083: The Evergreen Portfolio Strategy That Works in Any Market

00:00 - 37:59 | Christopher Nelson: Welcome to Tech Equity and Money Talk I'm your host Christopher Nelson and today I want to ask you a very important question what would your life be like if you could manage your portfolio like a tech ceo i'm talking bill gates jeff bezos elon musk what is the opportunity cost what are you losing by not managing your portfolio today how would your life be different if you could produce from your portfolio 60% of your income 80% of your income 100% of your income could be replaced by your portfolio what would your life be like i know so many people today tech professionals that have built up a large portion of equity but they don't know how to manage it. And so they're stuck in this 24 by seven lifestyle. They don't understand how to make the transition from money maker to money manager. The good news for you is we're going to be covering off today on the fundamental strategy to do that, which is the evergreen portfolio strategy. This is a strategy that's used by ultra high net worth individuals, especially tech executives and CEOs, the way that they manage their portfolios to generate generational wealth. We're going to get into it right now. As a technology executive, you've mastered the art of making money through leadership, through innovation, through perseverance, and through tech equity. But when it comes to making financial decisions in your portfolio for your future, the stakes seem much higher. Because it seems like every decision that you're going to make, your future hangs in the balance. I know I've been there. I've been up late at night, looking at market trends, researching new opportunities, and trying to understand the best moves to make, and really putting my hard money to work. And sometimes it's just not the fear of losing money. It's the fear of missing out on an opportunity. Whether that's a new tech trend, or it's a new investment, or a new way to invest that you want to explore. All of these feelings, emotions, and what to do next raise the stakes of making these financial decisions for our families. But the reality is that we can learn a method, learn a process to make these decisions. And if you stick around to the end of the episode, I am going to share with you some of the steps that I've taken to transition from being a moneymaker to being a money manager. But before that, I want to share with you my personal story of how I learned this process and this strategy of the Evergreen portfolio. Let's be honest as a technology executive you've built your wealth with your leadership, your expertise, your innovation and equity compensation. But when it comes to making decisions around your own portfolio the stakes seem incredibly high. It seems like every decision that you're going to make your future hangs in the balance. I know because there was a time when I had 90% of my wealth in a single stock. I'm going to tell you more about that story in a second. But I think for many of us, you know, when it comes to managing our finances, there is more fear, there is more anxiety and things that drive us that can lead us astray. And sometimes it's not the fear of losing money. Sometimes it's the fear of missing out on an opportunity. But those things can lead us in many different directions, whether that's the latest tech trend or whether that's pursuing a new real estate investment opportunity that I don't really understand what it is. Here's the good news. The good news is that learning to invest, learning this evergreen income portfolio style is a skill. It's something that you can learn and it has a very straightforward framework. I'm excited to introduce this to you today, but let me walk you through my story first of how I learned this myself, because I think you're going to have a lot of takeaways and it's going to make it real for you. The day that everything changed for me was April 19th, 2012. It's a day that I'll never forget. It was on this day that Splunk went through its initial public offering, otherwise known as an IPO. On that day, surrounded by some coworkers and friends in our office in San Francisco, our stock went live on the NASDAQ. And at that point, myself and many people around me were minted multimillionaires. It was an incredible moment that was full of joy. It was full of happiness. But later that night, as I got home and I saw my pregnant wife, and I was thinking about buying a house and financial responsibilities, it really all came crashing down. Because the reality was, while I had made that money, I had no idea of how to manage that money. And I was overwrought with fear, with anxiety, and a little bit of depression. I felt isolated and alone. Who do I talk to? Who do I trust? These are feelings a lot of us experience who have either built that wealth slowly and we realize, you know, just like when you're climbing a cliff, how high you are and you look down and say, well, I built all this wealth. What do I do with it? I felt the same way. And the reality is, this is a psychological syndrome. It's called sudden wealth syndrome. And this happens to lottery winners. It happens to athletes who win big contracts and it's a state of overwhelm because we don't know how to manage the money that we just made. And so the days following that were excruciating because I had 90% of my wealth locked up in a single stock so