Can a gas station attendant be wealthier than a gas company CEO? He can. As you read on, I’ll name names and identify repeatable ways that the attendant did it.
Is the American dream and the prospect of wealth open to a 20-something worker who finds herself thousands of dollars in debt and surviving paycheck to paycheck? It is. Read on and I’ll dissect how she changed her habits and her attitude toward money and we will follow her journey.
Can an individual investor outperform the “smart money” of American institutional investors by following a simple and understandable asset allocation and portfolio management framework? They can. I will share a few of the ways they may do it, including how to develop the ability to identify shifting risks and opportunities in the capital markets that can keep their plan on track.
Can you or I, an average person, implement a philanthropic plan that can eclipse the generosity of billionaires like Bill Gates who have taken the Giving Pledge? We can. I will talk about ways to make this very thing happen while allowing our own savings and retirement planning to remain focused.
Can the dollars we spend redistribute wealth to other members of society in a repeatable and sustainable way? Yes, without question they can. I will explain how to make it happen.
I’ve chosen to attack these questions, do the research, and share the results because I believe the time is right to do so. While the word “wealth” has come to mean abundance for some, it has become a bad word in too many corners of our society and throughout the world. When the roadmap to wealth and happiness is painted over with failure or jealousy we deny ourselves and our neighbors the unalienable right to pursue and, more important, to achieve happiness.
Tailored Wealth Management will address three
pillars of wealth:
Part I: The Landscape of Wealth around the World will provide you with the facts that will help you develop a more informed view of wealth, not only as it relates to you, but also how it relates to your neighbor or a family who lives halfway around the world. It will inspire you to acknowledge the strengths and advantages that are unique to where you find yourself in life and fortify you with stories of people just like you who are breaking down the barriers to wealth in their own lives. You’ll do well to understand and adapt their habits and make them your own.
Too often, when we think about wealth, we think of the people higher up on the net worth ladder. In this book, I will shine a bright light on the wealth ladder, let you know where you stand compared with the other seven billion people on the globe, and let you decide for yourself whether the road to wealth, abundance, and happiness are open to you and your family.
Wealth management, in and of itself, should not be complicated. But for all too many individual and institutional investors it has become complicated. That has led to failure and it is imperative that investors take inventory of the lessons learned from the last quarter century not only to not repeat them, but so that the new generation of investors who haven’t yet made a single mistake may learn from them. Specifically, academic studies from the twentieth century have become twisted into myths on Wall Street. We will, and we must, break them down for what they are and what they are not. To that end, I will share a new way of looking at forward portfolio forecasting that I believe is superior to the models that have left Americans with trillions of dollars of unfunded pension plans and retirement accounts.
The third pillar of wealth is redistribution and it would be a lie to call it by any other name. Every dollar we have ever saved, inherited, won, found, or earned will eventually pass on or, as I think of it, compost into the soil of another person or entity. Those who have been successful at the first two pillars of wealth would do well to tighten their focus on how, who, and when to redistribute their money lest that decision be made by someone else after they die. When your cup runneth over, the prudent wealthy person will ensure that not a drop is spilled on the ground so that all of it reaches its intended recipient.
Cause and effect is a theme that runs throughout Tailored Wealth Management. If I identify an effect, I owe it to you (to the best of my ability) to identify the cause that brought that effect into being. Challenge me, readers, if I have gotten it wrong. The people to whom you’ll be introduced in Chap. 2 are not outliers. They are regular people who have shown that wealth and happiness is achievable. The Efficient Valuation Hypothesis, the bedrock of Part II, is my rebuttal to the roulette wheel of Wall Street that many investors believe is their only option. In Part III, I will discuss spending your money, passing it on to your family, and giving it away to strangers. It is debatable whether building wealth or redistributing wealth is more fun, but the sharing habits of those who have done both well should leave you stronger than you were before you learned their stories.
I have given you my best with this work. Give yourself and your family your best once you finish the book.
In Investing Strategies, I shared the story of Dennis and Judy Jones who turned their life savings of $100,000 into a $3.6 billion company by the time they rang the closing bell of the New York Stock Exchange on August 30, 2000. The Jones’ tale of success, which brought them from the trailer they lived in as newlyweds to the upper echelons of wealth, is impressive; in fact, it is so spectacular, to bring us down to earth, I feel I should tell you a few stories about regular folks who achieved a more moderate success and how they did it.
