DOLLARS AND SENSE
In the early spring of 2009, Jay, a good friend and art dealer, called and said he needed to meet with me privately and immediately. His tone was serious.
He asked if we could talk over dinner at a local steakhouse that evening. I agreed.
I couldn’t imagine what was troubling him or how it involved me. When I walked into the restaurant a few hours later, he was already at the bar and waved me over.
We made the usual small talk, but he was edgy and stiff, not his usual relaxed self. I asked what was wrong, but he insisted that we wait and discuss it over dinner. When we finally settled down and ordered our meal, he took a long pull on his vodka tonic, leaned forward, and said he needed my advice.
His financial fortunes had recently taken a dramatic turn for the worse. With the economy in a deep recession, his art business was on life support. He had essentially no income. To make matters worse, he had seen his investment portfolio decimated by the recent financial crisis. As he was hoping to retire soon, this really troubled him.
Jay had been a good friend for over a decade. I knew he was a conservative guy who invested exclusively in diversified stock and bond funds. But even tried-and-true approaches provided little protection in the meltdown of 2008. And 2009 wasn’t kicking off any better.
“Alex,” he said, looking pale, “I’ve worked hard, saved, and compounded my investments all my life. Now everything is circling the drain. I’m 65 years old and for the last 25, I’ve considered myself financially independent. I’ve always invested smart and added to my portfolio regularly. I’ve never touched principal, not a dime. Now I’m afraid I don’t have enough to retire. Never in a million years did I imagine I’d be in this position.”
“I’m not asking for investment advice,” he said. “Because even if you told me this was a great time to buy stocks, I wouldn’t move a penny into the market now. I can’t afford the risk of buying anything. But I’m not going to sell everything near the bottom either. I don’t know what to do.”
He tipped back his vodka tonic again. He looked pretty desperate.
“I brought my statements with me,” he added. “I just want you to take a look at what I own and tell me what you think.”
I agreed and he reached down and pulled them out from under the table. Looking over his holdings, I saw a lot of solid, blue-chip names. He was right. He hadn’t invested unwisely. He had just gotten caught up in the financial maelstrom like millions of other investors.
As I leafed through the pages, Jay kept shaking his head and muttering that he didn’t know what he was going to do.
I asked him a few questions about his investment income, his monthly overhead, and how much he thought he needed to live comfortably when he retired. Then I asked him what he thought—conservatively—his portfolio would earn over the next 10 years.
I thought his answer was too conservative, but I didn’t object. “And how long do you think you’ll live?” I asked.
“I’m in good health,” he said. “I might live another 30 years.”
I pulled out a financial calculator and showed him how much he could draw down his portfolio every month for the next 30 years, even if it never recovered and he earned only the modest return he projected. I pointed out that he would gradually spend the capital itself—something he had never done—but that his portfolio would last 30 years, as long as he withdrew only “this much” every month. (Incidentally, this is called a systematic withdrawal calculation, something everyone approaching retirement should do.)
The numbers amazed him. Like many lifelong savers, he is a frugal guy. He wasn’t currently spending as much as he could withdraw every month. And he expected to spend even less in the years ahead (a good thing since inflation steadily erodes your purchasing power).
He brightened up immediately. The financial meltdown had stung him, but he realized it wasn’t the end of the world. He wouldn’t have to spend his golden years counting nickels or living in a Sub-Zero carton. The change in his demeanor was instantaneous. His whole disposition did a one-eighty. He even grabbed the check with a flourish.
Over the next week, Jay called me three times to thank me. He hadn’t been sleeping well before and had been snappish with his wife. He had felt the weight of the world on his shoulders. Now it was lifted.
“Thanks to you, old buddy,” he kept saying. “Thanks to you.”
This outpouring of gratitude confounded me. After all, what had I done? I didn’t take over the management of his portfolio. I hadn’t suggested he make changes. In fact, I didn’t recommend he take action of any kind.
Then it dawned on me. He was grateful for something else. I had helped him change his perspective—and that made all the difference.
What does this have to do with these essays? Everything, really. My goal here is to subtly shift your perspective by sharing ideas that helped me change my own. It might be a new finding of science or the rediscovery of an ancient philosophy. It might be a conversation with a historian or a money manager or an experience with a stranger that altered my point of view. In each case, the subject is something that, however slightly, altered my own worldview.
This may seem unusual coming from an investment analyst who writes a financial letter. After all, I make my living showing readers how to invest, how to reach their financial goals. But I have spent a lot of years reading and thinking about things that can’t be measured in dollars and cents. Here are a few of them.
Are the Rich Smarter than You?
Growing up, when I got into an argument with my mother, she would sometimes resort to the nuclear option, her tried-and-true conversation stopper.
Putting her hands on her hips and using the worst faux Southern accent imaginable, she’d say, “Well if you’re so damn smart, why aren’t you rich?”
I never knew how to respond to this. Of course, I was twelve at the time, and the deadbeats on my paper route kept margins low. Still, it ingrained in me the notion that the rich must have a little something extra going on upstairs; otherwise, we’d all be rolling in it. Right?
There is, in fact, some evidence to support this. According to a recent report from the U.S. Census Bureau, there is a strong positive correlation between education and income. Over an adult’s working life, high school graduates should expect, on average, to earn $1.2 million; those with a bachelor’s degree, $2.1 million; those with a master’s degree, $2.5 million; those with doctoral degrees, $3.4 million; and those with professional degrees, $4.4 million.
