If I Were a Rich Man
Topol had it all wrong when he fantasized about being a rich man in Fiddler on the Roof. Fans of the popular Broadway show probably know the lyrics to, “If I were a Rich Man,” but the real lessons come from the rest of the song.
In one refrain, he sings: “If I were a wealthy man, I wouldn’t have to work hard”. Really?!
In my experience that’s simply not true. The wealthiest people I’ve known also happen to be some of the hardest workers. I believe building wealth is hard work, and keeping it is just as hard.
In another refrain, Topol sings that he would “build a big, tall house right in the middle of town” with ”rooms by the dozen” and ”a staircase going nowhere just for show.” Is that the sort of thing most wealthy people do?!
The song’s lyrics are more an ideal of wealth expressed by someone unfamiliar with wealth creation.
The lessons learned when creating wealth are very important once wealth is achieved. It’s not at all surprising why so many lottery winners end up penniless. Similarly, inherited wealth is more likely to be spent than saved.
Wealth is a fortress to be protected, not wasted. Those who have earned it recognize how difficult it was to build and are therefore far more cautious with what they’ve earned.
I had a wealthy mentor. It was not uncommon for him to drive around town looking to save a few pennies per gallon on gas. Some would call him a penny-pincher. In fact, he had habits developed over his life that kept him from spending money he didn’t have to spend. That was just one of the reasons he created the wealth he had.
When it comes to managing portfolios, it’s important to remember the lessons of wealth creation. What we run up against is a financial industry that presents investing as something of a game.
If you listen to the financial industry, you might conclude investing is solely about gains and relative performance.
Don’t get me wrong, when we invest in stocks for our clients our goal is to generate gains and provide good performance. But those aren’t the only things we consider when investing our client’s money.
What is wealth?
When I was a kid it seemed the standard answer was pretty simple: one million dollars. In the ‘60’s and 70’s the term “millionaire” was a clear statement of wealth.
Now that I’m not-so-young and have been in this business for quite a while, I have a not-so-simple definition of wealth. I believe it’s a personal measure, and that it exists at the intersection of the life you want to live and the amount you have saved.
I’m often asked: “How much do I (we) need to retire comfortably?”.
The answer is wholly tied to the answer to my follow-up question: “How much do you spend?”
Out of those two questions comes my definition of wealth: Wealth is having enough money to comfortably live the life you want to live and not worry about it.
Fortunately for almost all of us, saving that amount doesn’t trigger a whole new approach to living. What I mean is that most of us settle into the life we are comfortable living. We have a house we like, we drive a car we’re comfortable driving, we take the trips we want to take, go out when we want and stay home when we want.
If we save enough to fund that life, we don’t raise the bar as soon as we’ve achieved it. We’re happy with our lives and are more than willing to preserve that lifestyle once its’ achieved.
But sometimes people don’t understand preservation in the context of their portfolio.
When discussing investment allocations with new clients, we often have people who have been predisposed to owning stocks their entire career. They like growth and over the past several decades, the stock market has been quite favorable. So, it’s no surprise to find people predisposed to stock ownership.
For the most part, we agree.
However, as the amount you have saved approaches the amount you need, you need to become more conservative with your investment allocations. You should still own stocks, but you should also be building an allocation to bonds to help preserve what you’ve saved.
To make this point with new clients, I’ll ask: What if we keep all your money in stocks and double the size of your portfolio, how much will your spending increase?
The answer is almost always: “It won’t”.
I contend it makes no sense whatsoever to risk a lifetime's worth of saving once you are financially secure. Capital preservation becomes a more important goal.
I would also point out that taking a more conservative approach does not mean your portfolio will stop growing. You’re just reducing your exposure to the swings in stock prices. The balance we look to find for each client is to ensure what they have accomplished is not wholly dependent on the stock market performance.
If you would like to discuss capital preservation and other important topics regarding today’s market environment please give me a call.