Before I get to these tales of ordinary financial success, I want to share two observations that speak to the causes of success in young people and its effect on them. The first is a young man named Trevor Kates, who plays the piano very well. My daughter Fiona’s piano teacher is Kiley Kozel, who enjoys hosting periodic recitals during which her students get to show off their current work. At one particular recital her student Trevor played with incredible precision, passion, and artistry. It reminded me of Geoffrey Rush in the movie Shine as he slayed Rachmaninoff’s “Concerto Number 3,” only Trevor was just 11 years old! When he completed the piece, around the auditorium, I heard “He’s simply gifted,” echoing throughout the audience. At the conclusion of the recital, Kiley gave out awards to the children based on the number of minutes they practiced the piano that month. After presenting the awards for 60 minutes, 120 minutes, and 500 minutes, it was Trevor’s turn. He had practiced for 27 hours and 21 minutes that month. Trevor may indeed be “gifted,” but the cause of his success no doubt came, at least in part, from the amount of work he put into his art; the effect of all that effort was the polished gem that resulted.
Another example of effort leading to results came on the day my other daughter, Riley, graduated from high school. Of the top five members of the graduating class (as measured by cumulative grade point average), two received the perfect attendance award for never having missed a day of school for all four years. Cause and effect anyone?
And now, let’s return to our average Americans.
The Cause, the Money Habit; the Effect, a Nest Egg
My first example is of a young adult, JP Livingston, who retired at the age of 28 with $2.2 million in the bank. Today, JP is the author of a financial blog called www.themoneyhabit.org. According to JP, both of her parents were raised in humble conditions; in fact, her father grew up with eight people living in a one-room apartment. To make ends meet, the family had to be frugal. Her father graduated from college, and her mother worked as a secretary after her children were old enough to go to school.
Early on, they knew that if JP wanted to attend college , she would have to work hard to get good grades and scholarships, which she did. In fact, she earned enough merit-based scholarships to attend UCLA on a full ride, but JP aimed for and eventually attended Harvard, which meant she had to shoulder some of the tuition through loans. To minimize the cost of her Harvard degree, JP realized that by graduating in three years instead of four, she would save over $50,000. She also realized that if she actually HAD $50,000 and wisely invested it, it could grow handsomely over the next ten years. Of course, she didn’t have a nest egg at the time, but this thought led her to study the impact of financial decisions made early in one’s life or career.
Her initial plan was to graduate and start her own business, but an investment bank recruiter on campus offered her a job after graduation in 2009 with a starting salary of $60,000. While the thought of being her own boss sounded great, the stability and experience that she could get working at a top-tier Wall Street firm was obviously the wise choice. Just as she understood she could minimize her college costs by graduating early, JP understood that the chance to make a bonus of up to $40,000 would be driven by hard work and achieving results. She did both, earned the bonus and received a six-figure paycheck right out of the gate.
As much as she enjoyed her job, JP’s long-term
goal was to become a writer—although not a starving one. To achieve her dream, she would need to be wealthy enough not to have to work a traditional 50- to 60-hour-per-week job; essentially she would have to retire at an early age. To achieve this she maintained a maniacal dedication to her job and continued practicing the frugality taught to her by her parents and grandparents. It took her eight years to achieve the “wealth” that would allow her to take the step of becoming a self-employed writer. For
JP Livingston, the way to achieve wealth can be summed up in two simple equations:
In her blog, JP explains that out of the $60,000 gross pay (excluding bonus) she decided she could spend $24,000 after tax on living expenses and, therefore, could save the rest (including the bonus). Although on her salary she could have lived in a relatively trendy part of Manhattan, she opted for a studio outside of the city where her rent was $1100 per month. And that’s how over eight years she built her $2.2 million nest egg.
Today, JP is married. Her husband is still employed. Together, they now spend $32,500 per person per year, a total of $65,000 per year. That is a 35% increase in their standard of living assuming that together they had spent $24,000 (per person) per year, or $48,000 per year, as JP was doing when she was single.
JP and her husband know that their annual living expenses of $65,000 could easily be covered by a 2.9% draw from their $2.2 million portfolio, but they know that taking 2.9% from their portfolio would rob it of the compounding effect on those funds. Instead, they choose to allow the portfolio to grow and cover expenses out of her husband’s salary. Savings and investing are not a thing of the past for this couple because they wish to continue to grow their net worth so that in the future they can have greater flexibility about how they spend their free time. They have set the trajectory of how and when they wish to enjoy such things as leisure activities and fancy homes in smaller steps than their peers.
Living around New York City, as this young couple now does, demands that as they continue their journey they maintain and hone the discipline that built their portfolio. They live in a 325-square-foot apartment on the fifth floor of a walkup. JP jokes that the floors are so slanted that if you drop a marble, it will make its way to the wall by the force of gravity. Groceries come from neighborhood grocers in Chinatown or Trader Joe’s; furniture is purchased off Craigslist. Their rather modest lifestyle is a choice that makes them smile.
Today, we’re all bombarded with messages telling us that to be happy we need more and more things, and that famil...
