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IN THE ANCIENT WORLD, before the invention of the printing press, a strategy for remembering information was to build a so-called memory palace. The idea was to associate words with images. Even today, this is how participants in memory competitions can achieve feats like reciting a thousand digits of pi.
Similarly, when it comes to personal finance, I’ve found that certain images can help illustrate important concepts. These are the ones I rely on the most:
1. On Jan. 31, 1940, the very first Social Security check was issued to a woman named Ida May Fuller, who had just turned 65. Her first monthly check was just $22.54, but she continued to collect benefits for the next 35 years, until she died at age 100. Over the course of her long retirement, she collected nearly $23,000 in benefits. If you’re wondering whether it makes sense to delay Social Security so you receive a larger check—guaranteed for life, with adjustments for inflation—it may be worth keeping Ida Fuller in mind.
2. In his book The Psychology of Money, Morgan Housel notes that the concept of compound interest is difficult because the math defies easy mental arithmetic. “If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72).” But, Housel says, “If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode.”
What’s another way to visualize the concept of compound interest? Hard as it is to believe, if you fold a piece of paper in half and then fold it again, and continue folding it 40 more times, the resulting stack of paper would be so high that it would reach the Moon. This illustrates the importance of continuing to stay invested—even during periods of market volatility—so your portfolio can benefit from the power of compounding.
3. In summer 1789, George Washington fired his postmaster general, Ebenezer Hazard. Looking for a new profession, Hazard started an insurance company, which he called the Insurance Company of North America (INA). It’s been through a number of acquisitions over the years, but it still exists today, more than 200 years later. And while INA is the oldest, many insurance companies are 100 or more years old.
What explains this longevity? Credit a financial strategy known as asset-liability matching. To avoid shortfalls, insurers earmark specific funds for each set of expected future claims. While this may be an overly engineered solution for everyday household finances, the concept of earmarking funds is nonetheless useful for financial planning.
4. In the late 1920s, when the stock market was booming, Yale University economist Irving Fisher declared that the stock market had reached a “permanently high plateau.” Just nine days later, the market crashed, ultimately dropping 89% from its peak. Fisher’s proclamation is, in my mind, the best illustration of the danger of recency bias, which is the tendency to extrapolate from recent experience.
5. If you’re in retirement, and the stock market declines, how can you avoid selling when the market is down? The best approach, in my view, is what’s known as the bucket strategy. Instead of thinking about your portfolio as one large pile of savings, segregate it into two or three mental buckets. When the stock market is doing well, you can sell stocks to meet your living expenses. When the market is low, you can lean on your bonds. And when both stocks and bonds are down, as they were in 2022, you can draw from the cash bucket.
6. You’ll notice that the three buckets I proposed don’t include commodities, such as gold. Why not? Warren Buffett once provided this illustration: “If all of [the gold in the world] were melded together, it would form a cube of about 68 feet per side.” At the time, Buffett said, that cube would have been worth about $10 trillion. For that same $10 trillion, an investor could buy all of the farmland in the U.S., plus a fair number of public companies, all of which would produce substantial income each year. By contrast, the cube of gold wouldn’t produce anything.
Gold, Buffett says, “just sits there.” This cube of gold illustrates a concept known as intrinsic value, which refers to the ability of an asset to produce income. Because gold—like cryptocurrency—doesn’t produce income, it’s worth only what the next person is willing to pay. That can make its price volatile and unpredictable.
7. You may be familiar with the Breakers, the 125,000-square-foot Newport mansion built in the 1890s by Cornelius Vanderbilt. At the time, the Vanderbilts were the wealthiest family in the U.S. But just 50 years after Cornelius’s death, the family’s wealth was essentially gone, owing to overspending. The Breakers is thus a reminder that financial planning can be important even for the wealthiest families.
8. When she died in 2016, a Brooklyn woman named Sylvia Bloom left behind an estate worth $9 million. More remarkable than the number, however, was the fact that Bloom had worked as a secretary and never earned a high income. Stories like this appear from time to time. Invariably, the phenomenon is attributed to extreme frugality.