that if the market went up 10% and took the stock up 10%, I'd feel like, okay, I could punch out at work for the day because I just made an insane amount of money. Or if the stock market went down 20%, I felt like I was going to throw up in the trash can underneath my desk because I was going to financial ruin. It was a very, very hard place to be. It was very lonely and frustrating because when I went and I tried to talk to people that were in my network who hadn't experienced the same thing, they would tell me things like, why are you so sad? Why don't you just suck it up and deal with it? They didn't understand that I had this vision for this equity that I could turn into a vehicle for my family that would generate income. For this generation, take care of my wife and I, and also be something that I can pass on to the next generation. For those of us that see building wealth like this as an avenue to get ourselves to financial freedom and to help our families, it's not good enough just sucking it up. We want to have a plan. We want to know what's next. So it was so important for me that at this point in time, my turning point was a few weeks after this IPO, I realized that I had to get serious of transitioning my mindset and my skillset from being a moneymaker to a money manager. And this was the start of my journey. I started off by writing out a big reason. I needed a purpose. I needed something in front of me that was going to move me forward even when the times got tough. And for me, that is why I wanted to be able to replace my paycheck with portfolio income. Five to seven years so that by the time my boys got to middle school, I did not have to work a W-2 job and I could walk with them alongside as they were growing from boys to men. That was very, very important for me. The vision I also had was really clear. When I was in college, I'd read Rich Dad, Poor Dad, and I knew that there was this vision, this quadrant four of where you could put your money to work for you, and it could actually generate income, it could continue to grow, and it could be a business that I could go and run. Starting off, it was scary. I have to admit, I didn't know where I was going and what I was doing, but I had this clear vision. I had this clear reason. That's when I realized what was so important is that I didn't have to go at this alone. that there were other people who were trying to do the same thing that wanted to help me that were trying to continue to grow their particular portfolios and were willing to share ideas and strategies of what they'd done. This was incredibly freeing and open. And I just want to make sure that you know that this is a place for you here. So if you like this video, if you're interested in what you're doing, just hit the subscribe button, follow the podcast, ask any questions here on this video, because ultimately, this is your community of like minded people that want to grow their careers, build wealth with tech equity, and manage the money that comes with it to their own personal freedom. Let me tell you, the next thing that I did was I sought out astronauts, not astronomers. I wanted to talk to people that had been there and done that in this particular journey that was so important to me. And so the three things that I did then that you can do today are I wrote down my why for my portfolio. This is what I told you is I want to get to financial independence in five to seven years, actionable, time-based. so that I could walk with my boys and be present for them as they were growing up from boys to men. So important. The second thing is I wanted to get grounded in the fundamentals. I wanted to understand the math behind different investments, the way managing these portfolios really worked. And I wanted to get a basic in this education, a foundation in this education. And then step three was continuing to network with others. Those were the things that kept this moving forward. And what I discovered then is this evergreen portfolio strategy. So this is what I'm going to walk you through right now. So I want to share with you the fundamentals of the evergreen portfolio strategy. An evergreen portfolio is a portfolio that protects the original invested principle, so that's the money that you put in, and then it provides you income through income bearing assets and it continues to grow. It's a portfolio vehicle that can generate generational wealth. Because like a tree it continues to produce fruit versus a traditional portfolio, a traditional growth portfolio that is used to think of it more of like a storehouse where it stores your resources. and you want to get a large supply, and you continue to then draw off of those resources, while some of it can continue to grow, but the goal with the growth portfolio is that you continue to draw it down, and then whatever's left over, you divide it up amongst your family. Now, the difference between the evergreen portfolio is that it is intended to provide you income while it's growing at the same time. This is what gives it its evergreen nature is that it's producing enough income to cover your expenses while growing and preserving that original capital. So let me give you a simple example, a $2 million portfolio. So if you have a $2 million portfolio, you would put $1 million would be allocated to growth assets. You'd have $1 million that would be allocated to income assets. And to keep the