The concept of asymmetric wealth creation is a powerful way to grow your earnings, increase your investment returns, and improve your life more generally.
The best thing about it is that it’s also very easy to incorporate into your decision-making.
All it takes is a slight re-framing of the way you look at opportunities to earn money, invest your savings, and spend your time.
Intrigued? Let’s dive in.
The Beauty Of Asymmetry
Imagine I offer you the following trade.
We flip a coin. If it’s heads, I give you $10. If it’s tails, you give me $10.
Should you take the trade?
Well, it doesn’t really matter. Assuming a large enough number of coin flips, we both end up exactly where we started, at least financially speaking.
But what if I was to change the rules?
Let’s say that I was willing to offer you $50 for every heads you get, but only take $10 in return every time it’s tails.
Well, now THIS is a game you should be willing to play all day long.
After 100 flips, you would end up about $2,000 ahead (50 heads * $50 less 50 tails * $10).
In other words, every flip has an expected value of $20 (50% chance of winning $50 and 50% chance of losing $10).
Bring it on… except that I am not walking around offering trades like this one.
But the good news is that when it comes to creating wealth, there’s an abundance of asymmetrical opportunities in life.
All you need to do is spend enough time looking for them – and putting your money behind them.
The Ivory Tower
A very basic example of a highly asymmetrical money move is upskilling yourself through part-time or full-time education.
Let’s say you are 25 years old and plan to work for another 30 years. You can keep plugging away as you currently are – or you can get an advanced degree that will lift your salary by $40k a year.
Over a 30-year working career, that adds up to $1.2m of incremental earnings.
In that context, spending $20k or even $50k to get that degree is an absolute no-brainer. Financially, you still end up light years ahead of where you started.
This is not to say going back to school is always a wise move.
There’s the time value of money, taxes on incremental income, and expensive degrees that take a long time to complete but give you zero earnings upside.
Also, the math might break down if you decide to pursue extreme FIRE and retire in the next 10 years or so. In that scenario, you might not be working long enough to get the right return on your investment.
But the fundamental premise holds firm. This is exactly why so many people (myself included) choose to go back to school as a way to climb the wealth ladder.
As much as I dislike the “hustler” philosophy, a side hustle is yet another great example of an asymmetrical money move.
It costs literally nothing to buy a domain and some hosting.
Assuming you’ve got 5-10 hours in your week where you are otherwise unproductive (watching TV, spending time on social media, etc.), the opportunity cost of writing a blog is also likely to be minimal.
Now, one of two things can happen here.
Your blog can wither and die. This happens to most people and is primarily due to a lack of focus, passion, or persistence.
Too bad – but you are NOT any worse off. A few bucks out of pocket and a bit less time on Instagram. Zero harm done.
Alternatively, your blog can blossom into a nice digital property generating $1,000 (or much more) per month in side income.
Yes, it’s a lower probability event. That being said, it makes starting a blog an equivalent of a trade with no downside (which is why so many people try it in the first place).
The concept of asymmetry is equally relevant when you put your money to work.
As an example, I always run a downside case when I look at buying real estate.
That is, I assume that everything that can go wrong, will go wrong – and look at what happens to my returns in that scenario.
Let’s say my downside case suggests I will break even – while my “base case” indicates a 15% annualized return.
In that context, making the investment an absolute no-brainer. Worst case, I end up where I started.
But if the worst case doesn’t transpire (and it rarely does), it will be a home run and I will generate a return well north of what I would be able to get in the stock market.
Speaking of which…
Money Slam Dunks
Yes, the past does not predict the future.
Yes, valuations, volatility, pandemics, inflation, armed conflicts, Russia, climate change, and everything else.
And yet, stock market investing remains one of the most asymmetrical money-making opportunities available to retail investors.
As a matter of fact, it gets even more asymmetrical – in your favour – as time goes on:
I mean, if the worst that could happen is you only make 7.8% on your money over 30+ years, what are you waiting for?
It’s basically taking the stock market and putting it on the mother of all steroids.
To illustrate the point, here’s what an 8% equity return looks like when you invest through your workplace pension:
Even a minimum employer match of 75% transforms an 8% return into a 12% – 14% returns.
Those in higher tax brackets or with more generous employers could get up to 15%, annualized.
And it’s all available to you – at a click of a button.
There are many other asymmetrical moves that can help you live a better, happier life.
A quick 30 minute burst of exercise and meditation in the morning will make you feel dramatically better for the next 14 hours.
A good diet will do wonders to your energy levels – and avoid a lot of health issues down the road.
Similarly, paying proper attention to your spouse will make for a much happier marriage and is likely to save you some expensive counseling or even a trip to a divorce lawyer in the future.
But as it turns out, the asymmetry works both ways.
The Other Side Of The Trade
The obvious thing to point out is that you NEVER want to be on the opposite side of an asymmetrical money move.
That is, unless you prefer to incinerate your wealth as opposed to growing it. Sadly, there’s plenty of ways to light that hard-earned money of yours on fire.
Some folks do it by financing discretionary purchases with expensive, 20%+ credit card debt.
Many others still pay active money managers a whopping 1% fee to underperform the market:
Yet others take things to a whole new level and pay hedge funds a 2% management fee – and 20% of profits – for the illusory promise of delivering “risk-adjusted” returns.
The asymmetry also plays a big role in incentivizing the people who work for you.
As the banks have quickly found out during the financial crisis, it’s not necessarily a good idea to pay traders a percentage of the profits they generate.
For the traders, there’s only upside from taking on increasingly risky trades.
The worst outcome for them is losing a job. The worst outcome for the banks is being saddled with multi-billion losses that take years to unwound.
Ditto for CEOs who have deep out of the money stock options as part of their comp structure. They know the only way they will ever get paid is to swing for the fences with risky strategic moves.
No wonder that hedge fund managers, star traders, and risk-loving CEOs usually end up rich – they are on the right side of the trade. Make sure you are not on the opposite one.
But leaving that aside, take a moment to reflect on the most successful people you know.
Chances are, many of them are probably taking advantage of asymmetrical opportunities to optimize their finances – and life more broadly.
If you want to join them, you may want to do the same.
As always, thank you for reading.
About Banker On Fire
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
Find out more about me and this blog here.
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