But that’s only part of the story. The more important element, I think, is time. Mrs. Bloom lived to 96. It’s been the same with other notable cases, where someone of modest means was able to leave a huge fortune. While frugality doesn’t hurt, it’s not necessarily the path to wealth. Sometimes, it’s longevity that plays the larger role.
9. Why are exchange-traded funds (ETFs) typically more tax-efficient than traditional mutual funds? With traditional funds, investors can redeem their shares for cash at any time. That’s a good feature, but this can force a mutual fund’s manager to sell holdings, incurring a tax bill that must be shared pro-rata with all of the fund’s shareholders.
This doesn’t happen with ETFs. The way to think about an ETF is that it’s like a basket of investments that’s passed around among investors but, importantly, is never handed back to the issuing fund company for redemption in cash. That means there is never forced selling in an ETF, and that’s a key advantage.
10. On April 1, 1976, Steve Jobs and Steve Wozniak founded Apple. What’s less well known is that they initially had a third partner, a fellow named Ronald Wayne. But Wayne quit just a few weeks after the company got started, and also sold his 10% stake. When he sold his shares, Wayne received just $2,300.
While it’s easy to criticize Wayne’s decision with the benefit of hindsight—some have called it the worst stock trade ever—the reality is that most financial decisions have an element of uncertainty. That’s why I recommend, wherever possible, a “center lane” approach. In Wayne’s case, for example, he could have sold just half his shares.
11. One of the reasons the stock market is endlessly frustrating is because its movements often seem random. At the same time, we’re told there’s a connection between stock prices and corporate profits. To help square this circle, Benjamin Graham, the father of investment analysis, offered this illustration: In the short term, he said, the stock market is like a voting machine. In other words, it’s a popularity contest and not necessarily rational.
But over the long term, the market is more rational. It becomes a “weighing machine,” Graham said. Especially during times of uncertainty, I find this illustration helpful. It gets us to look beyond the news of the day, so we stay invested long enough for compounding to work its magic.
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 check out his earlier articles.
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Is the bucket strategy just a simpler version of the insurance asset-liability matching strategy? I’m just starting retirement; but, I’m on the younger side so my approach has been to blend the two. For instance, I have a Roth IRA I hope I might not ever touch (legacy for the kids) or if it does need to be touched, it will serve as a “long-term care” bucket. So yes, there are the three buckets to manage market volatility but then beyond that what income and asset sources will be used at different times through what will hopefully be a very long retirement?
The most fascinating detail about Sylvia Bloom, left out of this article, is how she amassed her wealth. According to The New York Times, “She was a secretary in an era when they ran their boss’s lives, including their personal investments,” recalled her niece Jane Lockshin. “So when the boss would buy a stock, she would make the purchase for him, and then buy the same stock for herself, but in a smaller amount because she was on a secretary’s salary.” Smart cookie!
Well what an article about the value of pictorial representation really needs is…..pictures, and no investing site does a better job of showing the virtues of this than Portfolio Charts:
https://portfoliocharts.com/portfolios/
The innovative tools on this site really give you a visceral feel for what it would be like to own any of the featured portfolios (or a custom allocation of your devising) through every market condition and include things like maximum drawdown and years to recover, safe and perpetual withdrawal rates and the all-important (for retirees especially) “ulcer index.”
Also of note is that the actual data shows that your claims about gold are incorrect. No asset (including equities) has an “inherent” rate of return, but gold has been a store of value for thousands of years. In judicious amounts in some (but obviously not all) portfolios its a useful diversifier and helps with sequence-of-returns risk more than any other asset. There are plenty of great portfolios that don’t include it, but I challenge you (or anyone else) to find a portfolio with better risk-adjusted returns than the Golden Butterfly and other similar portfolios on this site that combine a slice of gold with stocks and bonds. IMHO Portfolio Charts and Humble Dollar are probably the two most valuable investing sites on the web.
