My previous post proposed a crazy idea that what we should be doing to help new investors is giving them $50,000 to start off with. Even though this is a long shot, how could a system be put into place to provide this capital to new investors and how is it all coordinated? Well since I have nothing else better to do than to write up financial theory, and you appear to be a sucker who is willing to read about it, let’s exercise some financial imagination!

The oversimplified concept is that an investor or set of investors temporarily transfer $50k in investments to the new user, and that user gets to liquidate 5% of its value at the beginning of the following year. Over time, the original value of those assets are transferred back to the original investors, while the recipient user was able to capitalize on the growth during that time. But when we try to fit this concept into reality, things get more complicated since transferring of assets can be quite complicated, and trying to hold value constant while the asset itself is volatile makes it difficult to work with clean numbers.

A Centralized Fund

What is needed to bring this concept closer to reality is a centralized service that is able to mitigate these exchanges. If there was an online service that provided the perpetual value method of investing, what can happen is that the exchange takes place within a single fund that just transfers the percentage of what one has access to the fund. By centralizing the assets into a single fund for the exchange, all that has to happen is the lender has two options: if they want to only temporarily lend money to new investors, they just buy as many shares into the fund as they like, but if they just want to donate money, they just donate the amount they want to contribute towards (this may require a parallel service that is identical to this fund, but is wholly operated by a non-profit entity). The lender either buys or donates into the fund, and when a new user enters the program, shares of the lender/lenders are then allocated to the recipient’s portfolio.

For the recipient, these shares would just appear as part of their portfolio, like purchasing shares of a mutual fund. They would have their own diversified portfolio that they are actively contributing towards and have control over, and along side that they would see how much of this other fund is part of their account. When dividends are dispersed, they are credited to the user’s personal account, and the asset value growth would be reflected in their account total. But the user doesn’t have direct control over these shares, and can’t sell them to buy shares in other assets or to liquidate it. With each passing year, shares of the fund are removed from the user’s account and are then either transferred back to the lenders, or if they were donated shares, then they would be transferred to the next new user.

Since demand is most likely going to exceed supply, there are two options that could be taken if we keep the lending principle at $50k. The new users have to be either:

  1. On a waitlist, so things are filtered in a first come first serve process.
  2. Or through a lottery system where the new user is selected from the pool at random as means to determining priority.

Another option is not to hold to the $50k tightly and just allocate whatever is available, but this could lessen the significance if the user only starts out with something like $500 from this fund.

I don’t have an optimal solution for this issue yet, but for now, I’m holding to the first option and the process being whenever there is $50k worth of unallocated funds in the system, one more user gets selected to hold the funds for 6 years. Unallocated funds result from either the contributions of lenders, donations, shares that were donated and have been recycled back into the fund, or just from the overall growth from the fund itself.

To explain how the account grows and how that can be converted to available shares to users while working through the constraints of mixing asset values and shares available, we need to first observe what is happening with a particular share. Let’s say each share in this fund is worth $10 initially. That means the recipient is given 5,000 shares to start off with. If we assume the shares grew in value by 10% over the year, that would mean that each share is now worth $11. Thus when the user sells 5% of the the value, that would be $2,750 worth of shares, which means they would sell off 250 shares at $11 per share. But then they need to give back $1,000 of the $50k in year 2, so that means they would return 91 shares back to the fund. This means that they have 4,659 shares now. Now on the other side, when allocating funds to a new user in year 2, where the shares are now worth $11, that means they only need to allocate 4,545 shares to give them $50k worth of assets.

When shares grow in value, that reduces the quantity needed to satisfy the nominal value, thus shares that have been returned to the fund that are not allocated grow in value, that grows the available cash that can be allocated to new users.

Demonstrating the Fund Operation

Now that we have a better grasp of how this relationship works between the lender and the recipient through the shared connection to the fund and its shares, we can play out a hypothetical scenario showing how this is all played out.