math very simple, growth assets grow at 10% a year. Income assets produce 10% cash on cash return every year. So what does that then look like from a performance? It means that you will get $100,000 will be provided to you through these income bearing assets. That's what you have to live off of for the year. And then at the end of the year, the growth assets will produce another $100,000. So when you get to year two, you will have taken $100,000 to live off of, you'll have $2,100,000 that you have for the following year in your portfolio. This is where you can see over time that this portfolio will continue to grow while it produces income. And at the same time, you can adjust those knobs. So maybe you want to slow down growth, and you want to increase income. Or maybe you want to decrease income and increase growth. Or you can keep it very simple as you keep it a closed system. You're generating income, whether that's through a W-2 job, whether that's through some contracting, or a business that you start. and you have that as a closed system where that income just continues to reinvest and continue to grow until you need it. This is the overall concept of an evergreen portfolio. So it may sound new to you, it may be something different. I need to continue to break this down for you and talk in detail about some of the assets and allocations and why they are different. The core thing to understand is that this is a mathematical model that is supported by real assets, real investments that you can make that can support this. And this is a strategy that's executed by ultra high net worth individuals, meaning individuals that have $20 million or more of personal wealth or personal net worth. However, it can also be executed for people who have a million dollars in net worth and possibly even less. The key thing is to understand the differences right now. I want to call out the differences between the traditional portfolio and the evergreen portfolio so that you can see how they're different. And then also how the evergreen portfolio requires you to be the CEO of that business. So what is an evergreen portfolio? I've been talking about it for the last couple of minutes. Let's get to the point. So an evergreen portfolio generates enough income to cover your expenses so that then the remainder of the portfolio can grow. That may sound weird at first. Let me take a step back. An evergreen portfolio has assets inside of it. We'll cover off on these assets in a moment, but I'm talking private equity assets, commercial real estate and real estate that generates significant income that are able to pay you checks, but at the same time, protect your original principle so that it can continue to grow. Now, this isn't something that I've made up. This is something that I'm reporting to you that I realized that ultra-high net worth, people who have $20 million in net worth or more, have been executing for years and are continuing to execute. The great news is that the strategy, the method to this portfolio can be replicated and executed on a much smaller scale. Whether you just have $1 million in personal net worth or less, you can still execute this strategy. Let me break it down even more. Let me give you a tangible example. So let's imagine that you have a portfolio, and we're going to do this for simple math, $2 million. You would then, to execute an evergreen portfolio, you would have $1 million in growth assets that its job is to grow 10% a year. So that $1 million will produce $100,000 of growth. And at the end of year one, you have $1,100,000. The second set of assets, which is allocated towards income, is going to produce $100,000 of income. Now, this income doesn't come from selling the assets. The income comes from operational cash flow, from dividends, from interest. And so it's preserving your original capital and paying you the $100,000. This is what makes the portfolio evergreen because at the end of year one, you have $100,000 in your pocket that you leverage, that you use to go pay your expenses. Then it's left with $2,100,000. It's grown that original principle and will produce even more the following year because of compounding. This is a great strategy to be able to live off of your portfolio and grow your portfolio at the same time. But to execute it, you need to have the desire to become that money manager, that CEO of your portfolio business to be able to drive it to execution. So what I want to do right now is I want to dig into what are the differences? What's the differences between this evergreen portfolio and a traditional portfolio? Number one, let me draw out an analogy so it makes it straightforward and simple. The evergreen portfolio is like a tree. It's like a tree that produces these resources and you take what you need for that year and what you don't need either. Plant more, you either put more into the tree and you want to grow bigger. Or maybe you don't need all those resources versus a traditional portfolio is like a storehouse where you're taking all your resources from the tree, whether it's fruit or it's probably nuts, you know, because it can stay through the long winters, but you're putting that in the storehouse and you're building up the supply. And then the goal is that when you need those resources, you just keep draining it down. Maybe those resources will multiply a little bit, but the overall goal is you continue to drain