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Tailor Made

Charles D. Ellis

EACH OF US IS UNIQUE. That’s how our friends instantly know who we are. In ways large and small, we differ from others in appearance, in the sound of our voice, in our age, stature and politics. Our life experiences differ greatly. Our fears and anxieties differ, as do our aspirations.

We are different financially, too. Our incomes vary, sometimes greatly. So do our savings. Some of us have inherited wealth; some none. Some of us feel a strong responsibility for others. Some support the institutions, such as churches, schools and colleges, that helped develop their values, skills and sense of community.

These differences matter. They define who we are as individuals.

That raises an important issue: Why do financial companies continue to emphasize such generalities as “invest your age in bonds”? Sure, most people can take more investment risk when young. Future earnings, and more savings, can make up for early losses. But is this enough reason to justify this rule of thumb? I doubt it. To clarify my proposition, consider how I invest and how my mother invested when she was alive.

First, although our portfolios had remarkably different asset mixes, I believe both of us got the decision right. Here are our percentages:

Mom: Stocks…0%. Bonds…0%. Cash…100%.

Me: Stocks…100%. Bonds…0%. Cash…0%.

You might well say, “How can such extraordinarily different asset mix decisions both be right?” Let me explain, and I bet you’ll agree that both Mom and I got it right. We matched our unique situations with an appropriately unique solution. Start with me. I’m in my mid-80s. I like saving and I don’t like spending on luxuries.

Financially, I’ve been fortunate. I’ve enjoyed investment success, particularly with Berkshire Hathaway since the mid-1970s. I’ve held a 100% stock allocation during a favorable market. I’ve also enjoyed a relatively high earned income. Even more fortunately, I continue to earn enough in my chosen career. When combined with required minimum distributions from my 401(k), it covers our annual expenses as a family.

Realistically, I’m not investing for my wife and me, so much as for my adorable grandchildren. Their time horizon for investing—the time between now and when they will want or need to spend the money—is very, very long. It could be at least 50 years. Anyone investing for 50 years would do as I do: 100% stocks.

Now, let’s look at Mom’s decision. My father’s parents died in the late 1940s and left a modest inheritance to my father. As a lawyer, he knew that he could “disclaim” the inheritance and pass that money on to his four children without any tax owed. Mom and Dad discussed it and agreed that Dad’s income was enough for them. What they most cared about was giving their four kids a good college education. Combined with summer jobs and contributions from Mom and Dad, this modest inheritance from his parents would cover the cost of four college educations.

Now, how to invest the inheritance? Mom and Dad had seen the awful impact that the 1929 market crash and Great Depression had on stocks, so that was out. Interest rates were being kept low by the Federal Reserve, so bonds were unattractive, particularly after inflation’s toll. Mom considered putting the money in a savings bank, but she knew from experience that banks could fail. At that time, savings account passbooks all said that the bank reserved the right to defer withdrawals for 28 days to assure liquidity. Mom knew that banks could implode in a lot fewer than 28 days. The upshot: She put the money into a checking account, where she could always take it out immediately.

You may well be wondering, “Why did this make sense?”

Mom grew up in the Deep South, where her father practiced law in a small city. Cotton prices were low in the 1920s, and many cotton farmers suffered. So did lawyers whose clients depended on cotton. They went broke together. Mom’s father could not pay the tuition for college. Fortunately, Mom was able to borrow the needed money from her sorority. To pay off that loan, she typed papers at six cents a page and made little girls’ dresses for $1 apiece. It took 15 years to clear her college debt.

Mom knew that the most important goal in our family was a good college education for each of her four children. And she knew that the moderate inheritance from her in-laws would be enough. The possible upside of having more than enough mattered very little, while not having enough would be a life-changing nightmare. Because she defined the problem correctly, Mom was able to figure out the right answer, which was to be 100% cash. All four of us went to great colleges, and that has made all the difference.

Rules of thumb can get many of us started in the right direction. But getting started and getting it right are different. Each of us is different from all the others. Since our financial situations differ, too, shouldn’t our best answers be custom tailored to our own unique realities?

Charles D. Ellis is the author of 18 books, including Winning the Loser’s Game, which is now in its 8th edition, with 600,000 copies sold. Charley has taught investing courses at both Yale and Harvard business schools, and he served for 17 years on Yale’s investment committee. Check out his earlier articles.

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