Let’s assume that in the first year, the fund gets both exactly $50k in shares lent to new users and $50k in donated shares. This would mean there’s a total of $100k worth of unallocated shares and then can have 2 new users be given $50k worth of shares each. After that first year, the fund shares grew by 10% and are now worth $110k. The users cash out $2,750 worth of shares each at the beginning of the year, bringing the fund balance to $104,500. Up to this point, $100k is still under the users control, thus $4,500 of that $104,500 worth of shares are no longer part of the users’ control. Then the users have to return $1,000 each in year 2, this brings the amount of the fund controlled by the users down to $98k, but $1,000 was only lent, and so $1,000 needs to be removed from the fund and given back to the lender. This brings the fund balance down to $103.5k. The other $1,000 was donated, and so it remains unallocated but still in the fund. This means that there’s now $5,500 worth of shares that are unallocated. At the end of year 2, the fund grew another 10% and thus is now worth $113,850. But since the users no longer have 100% of the shares in the fund, they receive 5% of what they have, which was the new base value of $98k, which over that year grew by $9,800 over that year, and thus they cash out $2,695 each.

Funds that are donated are recycled back into the fund, while contributions are returned to the original investor.

That is a simple simulation of how this mechanism can work. Let’s quickly observe what happens over 50 years with this model. We’ll add one new assumption that the only other funding that this fund will receive will only come from those who first were lent $50k for 6 years. If we assume once they’ve returned the $50k and have accumulated a large balance for themselves, and that on average they would contribute $1,000 annually to the fund. If all the capital invested in the fund was that initial $100k plus $1,000 annually from previous recipients, over 50 years 88 people would have been able to borrow $50k, with 29 people currently borrowing from the fund in that 50th year. In addition, over that 50 years, almost $1 Million was cashed out of the fund to the recipients, while the fund itself still is worth over $1.3 Million.

Phase 1 is the second year of a given loan, of which the first $1,000 is returned to either the original investor or to be recycled to the fund. Each phase is the following year of that given loan.

While that isn’t a blockbuster stat, since it took 50 years for less than 100 people to use this system, but that is from a system that only had enough to support 2 recipients, and all other funding was internally sourced. What if this was a feature in an investing program? For instance, what if one of the new robo-advisor funds added this concept and assigned 1% of its investments to be part of its program? It’s just a little side project that takes a tiny fraction of an investor’s portfolio that is being used to jump-start the newest investors? Well if we look at two of the largest new robo-advisors, Betterment & Wealthfront, they currently have as of March 2018, over $13.5 Billion & $10 Billion in assets under management respectively.

To fantasize what that would look like, this is what would happen if Betterment took 1% of its AUM (assets under management) just once, and after 6 years when that initial investment is returned back to the original investors, and then all remaining contributions come from those who were first lent money. The fund would have $135 Million to start off with, which means that 2,700 people will have $50k allocated to their portfolio. By year 50, an additional 39,100 people will have been able to use the fund without any additional external funding, bringing the total to 41,800 users. The fund will be worth over $500 Million over that time as well, and there would be 12,195 current users who have funds allocated to them at that time.

Again this hasn’t even reached its full idealized potential, this is based on the impact of an up-and-coming organization that did a single test on 1% of its assets for just one year. What if this was built into the design of an organization? What if the firm set out as their marketing angle to jump-start new investors that kept positively reinforcing itself, or other organizations saw the long-term impact funds could have and starting writing grants to fuel an investment fund like this? Or what if that 1 year test wasn’t just done by Betterment or Wealthfront, but by the behemoth organization of The Vanguard Group with its $5.1 Trillion in AUM currently?

I understand it still is probably too idealized of a concept, but I want to show the potential for setting a force into motion that in theory doesn’t dwindle down resources, but rather keeps perpetuating forward and its breadth of impact continues to grow. We can be creating a pay-it-forward system that allows us to get a running start that fuels positive actions in our own lives, and when our financial future has be firmly established, we can sow seeds for those coming up after us so they can receive the same benefits.

In essence, this becomes the inverse of social security: We are assisted today by those ahead of us, and we continue to grow the funding balance so that more people can utilize it in the future, rather than paying today into a fund that those ahead of us enjoy and shrink the fund to the point that there may be nothing left for us in the future.


Again this is still all just theoretical, and probably unlikely to materialize, but I wanted to explore how could a system be established that fueled the positive actions today that can tap into this whole concept of positive reinforcement actions so that every following action becomes easier than the last. But this concept allows the opportunity to shape a platform around it and not just be a theory for an individual to carry out, but rather be a full-fledged service that provides these features to individuals.

One can only dream.