it down so there's nothing left. What you're going to find in those two analogies is, well, what's the key difference? You'll find that in an evergreen portfolio, it is going to have traditional assets, meaning it's going to have stocks and bonds and REITs that are traded on the stock market, but it's also going to have alternative assets. It's also going to have private equity in there as well, versus the traditional portfolio is primarily going to be made up of traditional assets. You'll find that for an evergreen portfolio, it's going to require a lot more education and training, building skills to be able to execute versus a traditional portfolio. Once you learn about the stock markets and mutual funds and ETFs, you're going to be able to drive and manage that portfolio pretty well. It definitely takes less education to get up to speed and to be able to manage it. An evergreen portfolio has much better tax treatment. There's ways that you can run an evergreen portfolio where you are paying Zero taxes on the income. That is the opportunity there. When you look at a traditional portfolio, a traditional portfolio runs in a traditional manner, meaning that you're just living off that portfolio and you don't have holdings outside that can offset that income, even though that income is less than wage, you're still going to continue to pay taxes. So an evergreen portfolio is more tax optimized than a traditional portfolio. The big difference is going to be the income. With an evergreen portfolio, you're going to get from that portfolio of assets allocated to income asset classes, 7, 8, 9, 10%, 11%, 12% or more cash on cash return. That's going to be significant income. In traditional portfolios, that's going to be limited to 3%, 4%, maybe 5% on the top end. And in a traditional portfolio, you usually have a smaller allocation to income. You're usually looking at around 20%. You'll find the allocations in an evergreen portfolio are much different. You're going to allocate in some cases, 50% to income bearing investments. These are some of the key differences. One of the other differences is that an evergreen portfolio is going to require more systems and processes to operate because there's not a lot of software today that is built to manage private equity investments. And you'll find that a traditional portfolio has a lot of out of the box systems, especially those provided by wealth managers that can manage those. Ultimately, you'll find that an evergreen portfolio requires you to be the CEO and the money manager that's going to drive it. That's all the difference. But the question I would ask is, what's the upside? The upside of an evergreen portfolio is the fact that you can generate enough income to be able to get financially independent and to live your purpose, to live your mission, to live your vision of your life. versus the traditional portfolio, it can get you there. But will you still have that same sense of financial security? Will you still have that same sense that you can walk away from something knowing that over time, this asset is intended to deplete itself? It's an important question that you ask yourself. So let's go to asset allocation strategy. Am I just making this up or are there other people doing it? Well, I'm here to tell you that in my personal journey, I became so focused on understanding what an evergreen portfolio looks like. Now, I know many of you have heard when you're online on social media, you've heard about passive income. And that is a term that's used a lot to describe private equity investments in commercial real estate. But the reality is those are assets in a portfolio that you need to assemble based on your portfolio goals and manage. One group that does this very well that we can track the data from is a group called Tiger 21. Tiger 21 is a group. They have a website. You can go subscribe to their newsletter and you don't have to be an ultra high net worth person and you can study them. And that's exactly what I did. And they produce every quarter an asset allocation of where all of their members are, what are the assets that they're investing in? This is where you get a true view into what is the makeup of these evergreen portfolios and how different they look from a traditional stock portfolio. If I were to show you a traditional stock portfolio today, you would see that. And again, this is from a survey of a lot of households in the United States. It's going to be 70% gross stocks. 20% conservative bonds, they're going to have yields from 3% to 4%, and then it's going to have 10% in cash. What's that going to look like when you look at Tiger 21? Do you know how much of their assets are allocated to public equities? What's 70% in a traditional portfolio? Right now, it's around 25%. A quarter of the investments are there. Why is that? Well, it's because half of their portfolio is split up between private equity, meaning investing, whether that's in funds, whether that's investing in businesses, and real estate. The remaining 25% a quarter, is going to be split between very high-risk investments such as venture capital, hedge funds, or maybe even super low-risk investments like commodities or farmlands or where they hold their cash. But this small view into this world of the ultra high net worth shows you right out the gate that their portfolios are constructed differently to perform differently. And the key difference