’s throw away from the course and we had to play miles away, at a public course. And elite schools? Don’t get me started. In 1990 the acceptance rate at Harvard was 14.3%. In 2024 it was 3.5% due to more people chasing the same number of spots. Private equity is just getting acquainted with the youth sports obsession of the upper middle class. Your travel soccer club cost us about $2,000 a year. I won’t be surprised if it will cost you $20,000 for your child to “keep up” athletically (private coaching, premium equipment, elite sports camps, etc.).

Before you fall into line to chase all these things, ask yourselves if it’s really worth it. You both went to public schools and kicked butt. I have great golf and hiking memories with you that primarily took place on public courses and trails. Yes, your mom and I fly first class more frequently now, but my favorite travel memories are the four of us packed in a minivan slowly making our way to southeastern Kansas to visit family. (Why I could never convince any of you that you can get a decent sandwich at the right gas station is beyond me).

Listen, I’m not trying to slow you down. Professional and financial goals are important. Go for it while you are young! But remember, it’s very easy to get on the treadmill of material success without even knowing it. By design, a treadmill gets you to expend a lot of time and energy without getting anywhere. Don’t fall for it. In fact, do me this favor: As the years pass and you periodically check your asset spreadsheet, pull out your phone and spend 5 minutes scrolling through the family pictures you have there. Start with a different set of pictures each time and take a few minutes to remember the context. That’s your real net worth, and I promise you those memories will be much more valuable than any number of “0s” you will find on that spreadsheet.

I’m open to meeting for lunch to talk about these things in person. Heck, I’ll even bring the sandwiches…just don’t ask me where I got them from 😉.

All the best,

Dad

Fun Fact: Speaking of memories, it turns out we forget nearly 50% of new information within an hour, and up to 70% of new information within 24 hours

Investment “Advice” From Apex Predators

I was channel surfing the other day and landed on David Attenborough narrating a Planet Earth episode on crocodiles (What a voice!). Apex predators are at the top of their food chain, looking down on all other animals. Yes, they tend to be fast, have razor sharp teeth and often big claws; but design isn’t the only thing that got them to the top. Their habits play a major role, and those habits carry over to successful investing. Some examples:

Cheetah — The world’s fastest cat can reach speeds of 75 mph in pursuit of prey. But cheetahs don’t sprint all day long. They are smart enough to conserve energy, and they don’t turn on the jets unless and until they know their prey is in range. Investment parallel: You don’t have to be in constant action; you just must act decisively when opportunity arises. Over-trading and/or switching strategies is the enemy of long-term success.

Golden Eagle — Yes, their talons are big and they can dive at speeds of up to 200 mph. But what puts it all together for the Golden Eagle is their unbelievable eyesight. Multiple times sharper than human sight, they can spot a rabbit from up to 3 miles away. Investment parallel: It’s best to take the long view and parse out the short-term noise. Look out at the investment horizon to spot long term trends early, but act with caution.

Sharks — Aerodynamically designed, they glide through the water with tremendous efficiency and fluidity. Investment parallel: Keep costs low (fees, taxes, turnover). Small inefficiencies can compound over time.

Lions — A single lion can strike fear in any animal, but that’s not how they hunt. They hunt in packs using teamwork to force herds into a weak position before attacking. And they hunt at night to increase stealth. Working this way, they maximize the probability for success. Investment parallel: Your various investments should work efficiently as a team. Asset allocation matters more than stock picking. Being in the right position beats chasing every opportunity.

Crocodiles — Crocodiles are master ambush predators capable of waiting for hours or days for prey, and in periods of scarcity, they can go months without eating. They position themselves in the right spot, stay motionless, and then wait—and wait—for their prey to venture by. Hours can pass without a single movement. Investment parallel: Patience is the best investment strategy. Long periods of inaction (and boredom) often take place before real investment opportunities show themselves.

In nature and the markets, success (and survival) isn’t about constant motion; it’s about disciplined actions.

Fun Fact: One of the smallest apex predators is the dragonfly. Only a few inches long, they have nearly a 100% success rate when hunting insects which they grab mid-air with incredible precision. Around ponds and wetlands, they have no natural predators while actively hunting. I wonder if we humans would be on their menu if they weren’t so tiny

Annuities: Worth Exploring, but Handle With Care

Annuities tend to fall into one of two buckets for most people: either “safe and steady” or “confusing and costly.” Unfortunately, those in the “confusing and costly” bucket don’t often inhibit annuity producers from selling them, and trust me, many of those producers don’t have a firm handle on how the particular annuity operates either.

Some folks have an annuity but don’t even know it. I often come across that situation after a client visits their bank in search of a good, fixed interest rate and leaves with “something my banker recommended” which turns out to be an annuity. The money you put in the annuity sold by a banker doesn’t stay at the bank. It leaves there and ends up in the account of an insurance company. That’s not necessarily a bad thing, but many people are surprised to learn that fact.

There are strong opinions, both good and bad, about annuities. Let me try to clear things up:

Annuities aren’t inherently good or bad. If you’ve heard horror stories about an annuity, that is usually a problem with the annuity salesman. Understanding the basics can help you decide whether they belong anywhere in your financial picture.

At their core, annuities are contracts with an insurance company. You give them money and in return, they promise some combination of growth, income, or protection. Think of them as a way to turn a lump sum into a stream of payments, often designed to last for life.

There are three primary types of annuities worth knowing:

• Fixed annuities offer a set rate of return. They’re straightforward and behave a bit like a CD, though typically with longer lock-up periods. Often, these are the annuities people walk out of a bank with.
• Variable annuities allow your money to be invested in market-based subaccounts. This introduces growth potential—but also risk, and complexity, and sometimes unknown (unexplained) fees. The value of these annuities can go up and down with the market.
• Indexed annuities fall somewhere in between, tying returns to a market index (like the S&P 500) but with caps, floors, and participation rates that limit both the upside and downside.

One commonality of all three annuity types is that the growth is tax-deferred until it is withdrawn. Annuities do not provide a step up in basis on the gain at death and all tax on an annuity withdrawal is at ordinary income rates.

One of the main reasons people consider annuities is income certainty. Some annuities can convert your savings into a guaranteed monthly payment you can’t outlive. That can be appealing, especially for those without pensions or who value predictability over flexibility.

That said, annuities come with trade-offs. They often include surrender periods (meaning your money is not easily accessible for several years), fees (particularly with variable annuities), and complexity that can make apples-to-apples comparisons difficult. In many cases, you’re giving up liquidity and simplicity in exchange for guarantees.

So where do they fit? For some, annuities can serve as “personal pension” that covers essential expenses with reliable income. For others, especially those comfortable with market volatility and managing withdrawals, they may be unnecessary.

Bottom line: Annuities are tools. Like any tool, their value depends on whether your needs can be matched with a specific annuity type. I do have one important reminder that applies to all annuities: If you do use an annuity in your financial toolbox, make sure you have beneficiaries listed on file with the insurance company.

Fun Fact: A “millionaire” and a “billionaire” are both well off, but far from similar. In fact, the clearest way I found to get people to understand the difference is in seconds. A million seconds amounts to 11.57 days. A billion seconds amounts to 31.7 years. Quite a difference!