The Wealthy Vampire

It was the heady 1990’s and you really could not swing a dead cat without hitting a new personal finance book.  Just about all of them extolling the virtues of mutual funds and the stock market as the way to get wealthy.  The Robert Kiyosaki/Suze Orman smack down came down to just that: the viability of the stock market, mutual funds and 401Ks as retirement savings vehicles.

I was looking at a ranking of the world’s wealthiest people Warren Buffet is on that list, of course, but he has the distinction of being the only one who created his wealth as an investor and even Mr. Buffet doesn’t invest the way the average Joe is taught to invest.  Mr. Buffet doesn’t own mutual funds.  His company Berkshire Hathaway buys other companies like Wells Fargo, Sees Candies, the Pampered Chef, Geico and runs them.

Berkshire Hathaway has been around for decades.  Those who bought in the 1960s and held were the ones who created the  bulk of the wealth.  The truth is that the investment time horizon for the stock market is 30 years. In my post the Great 401K experiment, I quote author and financial strategist Charles Farrell who points out 68% of the wealth generated by market investors is generated in the years 21-30 of the investment.

One of the most interesting books I came across in the mid 2000’s was the Wealthy Barber.  Here was a small businessman, a barber, who mentored three young people about how to create wealth and wouldn’t you know it, his main vehicle was mutual funds.  He was a lover of term insurance and eschewed whole life.  Given the true historical returns of the market that I discovered while writing the Great 401K experiment, I am forced to conclude that that barber was a vampire pure and simple.

Before I go further I want to point out that mutual funds and 401Ks are not the same thing.  A mutual fund is a fund that invests in classes of assets from commodities to bonds to stocks to real estate.  You can go short. You can go long.  Yah, Yah, Yah.  The point is that you don’t have to have a 401K to invest in mutual funds.  A 401K is a tax-advantaged savings vehicle and it is a very common way that people invest in mutual funds.  I only care about 401Ks and mutual funds in so far as people use them to invest in the stock market.

Now back to vampires.  I truly believe that barber was a vampire.  From Twilight, to TV’s Moonlight, from Dracula, to TrueBlood all of our vampire subjects have become wealthy through the passage of time.  Time that exceeds the normal human life span.  Heck I just finished a cheesy vampire novel that has one of our vamp friends starting out poor in a one-room flat and, poof!, three hundred years later he is wealthy in a resplendent home.

All of this actually points out one true thing:  that wealth is actually created by taking right actions over time.  It is the American Dream that each generation will succeed and exceed the prior one.  We understand that wealth creation may take a generation or two or three.  There is simply no denying the impact of time on wealth creation and therein lies the rub.  In a pension-less society will parents become so focused on saving more, earlier in order to plan for retirement or will they simply accept a significantly lower standard of living in retirement while putting away for college and weddings for their children during their working years?

It is easier to spend money in the present when you know you have a pension in the future.  What about when you are dealing with an entity the long term behavior of which is unknown, like your 401K?  In some ways these are deep questions.  Those who begin saving early may have time to recover from the vagaries of the markets.  Those who begin saving late feel forced into the markets chasing returns in an effort to make up for the time they were not investing.  Something is afoot as more and more articles appear in the mainstream press about the shortcomings of the 401K and the perils of people being expected to provide for their own retirement.  Saving 10% with a company match will not be enough.  Perhaps we will conclude that saving 30-50% of our incomes will be.  Since most of us are human with but one life to live, I suspect that that will be the conclusion, a real bother since 70% of American households make $65,000 or less.

Ah, where is a good vampire when you need one?

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