is that they bring into their portfolio private equity, which are investments that are outside of the traditional stock market. and they bring in real estate. Why is everybody talking about real estate? Why is everybody so hyped all the time about real estate? I'm sure you ask yourself this and sometimes you sit there and say, can we just stop talking about and stop getting some real estate out of my feed on LinkedIn. The reality why so many people are talking about real estate is because it's truly a magical asset. With real estate, you can generate income, not income exactly, but you can make money four different ways. So let me call this out. Number one is cashflow. Real estate purchase for cashflow will generate checks based on operational income every single month. It'll continue to pay you profits that you can take off. And that cash flow also then has appreciation. You can also buy assets that give you cash flow and then also appreciate. You can also then buy these investments that not just give you cash flow and appreciation, but then also the mortgage is paying down the equity. And then the fourth is depreciation. Depreciation is your secret weapon against taxes because when you have depreciation, you can actually write that off. And this is the true power of passive income, the tax term. Whereas if you're getting real estate income of $100,000 a year, and then you have $100,000 of depreciation, you don't have to pay any tax. And that's the ultimate nirvana for an investor is how do they shape their portfolio so that you're actually generating income, but you're not paying any taxes. And when you're running an evergreen portfolio, here's the great tip for you who are out there working, is you don't need to replace all of your income with this real estate or portfolio income. Why is that? It's because you're going to pay much less taxes. If you make $150,000 a year, and let's say you make $25,000 and you pay $25,000 in taxes, well, then you just need to make $125,000 a year in your portfolio income that is able to be tax protected because that's what you're taking home anyway. These are the insights. These are the differences. This is when you get down into this, you can understand that these portfolios are constructed differently and they're built differently. And the big engine of this is these private equity real estate investments. Is the risk worth the reward? Is the risk of now taking some of your hard earned dollars, moving that into private equity, figuring out how to manage it yourself, is that worth it? Well, I think the key thing to note is that these private equity investments have incredible risk adjusted returns. Is that when you are in asset classes like real estate or you're actually owning businesses that you can generate this 10, 12, 13% cash on cash return and private equity historically has been beating the market for a number of years, especially in specific asset classes. So that's important to understand. Number two is you also get diversification. You're also outside of the market so that when the market's going down and there's a high inflationary environment, the value of your assets are going up. I saw this play out in 2020 as I saw the stock market getting depressed and we had now significant real estate holdings and those values went up. As I saw, our portfolio wasn't as volatile. That allows you to sleep better at night to realize that you're managing your money better yourself than you could if somebody else was managing it. And I think that's something that's so important to understand is that when you're looking at taking this risk, you're also learning how much you can trust in yourself to do the work, to do the diligence, to understand the underlying investment and place your own capital. because when you are able to ultimately do that then you can manage your portfolio like a business. All right, I want to give you right now the five mindset shifts of how you go from being a moneymaker to a money manager. But before I do that, I just want to say, if you are enjoying this content, if you are somebody who is working for tech equity, you're financially focused, you want to get to financial freedom and independence, you want to be a part of this growing community, I would ask a couple of things. Number one, subscribe here on YouTube. If you're listening online, follow the podcast. Comment. If you are on audio, you can go on to our website at techequityandmoneytalk.com. You can leave comments. You can leave reviews. We need your reviews. Give us feedback. What are you getting from this? If you're on YouTube, comment, ask questions. I'm here to answer all those for you because ultimately, my goal for you is so that you can make your biggest equity and money decisions and feel confident and have the knowledge to be successful. That's why we're here at Tech Equity and Money Talk. So if you stick around for the podcast this long, this is where you get paid. This is it. This is the moment. I'm going to give you the five mindset shifts that you need to transition from being a money maker to being a money manager. The first thing i understand and this is where i want to demystify it is that money management is a skill it is something that you can learn it is something that you're going to get better with overtime and compared to a lot of the skills that many tech professionals need for their day in and day out job this