Not Just Numbers

Adam M. Grossman

IN THEIR NEW BOOK The Missing Billionaires, Victor Haghani and James White make an interesting argument. Looking at the number of millionaires in the U.S. in 1900 and doing some math, they estimate that there should be many more billionaires today—thousands more, in fact—than there are. The question Haghani and White ask: Where did they go? Or, more specifically, where did their wealth go?

The authors consider possible explanations, including taxes—especially estate taxes—and the 1929 crash. But even after adjusting for those factors, they calculate that there should still be many more people today with a lot more wealth. In the end, they settle on two explanations for these “missing billionaires”: excessive spending and poor investment decisions.

To illustrate their observation about spending, they point to the Vanderbilts. When he died in 1877, Cornelius “Commodore” Vanderbilt was by far the wealthiest American. But just 50 years after his death, the family’s wealth was essentially gone, thanks to spending that exceeded even their vast means. One of Cornelius’s grandsons built the 125,000-square-foot Breakers mansion in Newport. Another commissioned Biltmore in North Carolina, which is still the largest home in America. And they endowed Vanderbilt University.

The second factor Haghani and White point to is on the investment side. Many of these families failed to effectively diversify, owning too much of a single stock. In many cases, these were shares in family businesses, which they held on to for emotional reasons.

While the Vanderbilts are an extreme example, their experience illustrates the importance of planning, even for wealthy families. When making a financial plan, I recommend a three-part approach.

1. Math. There’s no shortage of strategies for building a financial plan, from Monte Carlo analysis to the so-called 4% rule. But whichever approach you choose, there are five principles that, in my opinion, are universal:

  • Don’t draw a straight line. If you have many years to retirement, consider multiple scenarios. In each scenario, turn the dials on different variables, from spending levels to market returns to inflation expectations. Try multiple stress tests.
  • Keep investment fees low. Research firm Morningstar studies the investment industry and has concluded that, on average, “low-cost funds beat high-cost funds.” This is the case, the firm says, “in every single time period and data point tested.”
  • Keep things simple. Last year, Wall Street introduced more than 500 new exchange-traded funds. But most of these fit in the “shiny object” category and really aren’t necessary. The problem with these strategies is that they tend to be costly and tax-inefficient.
  • Keep an open mind. While simplicity is my favored approach, there are exceptions. For example, single premium immediate annuities carry complexity, but they make sense for certain investors.
  • Manage taxes. In addition to income taxes, keep an eye on potential future estate taxes.

2. Mindset. Back in 2004, the author Kurt Vonnegut was speaking to a group of college students. He told a story about how he liked to spend his time: When he needed an envelope, he said, he liked to walk down to the stationery store and purchase a single envelope. Seeing him do this, his wife suggested that he instead buy a box of 100 and keep them in his office. But Vonnegut objected. He enjoyed the walk and liked chatting with people along the way.

This helps illustrate an important truism about personal finance: The numbers are just part of the picture. Vonnegut would have saved both time and money by ordering a box of envelopes online. But for him, it wasn’t about the numbers. It was about what gave him enjoyment.

In other words, mindset is a valid component of any financial plan. While there isn’t necessarily a formula you can apply, there are questions you can ask to help inform the structure of your plan. These are some examples:

  • How would you rank order your financial goals? For example, would you prefer to have a vacation home where family could gather, or would you prefer to keep these dollars in the bank for added security?
  • How do you view the tradeoff between time and money? For example, would it be more important to retire early or to continue working, so your savings have more time to grow?
  • If you have children, how important is it to leave them the largest possible inheritance? Do you worry that the prospect of a large inheritance would demotivate them?
  • How important is charitable giving, both during your lifetime and as part of your estate plan?
  • How important is it to avoid market volatility? In other words, how much potential growth would you be willing to give up in exchange for limiting losses during market downturns?

There is, of course, no right or wrong answer to any of these questions.

3. Circumstances. My doctor and his twin brother are partners in their medical practice. But even when two people appear almost identical—with the same background, the same profession and the same income—there will be differences. Though these differences are often harder to quantify, they’re nonetheless an important component of any financial plan. These are some questions you might consider:

  • If you’re in your working years, how would you characterize the stability of your income? If you’re a tenured professor, that might allow you to take more risk than someone with a similar—but less certain—income.
  • To what extent does your retirement plan include guaranteed sources of income, such as a pension? 
  • Do you have other assets that might or might not have value—shares in a family business, for example?
  • Is health a concern, either yours or, if you’re married, your spouse’s?
  • If you have children, what is their financial situation? Might they need help, or might they be able to help you, if need be?

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and on Threads, and check out his earlier articles.

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