Adam or somebody, Please explain the Ida May example. I’m slow or dense on this one. Does this example mean we should take SSI early or wait???
thanks
Lester, I thought the same, and reading the linked article didn’t help me. My opinion is that if a person is going to live to be 100, the math favors waiting. Sadly, I have no opinion on determining how long a person might live.
Social Security provided Ida May with inflation-adjusted income every month until she died at age 100. If you want insurance against the risk that you’ll outlive your savings, delaying Social Security is the way you ensure you have the biggest “insurance policy” possible.
For compounding I sometimes ask if they know any big families that had a lot of kids whose kids then got married and also had kids who grew up to marry and start the process all over again and all of a sudden it is out of control.
It’s certainly true that frugal people who enjoy long lives, like Sylvia Bloom, can build significant net worth in their lifetime.
While I don’t know the details of Sylvia’s story, I’ll assume that, in addition to regularly investing small amounts in stocks over many years, she patiently left her portfolio alone and let its value compound.
If Sylvia had been an active trader, I also assume that her portfolio would have been worth significantly less than $9 million.
thanks for the shared wisdom on HD Adam.
Thanks for a great list of illustrations, Adam. I use images when explaining anatomical or physiological concepts to my physical therapy patients. Technical words are not helpful when we don’t understand the vocabulary, regardless of the field.
Thanks for sharing your wisdom, Adam. Nice article!
A fun list, Adam, thanks!
I especially enjoy your method of weaving history and stories into your articles to underscore and support financial topics.
I wish there was a easy way to help people who are not math people understand the real impact of compounding. Sometimes all you can do is go back to the multiplication, but with an easy version. If you earn 10% a year, how do you estimate what you’ll have in a few years? You start with $1. In year two you’ll have $1 + 10% of that, or $1.10. In year three you’ll have that ($1.10) plus 10% of that, or $1.21 ($1 + $.10 + $.11). It keeps creeping up, but the creeping steps each year start to get bigger and bigger. Then ask someone to imagine how it grows over 10 or 20 or even 50 years if you don’t touch it. Sometimes a light will go on.
I find a useful way to convey the incredible power of slient compounding is the doubling penny (1¢) illustration. If you double a penny every day for a month it will be worth over $10,000,000 by the end of the month! Granted this is 100% daily rate of return but it illustrates compounding’s “super power” effect over decades in just 31 days. Check out the spreadsheet in the below link.
🤓💰😲
https://budgetsaresexy.com/penny-compounding-interest/
The “bucket” approach is a favorite of Christine Benz over at Morningstar.com. She writes regularly on that topic. Others including Robert Brokamp at fool.com have written about “wealth defense” and the benefits if a “cash stash” for those approaching or in retirement. Holding cash can be somewhat disconcerting at times and bond funds can and do lose value on occasion. However, the purpose of that cash is to ride out market downturns and avoid selling equities at a loss. Downturns can range from a few months to a few years. Recent cash performance has moved it from the “cash is trash” category.
For those who are interested, chapter 11 of Christine Benz’s new book, How To Retire, has an excellent discussion of the three-bucket approach for managing cash flows.
Great article. I agree with virtually all except gold. In 1971, when the U.S. went off the gold standard, gold was prices at $35 an ounce. It’s now about $3,000 per ounce–about an 8% return, annually. If you go back and look at the performance of the Dow Jones, as well as the growth of the money supply, you’ll find that gold has done just about as well as those other two variables. Put another way, over the long term, gold is a store of value that may allow you to keep up with currency debasement. More recently, I looked at the growth of M2 (money supply), gold, and the S&P 500 from the end of 2019 to the end of 2024. Over those 5 years, annually, M2 increased 7%, gold 11.40%, and the S&P 500 up 12.73%. Thus, having some gold around may help keep the inflation demons away.
Jeremy Siegal’s book, Stocks For The Long Run, has an interesting chart showing the real returns of stocks, bonds, bills and gold over the 220-year period from 1801 to 2021.
According to the chart, $1 invested in gold in 1801 would be worth $4.06 in 2021. In effect, the real return of gold over long periods is nearly zero. This tells me that, while gold can be a hedge against a declining currency and help maintain your purchasing power, it won’t do much to increase your wealth.