really is not hard. Right? There's a lot of fundamental math that you need to understand. You need to understand about running a business. You know, when you think about looking at private equity investments, you need to understand how to read a profit and loss statement. You need to understand how to read a balance sheet. Right? And then managing your money from the top down is really, it's a skill that you can learn and you can get better with over time. Number two is that diversification is the key. To be successful in this, you have to think outside the stocks. You've got to get into alternative investments and private equity, and that's key. Great news is, like anything else, you don't have to go all in to start. You can start trying a little bit at a time. Right? And just get better and better over time. Number three is that this takes long-term thinking, right? You're building a business, a portfolio business that you want to last for generations. So you need to have that long-term mindset. That's going to keep you more conservative. That's going to keep you focused on maintaining that capital and generating income or growing it, which again, are the skills that you need to continue to run this portfolio as a business that's going to provide for you and your family and this generation and beyond. Number four is the most important. You have to be the CEO. That means that you don't have to do everything, right? But you need to be responsible for the people that you hire, the people that you may fire. but you are ultimately responsible for the direction, for setting the goals and the projections for every year. Are you hitting those? Measuring all that? Nothing measured, nothing managed. Those are the things that you need to do and you need to be the CEO and you need to drive this. And the fifth thing is that you need some systems, you need some processes to be able to execute this. This is a business. So don't treat it like a hobby. Treat it like a formal business that you hold yourself accountable for. And this is the job that you want. I came up with these mindset shifts as I was living them out. And I realized that this is actually an amazing job. As I transitioned out of being a technology executive to now being the CEO of the Nelson family portfolio. It has been my honor and my privilege to manage these assets, to also set up and prepare the next generation to own these. And I want this for you too. I know this was a power, power, power packed episode. There was a lot of stuff that we covered off on. I think first and foremost, let's go back to the beginning. As technology executives, it's easy to feel a lot of fear and anxiety when it comes to managing our own money and being the CEO but let's also be honest and I've had so many conversations with so many people where you shared with me that. You don't trust the system, you don't trust those fast food wealth managers that wanna get you into a cookie cutter portfolio that will produce what you don't know. You may not know because they're going to manage it. That's the way that they have all the control. So you don't trust that. You want your own, but you don't know where to get started. Well, get started with the fundamentals. I shared my story with you, not because I wanted to brag, but because I wanted to share with you the fact that somebody just like you, a director inside of a technology company, could all of a sudden generate wealth and then figure out how to manage it. And I did it through understanding the fundamentals. And one of the fundamentals is basic concepts, like an evergreen portfolio that I shared with you today, that Tiger 21, these groups of 20 million net worth and above, are managing and they're doing it on a month over month, week over week basis. And this information is there for you to consume as well. Go check it out. Go download their asset allocation report. See what you think. Have your own ideas. And then we broke down what the evergreen portfolio concept is for you. We compared it with the traditional so that you can understand what's different and what's required of you. The question that I want to ask you is, are you willing to take the chance to manage your money if it can get you to the point where you can get to the lifestyle that you want to live? I mean, you've taken your vocation, you've taken the responsibility for your work, and you've built a career. Now can you transition to being the manager of your portfolio and setting up a business for your family for the next generation and maybe the one beyond that? If that's something that you're excited about, this is the place for you. Tech equity and money talk. We are a weekly podcast. We drop episodes every single Tuesday. And at the same time, I want you to go to tech equity and money news.com. This is our online hub that we have for our newsletter. This is where we're putting out detailed articles that break down all of these frameworks for you. And we want to leverage this information to empower technology professionals. to be able to grow their career, build wealth with equity compensation, and manage the money that comes with it. Because we are here, our mission is so that you are equipped to make your most important decisions about tech equity and money and feel comfortable while you're doing it. My name is Christopher Nelson. I've been your host here. Thank you so much, and we'll talk to you next week.