By Zach Whitchurch
President | Wealth Advisor
Certified Private Wealth Advisor®
CFP®
“You can have all of the assets in the world you want, but if you have no liquidity, it doesn’t matter.” — Sam Zell (American billionaire businessman, 1941-2023)
Navigating the intricate world of investments and wealth management can be a daunting task for founders, entrepreneurs, and executives whose majority of net worth was (or still is) tied up in their company. Frequently, these individuals find themselves transitioning from one form of illiquid investment—their own companies—to other illiquid assets. This unique financial trajectory often involves a high risk tolerance, nurtured by years of entrepreneurship or leadership in their respective industry. They commonly channel their wealth into these new illiquid investments, causing a significant imbalance in their personal balance sheets.
While this type of personal investment of both money and time may yield large returns, this strategy sets up a complex financial journey fraught with potential pitfalls and challenges. This article seeks to unpack this financial phenomenon, illuminating its psychological aspects, potential repercussions, and how adopting disciplined and systematic investment strategies can assist in maintaining a healthier and more sustainable financial life.
Wealth Growth and Confirmation Bias
For many, working in the tech industry is akin to a bet on their career and business acumen, with the expectation of a sizable future payoff. If they help their company grow rapidly, there might be a significant payday in their future.
However, if their company is successful, it could lead to an imbalance in their personal financial portfolio. The value of the illiquid asset—usually from the company they work at—may have grown at a much quicker pace than other, more liquid and diversified assets. Thus, when the tech executive cashes out their equity from their company, they tend to think that the best way to invest moving forward is to reinvest in other illiquid assets (since they feel that is what has worked for them in the past). This confirmation bias can potentially lead to poor investment decisions.
Consuming Wealth: The Pull of Depreciating Assets
Upon the sale of their equity, people often find themselves in possession of a significant amount of liquid capital. This newfound wealth can trigger a strong desire to spend on depreciating “assets” such as luxury cars, homes, boats, and other high-end goods. The allure of these purchases lies in the emotional satisfaction they provide and the ability to enjoy the fruits of hard-earned success. However, it’s crucial to differentiate between want and need, as acquiring these depreciating assets often represents spending on things enjoyed but not necessarily needed.
This stage also presents a vital moment for mindfulness and discernment. While it’s perfectly acceptable to splurge on enjoyment and derive satisfaction from success, it’s equally crucial to be aware of the extent of these purchases and their alignment with long-term financial plans.
Overconsumption can quickly lead to an erosion of wealth and an imbalance in financial stability. The key here is not to deny oneself of life’s pleasures, but to strike a balance between achieving personal satisfaction and maintaining fiscal responsibility. Hence, understanding how these purchases fit into a comprehensive financial plan can help entrepreneurs and professionals enjoy their wealth while also preserving and growing it for the future.
Importance of Systems and Rules in Wealth Building
Understanding the importance of a systematic approach to investment is pivotal for founders, entrepreneurs, and executives looking to sustain and grow their wealth. The first step in this journey involves setting a clear framework or set of rules, defining how much money can be spent on “splurges” and how much will be reinvested to generate more wealth. In our experience, putting systems like this in place can be highly beneficial to navigating this newfound liquid wealth.
When considering new investment opportunities, we recommend a balance between both liquid and illiquid investments. While we don’t recommend reinvesting all your cash in illiquid investments, using a certain portion for them is perfectly fine.
Once we find the right balance, we can then determine the requirements for returns on different types of investments. For example, when evaluating an illiquid asset, it’s crucial to establish the risk-return profile that must be achieved for it to qualify as a worthy investment, given their lack of liquidity. This clear-cut approach helps mitigate impulsive investment decisions and combats the fear of missing out, promoting a strategic and thought-out investment plan.
Don’t Forget About Cash Flow
During 2020 and 2021 there were a total of 17,755 private equity deals completed. When you have this many deals turning over, it can seem like it will never end. However, according to Bloomberg, in 2022 the private equity corner of the M&A market declined a little over 38%. When you have most of your assets in illiquid deals, eventually you start to wonder where your cash flow will come from.
So another key component of this system is understanding what kind of income our clients would like moving forward, and how we could help generate this cash flow. The cash flow could come from real estate and dividends to interest, private debt, or other income sources like options premiums. By undergoing this evaluation process, we keep our clients from relying heavily on a single asset class. It also promotes financial flexibility, allowing them to maintain their lifestyle and ideally fund venture-style investments from income, not principal.
The key to reaping the rewards of such a systematic approach lies in discipline and consistency. Legendary investor Warren Buffet’s wealth accumulation is a testament to the value of such a disciplined approach. His consistent adherence to his investment rules over time has enabled him to remain unemotional in his decisions and steadily grow his asset base. Trying to mirror the crowd or a friend’s investment strategies might not necessarily yield the desired results, given the unique financial situation and risk tolerance of each individual.
This is where we step in, assisting founders, entrepreneurs, and executives in creating and following a tailor-made investment strategy. Our goal is to verify that investment decisions are purposeful, intentional, and consistent with their unique financial contexts and objectives. In doing so, we aid them in charting a path toward sustainable wealth accumulation and preservation.
Could You Benefit From a Strategic Approach?
Navigating the complexities of newfound liquidity after selling your equity can be challenging, but you don’t have to do it alone. At Solidarity Wealth, we specialize in creating a systematic approach that balances liquidity and growth so you can work to avoid costly mistakes and maximize potential investment and lifestyle opportunities. If you’d like an experienced team committed to cultivating a lasting partnership so you can focus on what’s most important, we’d love to see if we can help. You can reach out to us at info@solidaritywealth.com or call 385-374-1665 to schedule a discovery call.
About Zach
Zach Whitchurch is the President and a wealth advisor at Solidarity Wealth, a privately held, independent wealth management firm that serves as a multi-family office to some of the Mountain West’s most successful families, technology entrepreneurs, and executives. Zach works with clients to develop both “Wealthy Financial Habits” and “Healthy Financial Habits” and thrives on helping them understand their finances by simplifying the complex. He uses his broad knowledge on a wide variety of topics to implement creative strategies for clients as he helps them feel both seen and heard, and supports them along the path to their dreams.
Prior to co-founding Solidarity Wealth, Zach was a financial advisor and a senior vice president of investments at Wells Fargo. He has a bachelor’s degree in accounting and a master’s degree in finance from the University of Utah and holds the CERTIFIED FINANCIAL PLANNER™ and Certified Private Wealth Advisor® designations. He is also a Managing Partner of Solidarity Capital. Outside of work, Zach enjoys spending time with his wife and four children and being active in both indoor and outdoor sports. He is also involved with coaching youth sports, and loves to read and learn about how the world works on a deeper level. To learn more about Zach, connect with him on LinkedIn.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.