But here’s the rub. Studies show that those who earn the most aren’t necessarily the richest. To determine real wealth, you need to look at a balance sheet—assets minus liabilities—not an income statement. Just ask Thomas J. Stanley. The bestselling author of The Millionaire Next Door (Andrews McMeel, 2004), The Millionaire Mind (Andrews McMeel, 2000), and Stop Acting Rich . . . and Start Living Like a Real Millionaire (John Wiley & Sons, 2009), Dr. Stanley is the country’s foremost authority on the habits and characteristics of America’s wealthy. And many of his findings are counterintuitive.
For example, we generally envision millionaires as Lexus-driving, Rolex-wearing, mansion-owning, Tiffany-shopping members of exclusive country clubs. And, indeed, Stanley’s research reveals that the “glittering rich”—those with a net worth of $10 million or more—often meet this description.
But most millionaires—individuals with a net worth of $1 million or more—live an entirely different lifestyle. Stanley found that the vast majority:
- Live in a house that cost less than $400,000.
- Do not own a second home.
- Have never owned a boat.
- Are more likely to wear a Timex than a Rolex.
- Do not collect wine and generally pay less than $15 for a bottle.
- Are more likely to drive a Toyota than a Beemer.
- Have never paid more than $400 for a suit.
- Spend very little on prestige brands and luxury items.
This is certainly not the traditional image of millionaires. And it makes you wonder, who the heck is buying all those Mercedes convertibles, Louis Vuitton purses, and $60 bottles of Grey Goose? The answer, according to Dr. Stanley, is “aspirationals,” people who act rich and want to be rich, but really aren’t rich. (The Texas term, I believe, is “All Hat, No Cattle.”)
Many are good people, well educated and perhaps earning a six-figure income. But they aren’t balance-sheet rich because it’s almost impossible for most workers—even those who are well paid—to hyperspend on consumer goods and save a lot of money. (And saving is the key prerequisite for investing.)
In his new book, Stop Acting Rich . . . and Start Living Like a Real Millionaire, Dr. Stanley recalls an appearance on Oprah when a member of the audience asked the question, one he’s heard hundreds of times before:
Like so many others, this woman genuinely believed that the more you spend, the better life is. Bear in mind, we’re not talking about people who live below the poverty line. (Clearly, their lives would be better if they were able to spend more.) We’re talking about middle-class consumers and up, those who often live beyond their means and then find themselves under enormous pressure, especially in a weak economy.
Some were overly optimistic. Others didn’t realize that they are up against an army of the best and most creative marketers in the world, whose job it is to convince you that “you are what you buy,” that you need to outspend—to outdisplay—others. The unspoken message behind the constant barrage of TV and billboard ads featuring all those impossibly good-looking men and women is that you are special, you are deserving, and you need to look and act successful now.
According to Dr. Stanley:
Yet “everyday” millionaires see things differently. Most of them achieved their wealth not by hitting the lottery or gaining an inheritance, but by patiently and persistently maximizing their income, minimizing their outgo, and religiously saving and investing the difference.
They aren’t big spenders. According to Stanley’s surveys, their most popular activities include:
- Socializing with children/grandchildren (95 percent)
- Planning investments (94 percent)
- Entertaining close friends (87 percent)
- Visiting museums (83 percent)
- Raising funds for charities (75 percent)
- Attending sporting events (69 percent)
- Participating in civic activities (69 percent)
- Studying art (63 percent)
- Participating in trade/professional association activities (56 percent)
- Gardening (55 percent)
- Attending religious services (52 percent)
- Jogging (48 percent)
- Attending lectures (44 percent)
The cost associated with these activities is minimal. Most millionaires understand that real pleasure and satisfaction don’t come from the car you drive or the watch you wear, but time spent in activities with family, friends, and associates.
They aren’t misers, either, especially when it comes to educating their children and grandchildren or donating to worthy causes. Although they are disciplined savers, the affluent are among the most generous Americans in charitable giving.
They “give” in another important way, too. According to the IRS, the top 1 percent of America’s income earners pays 37 percent of the entire federal income tax bill. The top 5 percent pays 57 percent. The top 10 percent pay 68 percent. (The bottom 50 percent pay less than 4 percent.) It’s a far cry from the populist complaint that the rich “don’t pay their fair share.”
Just how prevalent are American millionaires? According to the Spectrum Group, there were 6.7 million U.S. households with a net worth of at least $1 million at the end of 2008. Very few of them won a Grammy, played in the NBA, or started a computer company in their garage. Clearly, thrift and modesty—however unfashionable—are still alive in some parts of the country.
So while millions of consumers chase a blinkered image of success—busting their humps for stuff that ends up in landfills, yard sales, and thrift shops—disciplined savers and investors are enjoying the freedom, satisfaction, and peace of mind that comes from living beneath their means. These folks are turned on not by consumerism but by personal achievement, industry awards, and recognition. They know that success is not about flaunting your wealth. It’s about a sense of accomplishment . . . and the independence that comes with it. They are able to do what they want, where they want, with whom they want.
They may not be smarter than you, but they do know something priceless: It is how we spend ourselves—not our money—that makes us rich.
Are You Losing Your Soul?
I recently bumped into an old acquaintance I...