“Energy is not only the basis of our existence, it is the fuel that makes everything in our lives real and possible.” -Tony Robbins
When I was younger and cooler(ish), a discussion of this topic may have very well been centered on Operation Ivy’s 1989 ska punk album aptly titled (you guessed it), Energy. It is truly raw energy captured on tape and can still easily get me as fired up as it did 20 (or more) years ago. However, in terms of energy discussion these days, what’s more top of mind is energy as the human life force and how that may translate to the investment world. Like our energy flow, we can view portfolios in the context of available resources and how we utilize them, and that’s where we’ll focus our attention in today’s edition of Alt Blend. Here we go!
Alive
I recently listened to a fascinating episode of the Huberman podcast that featured Dr. Martin Picard on the energy flow of the human body. In physics, there is a notion that we cannot distinguish between being at rest vs. moving at a constant velocity (speed); rather, we only feel the forces of motion when that speed changes (known as acceleration). For example, you may get pinned to the seat of your car when aggressively accelerating to merge into highway traffic, but there’s no sensation of movement once you’re cruising along at the posted speed limit.
Similarly, Picard argues that what we perceive as feeling or emotion within our body is the consequence of energy flow, and – more importantly – it is the single most vital element of being alive. When that energy flow stops, we die. As implied by today’s quote, a recently deceased person has all the same parts as a living person; the only difference is that energy is no longer flowing.
One challenge of the human journey is that we cannot create unlimited energy through greater food intake; overeating instead stores energy as fat, making us less energetic. Therefore, every decision we make can be viewed in terms of its impact on our limited amount of energy. On the financial side of life, while we could theoretically add unlimited amounts of capital to our investment portfolios, that is unrealistic for those not named Elon Musk.
The heart of the matter
We take in food and oxygen, and from those inputs, the small but mighty mitochondria, aka “powerhouses” in our cells, along with the heart, help to create/distribute the energy we use. Furthermore, our habits can influence that equation; for example, more exercise can increase mitochondrial and energy production. While I’m sure I’m wildly oversimplifying this from a scientific perspective, that notion really tracks with the human experience: exercise builds the capacity to endure even more exercise, and we feel more energetic.
Portfolio energy
When it comes to portfolio construction, the various investments we include will produce different amounts of available resources (i.e., “portfolio energy”) over time. Given we live in a fiat monetary regime, we must plan for constant inflation, which implies cash is a sure long-term loser, as it lacks the ability to maintain purchasing power. Like a corpse, cash has a fixed physical (or digital) presence and no energy production or flow. However, as we step out the risk spectrum into money market funds, bonds, stocks, and – yes – Alts, we can generate growth and renewable energy from our portfolio.
Discomfort is key
I assume this part is common knowledge by now (though whether people are willing to accept it is a whole other story): growing and improving our abilities and energy production requires some level of discomfort, challenge, or “doing hard things.” We accomplish things by setting goals and deadlines, and we get stronger and faster by running hard, getting out of breath, lifting heavier objects, and pushing our bodies to new limits. Elite humans, like professional athletes, do these things day in and day out, and those who can find enjoyment in those strenuous processes have a significant advantage over others.
Similarly, as we move across the spectrum of investments that enable greater portfolio energy production, discomfort naturally increases due to the characteristics that accompany them. Risk of loss, price volatility, and illiquidity can all be uncomfortable, but they are also essential characteristics for generating portfolio energy (i.e., income, growth of income, price appreciation) needed for long-term wealth creation. Embrace the volatility and uncertainty, and you have a distinct advantage over other investors.
Expenditures
Even if we optimize our bodies and portfolios for greater output and potential, the amount of energy, income, and growth is ultimately limited; however, we can significantly influence how our limited resources are deployed. With the concept of a limited energy budget top of mind, decisions throughout the day can be viewed in that context. Choosing to exercise is a form of reinvestment into greater future productivity and energy availability. On the other hand, opting to skip the gym and hit the bar not only costs energy for processing alcohol, but – particularly if drinking excessively or later in the day – it can also decimate sleep quality and have the negative compounding effect of less energy to use tomorrow. At the same time, there may be stress relief from the social interaction at the bar, which could result in net positive energy (h/t to Dr. Picard in the aforementioned podcast), so this all may not be as simple as it sounds.
On the portfolio front, we can reinvest income (dividends and interest) to compound and grow our future resources. If, instead, income needs to be drawn, then limiting withdrawals to dividends and income can preserve our nest egg, allowing it to continue growing to wage war with uncertainties and inflation over time. And if more than the total return (income and growth) is spent, then future resources are inherently being depleted. Any of those options could make sense in a given situation, but those decisions should be based on a sound financial plan.
Tools of the trade
An optimal portfolio (for both bodily and portfolio energy) is one that provides a high likelihood of meeting your financial needs while also allowing you to sleep well at night. I’m biased, but I think we can take a more energetic approach than using excessive amounts of “dead” money (cash) and the old waterfall method. We have the benefit of utilizing higher-yielding dividend growth, private alternatives; those components, along with knowing “what you own and why you own it”, serve as an important foundation for embracing unavoidable volatility.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