By comparison, $1 invested in stocks in 1801 would be worth $2,334,920 in 2021.
I’m not arguing that there shouldn’t be an allocation to gold in your portfolio, but maybe you should regard it like spice on food—a little is good, but too much can be distasteful.
Hello Patrick, First I want to let everyone know I do have a store of Gold and Silver coin which is spendable in a crisis. Yes, the price of precious metals has increased over the years which represents a gain. BUT, to realize that gain, what has to be accomplished?
A sale which reduces the stock and so future sales.
The great fact with Warren B’s wisdom is that there’s investments that simply kick off dollars without depleting the stock. Year after year, there’s something produced, and the base is never lost.
Selling time is underrated.
There are many such investments and a mix of them makes us very happy retired folk.
Thanks for the insights.
Regarding the Vanderbilt extended families squandering of their family wealth, read Anderson Cooper’s “Vanderbilt: The Rise and Fall of An American Dynasty”. He documents the wasteful, spendthrift habits of multiple generations. He does not bemoan, but states factually, that he inherited nothing from that dynasty. If you are not aware, he is the son of Gloria Vanderbilt. Some sources estimate his personal net worth at $250 million, earned, not inherited.
As a proponent of The Bucket Strategy, I couldn’t help but smile when I read #5. I’ve written a series on how I’ve been successfully using the strategy through 7 years of retirement, link below:
The Bucket Strategy Series – The Retirement Manifesto
In regards to your first point… while that woman got back far more than she paid in, for some of us how MUCH we get back is what matters. Not everyone has enough money that the difference is trivial. As a result waiting until 70 makes sense for some even if we never recoup what we paid in. As you said in several other points – life is full of uncertainties.
In my case 3 cancers, one with no cure but a longer life span living in a state that didn’t expand medicaid trashed my finances. Good thing I had retirement and savings I could cash in to pay for health care (didn’t make enough money for ACA care). As a result I am have far less money than I would have had now. I waited to turn 70 to collect SS (and am waiting until I have to, by law, withdraw from what retirement I have left). Two of those years I waited I earned $4k and $6K from work and so needed to find ways to bring in more (I am single which didn’t help but at least I lived in HUD) which made life very tough but despite the situation I managed to hang on. I figured that at least right then (I am 71 now) At lease then I could dumpster dive to sell stuff to earn money and do other odd jobs that I likely wouldn’t be able to do once I was back in treatment and older. As a result I needed more money when I was older than I needed now since then I’d have little way to earn extra when older. So I waited. The odds are against me getting it all back, but at least I’ll have more when I am less able to earn additional money and so my budget won’t be quite as tight. That is worth a lot to me, far more than “getting it all back and then some”.
Great lessons!
Here’s an article I gave to our grandkids when they graduated.
https://money.usnews.com/investing/articles/charts-showing-why-you-should-invest-today
Fantastic article. Some great ways to teach kids about money.
Could you please explain the message regarding thr Breakers? Hasn’t the building retained value for later owners? Or has it become a money pit. It has value as a unique object.
Also, the loss of Vanderbilt wealth may not really be accurate. Instead of one person holding the wealth, it was divided among heirs. Each person had less extreme wealth, but more people had wealth. (I knew one heir who gave all of his away.)
And there’s the concept of reversion to the mean. The index fund champions here celebrate this.
I think your Breakers question is answered in the linked article included by Adam above, relating to squandering a family fortune by poor planning or profligate spending by those in the later generation who had not earned it: https://www.businessinsider.com/how-vanderbilt-dynasty-lost-its-fortune-2017-12
Closer to home, Jonathan talks about both human foibles and “brutal math” headwind to any family fortune in his “Great to Gone” piece about his great-great-grandfather’s family’s fortune:
https://humbledollar.com/2020/02/great-to-gone/
Can anyone fold even the thinnest sheet of paper eight times?
The message I get from the illustration of trying to fold it 40 times is that it is impossible, so why bother trying?
