My approach toward wealth changed in 1992 when I went to a Vanderbilt University alumni meeting and heard William Spitz, the collegeâ€™s treasurer, give a talk about his book, â€œGet Rich Slowly: Building Your Financial Future Through Common Sense.â€
In the book, Spitz sums up his philosophy in 10 principles:
- There are no guarantees, sure things, or free rides.
- It is not necessary to earn extraordinary rates of return to accumulate a sizable net worth. Earning consistent, reasonable returns while avoiding losses should be the focus.
- Structure your program to understand the risks involved and have faith in your program to ride out the tough times without making hasty or costly decisions.
- Diversification is crucial. Spread your risk.
- Index funds will usually do as well, or better, than investment advisers or managed mutual funds.
- Make decisions based on economic performance and not on tax avoidance.
- Have the same program for asset allocation, no matter how much or how little you are investing. A person with $5 million to invest would split it into multiple types of investments; so should the person with $5,000.
- Every investor is his own worst enemy. No one is immune from swings in emotion and from following the herd. Structure your finances to avoid the availability of sudden decisions.
- Minimize costs whenever possible.
- Too much trading and moving money is expensive and counterproductive. To quote Spitz, â€œThe primary beneficiary of a high level of trading is your broker.â€ Set up your portfolio carefully, review it annually, stick with the plan, and donâ€™t panic.
â€œGet Rich Slowly: Building Your Financial Future Through Common Senseâ€ is aimed at academia and is not an easy read, but for me it was an epiphany. I had similar thoughts about how to make money, but Spitz summed them up in one book. It has been the cornerstone for all my philosophies since then.
Spitz gave his advice 16 years before the Wall Street crash in 2008. People who had their money allocated as Spitz suggestedâ€”among a variety of stocks, bonds, mutual funds, real estate, and annuitiesâ€”did much better in 2008 than people who had put their eggs in one basket.
A lot of people, including many at Wall Street banks, thought real estate could never go down. They put all their money in the real estate market and got burned.
When I worked as a Series 7 registered representative (often referred to as a stockbroker), I followed the lessons of the Get Rich Slowly book religiously. I had a large clientele of doctors, lawyers, and other well-educated professionals, along with injury victims and the occasional lottery winner.
I had my clients allocate their money into several types of investments and did my best to keep them from panicking when one class of investments did poorly. I reminded them it takes time to â€œget rich slowly.â€
Over the years, I kept noticing one thing. People who had easy access to cash were the ones most likely to fall off the â€œget rich slowlyâ€ bandwagon. They would have â€œemergencies,â€ such as buying a new car or a houseboat, or taking their friends on a cruise. Sooner or later, the money would be gone; well before they were able to â€œget rich slowly.â€
In the meantime, I had a parallel business that provided structured settlement annuities to injury victims. Structured settlements are only offered to injury victims and are tax-free. Thus, they are an attractive choice compared to taxable alternatives.
A structured settlement annuity can be designed in a number of ways, but the way I normally recommend is to pay it out over a personâ€™s lifetime, increasing it at two or three percent a year to keep up with inflation, and in case the recipient dies, guaranteeing it for thirty years to a beneficiary.
One of my first clients was a young man who lost his arms and legs in an accident and received roughly $3 million. If he and the motorcycle gang with whom he lived had gotten their hands on $3 million, they would have had the party to end all parties until the money was gone.
I set up an annuity so he received $10,000 a month.
Thus, they had a party every month until he died many years later.
You canâ€™t really cash in a structured settlement although some people make the unfortunate decision to sell their payments to companies like J.G. Wentworth, which heavily advertises on television. (If you watch daytime television such as the Jerry Springer Show, you are likely to see Wentworth or one of its many competitors.)
Because the money was harder to access, the people who took structured settlements were more likely to â€œget rich slowlyâ€ than my professional clients who could cash in a mutual fund or stock whenever they wanted.
I finally realized it was like dieting. I struggle with my weight in a big fashion and usually start a diet about once a month. If I start a diet when I have all my favorite foods in the refrigerator, I will fall off the diet immediately. If I have to drive to the store about two miles away, I think about it more and sometimes wonâ€™t go. If I have to drive twenty-five miles to get fatty foods, I am far more likely to stick to the diet.
The financial analogy is that having all your money in a savings or checking account is like having food in the refrigerator. Putting money in a mutual fund or certificate of deposit, where it takes some effort (and sometimes penalties and tax consequences) to cash it in, is similar to driving to the store two miles away. A structured settlement is like the twenty-five-mile drive for food. You have to do a lot of work to sell it and take a huge financial hit when you do.
It is better just to hang onto the structured settlement and stay disciplined, just like it is better to stay on a diet.
Eventually, I moved away from a successful career as a stockbroker and focused all my efforts on the structured settlement business.
Although many of the eggs are in the structured settlement basket, it was closer to the Will Rogers philosophy of being concerned about â€œreturn of my money as opposed to return on my money.â€
There is something similar to a structured settlement called an immediate annuity. It pays income for a personâ€™s life, just like a defined benefit pension plan. Although people seem to like lifetime income from a retirement plan, a Smart Money article stated what I long suspected: Few people buy them on their own.
I never understood why until I read an article called â€œThe Annuity Puzzleâ€ in the June 4, 2011, edition of the New York Times.
Dr. Richard Thaler, a professor of economics and behavioral science at the University of Chicago Booth School of Business, discussed how using 401k retirement funds to purchase an immediate annuity, with fixed and guaranteed benefits, was a simple and less risky option than self managing a portfolio or having the people on Wall Street do it for you.
He also noted that few people do it.
Thaler suggested that people seemed to consider an annuity a â€œgambleâ€ that they would live to an old age instead of realizing that â€œthe decision to self manage your retirement wealth is the risky one.â€
As people live longer than previous generations, they are more likely to run out of money before they run out of time on the earth.
An annuity is just one tool, like balancing your money among a number of different investments, but the key to â€œget rich slowlyâ€ is to develop good savings and spending habits. A person canâ€™t get rich, quickly or slowly, if he spends more than he makes.
He also will never be in a position to acquire financial independence or wealth without Wall Street.
Don McNay, CLU, ChFC, MSFS, CSSC is Chairman of the McNay Settlement Group and founder of Kentucky Guardianship Administrators. He was recently elected to the Board of Directors for the Society of Settlement Planners and was a past Board member for the National Structured Settlement Trade Association.