As my friend Nick Maggiulli is fond of saying, you have much more earnings potential in your job than in your portfolio, so it makes sense to spend more time thinking about your job than your portfolio.

People agonize over which mid-cap growth fund to pick and will agonize over expense ratios down to the basis point. This is not a great use of your time. If you took all your mental energy and figured out a way to get paid more at work, through a raise or stock options or something else, that adds up to millions of dollars more when you retire, after compounding.

I mean, both are important, but your income is more important than your portfolio. Trust me.

I’ve written about this in other places: I actually was a bit underpaid in my last couple of years at Lehman Brothers, relative to what my peers were making as ETF traders. Boy, that money would sure come in handy today, an extra $200,000–$300,000 compounded over 17 years. Politics are not my strong suit, I guess.

They say that the loss of a job can be one of the most traumatic things you endure in your life. Leave out the psychological trauma for a minute—not having an income for six months, a year, or two years of your life can be debilitating, even if you do have savings to live off. You’re not putting money in the bank. You’re not putting money in a 401(k). Everything comes to a complete halt.

Except for the first few months I started The Daily Dirtnap, I have never not had an income. It’s been nice. You know what else is nice? Having a W-2 spouse with health insurance. I think behind most great entrepreneurs out there is a W-2 spouse with health insurance. The only argument for single-payer that I can think of—everything else is terrible.

There are exceptions. In 2002, Bill Gates left Microsoft, and he had $40 billion in the bank. Over the course of 10 years, he gave away $26 billion, and in 2012, he had $80 billion. How is that possible? Well, his investing mentor was none other than Warren Buffett. That’s one of the craziest compounding stories I have ever heard. 

By the way, I looked this up: The top 1% in wealth in the United States is $11 million. If you have over $11 million, you are in the top 1%. Obviously, there is a big difference between the top 1% and the top .1% and the top .01%. Once you’re talking about the top .1% or the top .01%, you’re talking about people who are doing some serious compounding. This isn’t W-2 income. These are people who started a business and grew it very quickly. 

There is a rule of thumb that if you want to become a billionaire, you need to be compounding at 40%. Start with $10,000, compound at 40% for 40 years, and you will be a billionaire. You aren’t doing that in the capital markets, for sure. The world’s all-time greatest investors compound at about 20–25% a year. Look around, and you will see those great compounders. They aren’t doing it in the Total Stock Market Index Fund.

So again—your income is more important than your investing.

Investing Is Still Important

That doesn’t mean you shouldn’t care about investing. For example, there are people with zero risk tolerance whatsoever. They will keep their money in a bank, and after inflation, they will earn about zero over time, perhaps negative. Not that there is anything wrong with that. I get it. I don’t think it’s a crime against humanity. You buy yourself a lot of peace of mind that way. But you will have to work extra hard to get into the top 1%.

And then there are the people who take too much risk, which we have discussed many times before. That ends in pitiful and incomprehensible demoralization.

No, the answer is to take the right amount of risk, whatever that may be. The stock market has been returning 10% a year. That may be too much risk for you. The Awesome Portfolio returns about 8% a year. That may still be too much risk for you, or it may be the right amount of risk. You have to find the right level of risk appropriate for you. That’s not a question for me to answer. 

What I’ve found is that The Awesome Portfolio tends to be the right answer for most people, but again, it might be too much or too little risk. The point here is to target risk rather than returns. People do it backward—they say, “I want to earn 12% a year, and I’m going to take as much risk as possible to get there.” Do it the other way around—say, “This is the risk that I’m comfortable with, and these are the returns I’m going to get.” You will be a lot happier that way.

I’m sure there’s any number of people who cracked open an Excel spreadsheet for the first time and reverse-engineered what kind of rate they need to compound at to end up with $2 million when they retire. They have it backward.

Job Newsletters

I can only help with the investment part—I can’t coach you on how to make more money (other than to pay attention to politics). And the investment part is a lot more fun. Maybe a newsletter on how to succeed at a job would sell. Capitalism being what it is, there are probably some out there already. But they are probably from these schlocky “mindset gurus,” if you believe that sort of thing.

Coda: Here’s a pic of me DJing at Palm Tree Beach Club (formerly Wet Republic) at MGM Grand.  It went well—I was invited back!

Jared Dillian, MFA