Getting Rich Slowly

By: Don McNay
By: Don McNay

My approach toward wealth changed in 1992 when I went to a Vanderbilt University alumni meeting and heard William Spitz, the college's treasurer, give a talk about his book, Getting Rich Slowly: Building Your Financial Future Through Common Sense.

My approach toward wealth changed in 1992 when I went to a Vanderbilt University alumni meeting and heard William Spitz, the college's treasurer, give a talk about his book, Getting Rich Slowly: Building Your Financial Future Through Common Sense.

 

 In the book, Spitz sums up his philosophy in ten principles:

 

1. There are no guarantees, sure things, or free rides.

 

2. It is not necessary to earn extraordinary rates of return to accumulate a sizeable net worth. The focus should be on earning consistent, reasonable returns while avoiding losses.

 

3. The key is to 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.

 

4. Diversification is crucial. Spread your risk.

 

5. Index funds will usually do as well, or better, than investment advisers or managed mutual funds.

 

6. Make decisions based on economic performance and not on tax avoidance.

 

7. You should have the same program for asset allocation, no matter how much or how little you are investing. A person with $5,000 should split it into multiple types of investments, just like a person with $5 million should.

 

8. Every investor is his own worst enemy. No one is immune from swings in emotion and following the herd. Structure your finances to minimize the chance to make sudden decisions.

 

9. Minimize costs whenever possible.

 

10. Too much trading and moving money is expensive and counterproductive. To quote Spitz, "The primary beneficiary of a high level of trading is your broker." Set up your portfolio carefully, review it annually, stick with the plan, and don't panic.

 

Getting Rich Slowly: Building Your Financial Future Through Common Sense is aimed at academia.   It was not an easy read, but it was like an epiphany for me. 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 sixteen years before the Wall Street crash in 2008. People in 2008 who had their money allocated as Spitz suggested -- among a variety of stocks, bonds, mutual funds, real estate, and annuities -- did much better than people who 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 religiously the lessons of the Get Rich Slowly book. I had a large clientele consisting of doctors, lawyers, and other well-educated professionals, along with injured people and the occasional lottery winner.

 

I had my clients allocate their money into several types of investments and I did my best to keep them from panicking when one class of investments did poorly. I kept reminding them "getting rich slowly" takes a long time.

 

Over the years, I kept noticing one thing. People who had easy access to cash were the ones most likely to fall off the "get rich slowly" bandwagon. They would have "emergencies," such as wanting to buy a new car, a houseboat, or taking their friends on a cruise. Sooner or later, the money would be gone -- well before they were able to "get rich slowly."

 

In the meantime, I had a parallel business that provided structured settlement annuities to injured people. Structured settlements are only offered to injury victims and are tax-free. Thus, they are an attractive choice when compared to taxable alternatives.

 

A structured settlement annuity can be designed in a number of different ways, but the way I normally recommend is to pay it out over a person's lifetime, increasing at 2 percent or 3 percent a year to keep up with inflation, and guaranteed for thirty years to a beneficiary in case the person dies.

 

One of my first clients was a young man who lost his arms and legs in an accident and lived with a motorcycle gang. He received roughly $3 million. If he and the motorcycle gang had gotten their hands on $3 million dollars, they would have had the party to end all parties until the money was gone.

 

I set him up so that he received $10,000 a month.

 

Thus, they had a party every month until he died many years later.

 

You can'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 a daytime television show, such as Jerry Springer's, you are likely to see numerous ads from Wentworth or one of its many competitors.)

 

Because the money was harder to access, the people who took structured settlements were more likely to "get rich slowly" than were 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 and it seems I start a new diet about once a month. If I start a diet but 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 won'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 you 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 "return of my money as opposed to return on my money."

 

There is an investment  similar to a structured settlement.  It is called an "immediate annuity." It pays guaranteed income for a person'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 had long suspected: Few people buy them on their own.

 

I never understood why until I read the "The Annuity Puzzle," an article in the June 4, 2011, edition of the New York Times.

 

In that article, Dr. Richard Thaler, a professor of economics and behavioral science at the University of Chicago, discussed how purchasing an immediate annuity with 401(k) retirement money, with fixed and guaranteed benefits, was a simpler 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 "gamble" that they would live to an old age instead of realizing that "the decision to self-manage your retirement wealth is the risky one."

 

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.

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