Cammer – I agree – – I actually tried to do it and only got to 8 folds before I threw it in the trash – lol! I was kind hopping to get to the moon;-)
I got a lot of negative votes for this comment. So I will try to explain a different way. If somebody cannot do the exercise, then it isn’t a helpful exercise. Practical illustrations need to be practical.
Some people get it and some don’t. When I was in 1st or 2nd grade, my dad explained Zeno’s paradox as every time you take a step towards something, it is half the size of the previous step. Do you ever get there? I could picture it in my mind and it was so cool. I bet most, or all, of readers here can see it and understand the relation this has to compounding. Furthermore, we can see why, and understand why, models of planetary orbits which show equal spacing between the planets are an estimation of a log scale. You couldn’t include the outer planets in a linear scaled model unless you commandeered the neighborhood around the school. In my experience, most people don’t understand this. They never will.
Then add to the problem waiting for compounding. Most people aren’t going to wait.
Folding a sheet of paper 40 times, while impractical, serves to illustrate how powerful compound growth can be.
Another conceptual exercise is the wheat-on-checkerboard example. If you start by placing one grain of wheat on square one, and each subsequent square receives double the amount on the previous square, the 64th square will contain 18,446,744,073,709,551,615 grains of wheat (2^64 – 1).
This mental exercise, while also impractical in real life, illustrates very clearly the power of compound growth.
Such examples can serve to enlighten those who are uncertain as to what compound growth is and what it can help them achieve from their investments.
Regarding #11, I’d never pass myself off as a savvy investor, and in my best Forest Gump voice, I’m not a smart man but…. It’s always seemed to me that the market is looking for an excuse for a sell off, especially when some PEs get into the 50s. While I’m no fan of what’s going on in the country these days, I believe that the market has just been given some good excuses, and this too will pass. I hope.
Along the lines of number 3:
I just finished reading Benjamin Franklin, An American Life by Walter Issacson. In the book he writes about a codicil of Franklin’s will.
In the codicil Franklin wrote he wished, “to be useful even in my death” which occurred on April 17, 1790. Because he had been born poor and been helped in his rise to prominence by artisans his will established a trust of £2,00. He split the fund in two to help young artisans in Boston and Philadelphia.
Here I will address only the Boston half. The money would be loaned at 5% per annum for artisans who were seeking to start a business after their apprenticeship. He calculated that after 100 years the annuities would be worth £131,000. At that time Boston could spend £100,000 on public projects. Keeping the balance for another century he calculated the balance would be £4,061,000.
His calculations were quite accurate. After 100 years the fund was worth about 400K, and at that point the Franklin Union, now Benjamin Franklin Institute of Technology was established with 75% of the money. This amount was matched by a matching bequest by Andrew Carnegie who considered Franklin his hero. The balance was kept in the trust, and a century later the trust had grown to nearly 5 million (not quite the equivalent of £4 million) at which point the trust was settled and the proceeds were given to the Franklin Institute.
And now we have a potential black swan event where all the money may be grabbed by the government, if the Institute engages in woke activities.
Adam, thanks for the interesting article. My grandson who is in kindergarten started doing a compounding math question with me the other day. I don’t think he understood the financial implications but it sure got me twisted pretty quickly. 😂
#3 – I like earmarking. I have several Schwab accounts that hold funds for my property taxes, estimated income tax for my business, a “swag” account for my wife’s part time job that we use for travel, etc. Helps keep the finances straight and to avoid missing a big bill.
#5 – HD readers will recognize Christine Benz from Morningstar as the impetus for “buckets” in your portfolio. Sensible and helpful way to order your finances. And perhaps one can use earmarked accounts for the buckets. . .
Adam, thanks for a very enjoyable article. I think I’ll try the paper trick (2) with my grandkids today.
Reverse engineer the task – how large would the starting sheet of paper need to be for a human (or group of) to be able to fold it 40 times?! Allowances made for theoretically being able to work in space, or around the world, etc.
Just have them home by dinner time!
My father chose the penny doubling illustration for me, which is still not intuitive, a phenomenon which made a big impression on my daughter when I shared it with her.