11/1/2022: How to Bulletproof Your Finance

Don't get destroyed by the worst case scenario.

Over the weekend, I heard several horror stories of people being liquidated due to recent volatility and over exposure to META 0.00. It’s not a good situation to be in. As mentioned in my previous post, my experience during the dotcom bust in 2000-2002 was eye opening. Hence, I take risks very seriously. Although my liquid portfolio took a 30% hit this year, I am not in any kind of financial distress and I am still able to keep pace with my early stage investments. I want to share some thoughts on how I bulletproof my finances after receiving a windfall.

When Facebook IPO lockup expired, the first thing I did was to sell enough to have a pile of freedom money. I put this money into a separate account and diversified them into a 60/40 index fund portfolio. I only allowed my family to withdraw dividend and interest income from this portfolio and I make sure we live below our means by spending less than this income. I also bought an umbrella insurance policy that will cover up to $5M in case of catastrophe. I have a PAL(Pledged Asset Line) line against this portfolio but I only use it for cash flow management. I usually do not carry any balance on it.

For most people, a windfall is typically not large enough to build a pile that offers financial independence. I would suggest that people keep adding to this pile until the amount is large enough to provide financial independence. I don’t recommend people buying or owning any individual stocks/cryptos before this pile is built. It’s simply too risky and not worth the time and stress.

After the pile of freedom money was built, I still had some amount left and I considered it the play money. I decided I could do whatever I want with the play money as long as I don’t end up having a negative balance that eats into the freedom money. I still have a good amount of the play money that I plan to use to invest in early stage companies and real estate. I never take on debt and it’s very hard to be wiped out without debt.

Someone asked me if he should sell his META 0.00 stock since he has margin loans against the stock and he is getting margin calls. If he wants to keep the stock, he has to move more money into the account. I told him that he needs to plan for the worst. Namely, stay above water in case of the stock going to zero. There’s no point in guessing the bottom of a stock. Nobody knows the future. People should just make sure they could survive the worst case scenario and the worst case scenario of a single stock is that it drops to 0.

Borrowing against a single stock is extremely risky. But people have been doing it in the past decade without issues as the underlying stock kept going up. But suddenly, the climate turned. Interest rates went up, stocks crashed and people got liquidated overnight. If they still have the freedom money intact, most likely they are going to be fine.

But I am very shocked that many people who received large windfalls didn’t put aside the freedom money. Usually, the rationale is that they don’t want to pay tax and they believe in the company. People end up borrowing against the single stock for big purchases and personal expenses and they get used to it. When the stock started to fall, most people couldn’t get themselves to sell the stock at a lower price and were eventually wiped out. To be frank, I think such behavior is basically gambling. I am not suggesting that people should stop gambling. But people should set aside the freedom money and only gamble on the money they could lose. It’s never too late to reset whatever you have in your portfolio and start building out the pile of freedom money. The peace of mind is totally worth it.