Since tech professionals are by definition knowledge workers, we tend to be smart people. As smart people, we're subject to the Engineer Syllogism -- our confidence in our intelligence can lead us into trouble! That said, if we can maintain awareness of our cognitive biases, we can become pretty good DIY investors. Maybe we spend a lot of time researching good long-term stocks. Maybe we design our own low-cost portfolio. Maybe we purchase rental real estate.
There are many paths to wealth, but as tech professionals, we're driven to optimize. So: what is the optimal path? What course of action will give me the most return on investment?
Hypothetical Scenario: Iron Man does financial planning
In Seaborn's financial planning software, I have a couple of fictional clients that I use for examples and testing. For purposes of this analysis, let's take a look at "Pepper Potts and Anthony Stark". (Yes, I'm a huge nerd. You were expecting maybe one of the cool kids?)
In the "base case", Pepper and Tony make good money. (Well, Pepper makes the money. Tony does other stuff.) For purposes of this exercise, to make it more relatable, let's focus on Pepper, and say she's an "individual contributor" at Stark Industries, rather than CEO. Given their income, investments, spending, retirement plans, etc., they'll do quite well in the years to come. (It helps that Pepper invests any income they don't need for living expenses.) Check out their cash projections over the next 60 years:
They do quite nicely, with a median of around $3.5MM in today's dollars at age 95.
(Sidebar: this is the median case. Depending on the market, that outcome can vary dramatically! For purposes of this analysis, though, the median gives us the best baseline for comparison.)
Now, let's imagine that Pepper turns her considerable intellect towards investing. Currently, their investments -- which are matched to their risk tolerance -- are projected to return a median of 7.8%. Let's say she manages to outperform most of the smartest hedge fund managers on the planet, and improves that by 200 basis points net of fees without increasing volatility. Here's the outcome of a median return of 9.8%:
That's an extra $577K over the lifetime of their plan. Not too shabby!
Now, let's say Pepper instead works on her career. She spends some of her free time on professional development, she brings her A-game to work every day, and she consistently gets excellent performance reviews. Her raises go up from 2.6% each year to 3.6% -- enough to max out Roth IRA's for herself and Tony consistently, even as the max goes up with inflation. Here's what that looks like:
Here, she gets an extra $900K on top of the baseline. Note that we're comparing above-average but reasonable raises to beating the smartest investors on the planet, and the outcome is in favor of the raises!
Finally, let's say Pepper really doubles down on career. She networks, she focuses on effectiveness and efficiency, she stays on top of current technology and business trends, and she becomes a master of her craft. She knows how raises work, and puts that knowledge to good use. She gets incremental promotions every 2-3 years -- enough to make her average raise go from 3.6% to 4.6%.(Of course, this isn't counting the stock options she starts getting, but let's keep the estimate conservative.) Here's the result:
The improvement over the lifetime of the plan is $1.7MM -- triple the increase of the "improved investment" results. And if you throw stock options and increased bonuses into the mix (which will inevitably happen as she climbs the ranks), the numbers start to get truly astronomical.
So in the case of Pepper and Tony, the optimal path is clear: focus on career first, with investment "alpha" a distant second. A few caveats and notes, though:
Yes, this is just a case study, and a fabricated one at that. This is why I intentionally shifted the numbers to be conservative: the additional investment gains represent skill equal to a top-tier hedge fund manager, while the additional raises are above-average but achievable (and ignore bonuses and stock options entirely). Your mileage may vary, but chances are high that the benefits to focusing on earning more income in your particular scenario are even higher than the case study above.
This starts with a good financial plan. We're not assuming that Pepper ignores their finances to focus entirely on career. Rather, the base case assumes that the household is out of debt, maxing out their 401(k)'s, and investing all of the money they don't spend -- in short, making wise financial decisions. Once they have a good financial base set up, though, the most efficient path is to focus on incrementally optimizing career, rather than optimizing their investment strategy.
The cynical among you are probably detecting a sales pitch. It sounds something like this: "Hey, it's probably not worth your time to focus on managing your investments. Why not free up all that time by delegating your investment management to me?" First: good on you for having a sensitive conflict-of-interest meter -- it serves you well, especially when you're interacting with the financial services industry! Second: you're half right. It's a sales pitch for delegating investment management in general, but not necessarily to Seaborn! (If you like daytrading and market-timing, then definitely not to us!) I just want to make sure everyone is spending their time and energy in the optimal way, making decisions based on good information, and while your mileage may vary (as I mentioned above), the general numbers are pretty clear on the value of delegating here.
Finally: when looking at where to spend your time and energy, largest return on investment isn't the only question, or necessarily even the most important. As analytical people, we like seeing numbers go up, but money is more than just numbers: money is meant to be spent! At some point in your life (what the financial services industry calls the "decumulation phase"), the time comes to spend all of that wealth you've been amassing. Moreover, there's more to life than retirement; don't forget to live a good life now (while you have your health and energy)! So when looking at your own "life optimization" and how to spend your time, don't forget to take the larger context into account.
What do you think? Have you found your own personal, systematic balance of career vs. investment focus? As always, I'd love to hear from you via e-mail or comment!