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Fortune Keeper’s Dilemma: The Three “Whys”

About a year ago, in California, I had the great pleasure of giving a TEDx talk on investing. It was a warm April evening, and the organizers generously hosted an outdoor book signing for me. Over the next couple of hours about a hundred attendees of all ages shared with me not just their impressions of the talk, but also their stories about money, wealth, and investing. There were college students who had made their first money buying a stock, parents saving for their kids’ educations, and those who had just inherited wealth from their grandparents. Everyone had a story, but most of them also had a question: if building and keeping a family fortune is such a challenge, why should anyone bother?

In a strange way, talking about money is the last taboo. Business schools around the world teach how to earn it and make it grow but no one teaches how to live with money. It’s personal, intimate, and emotional. Egos and traditions (national, family, religious) are involved. Thanks to my professional commitment to family wealth preservation, I’ve heard many fascinating stories from veteran wealth creators as well as their inheritors. I like to think that my exposure to the values and the process involved have given me a helpful perspective.

Over the years I have come to know many people I think of as “fortune keepers.” One thing they have in common is three fundamental priorities. Fortune keepers nurture their wealth:

• for themselves
• for their loved ones
• for their communities and their causes

Or for all three of those reasons in one combination or another. Let’s look at them one by one.

1. For yourself: Why secure your own future?

Your nest egg

This comes up both in conversations with those early in their career who experience sudden wealth, and with others who are getting ready to slow down and retire. How can I make my money last, how long will it last, when can I retire – these are some of the questions we hear. The source of the wealth may come from a business or a career success, or an inheritance or both. If it comes over time, earned, and saved, one can ease into the new responsibilities and challenges. Often enough though, it’s a fairly sudden event – sale of a business or a piece of it, large share compensation from a generous employer, or meaningful inheritance from a loved one. We know that in the end, all we want is to enjoy the fruits of our work or the blessings that can come with inheritance received from our loved ones; but where do we start?

Risks and Rewards: the Happy Middle

If a large sum comes to us with a low likelihood of repeating the event, we need to look at the capital as irreplaceable. This is capital that must last for decades. Instinctively, we might choose to do nothing, holding it close and letting it sit earning very little. The trouble is that money loses value over time. A moderate 3% inflation will halve the buying power of a dollar in 25 years! Taking huge risks with that capital might expose us to unnecessary dangers, but inaction may do equal damage. A happy middle is the path we at Sicart like to advise. We stick to our investment discipline while we compound and grow capital over time, while avoiding taking risks of a permanent loss.

Self-reliance or dependence?

We all want to live in peace, security, and comfort. We seemingly have two choices. We can either rely on ourselves to provide those good things, or trust that the government will take care of us when we need help. It is the latter scenario that may get us off the hook, and gives us a false sense of security that we don’t have to worry about our financial future.

Self-reliance used to be the only choice, and still is for many today. I was reminded of this recently when I had the opportunity to visit what’s left of an immigrant waiting room in New York City. This was the place where, after a long sea voyage, newcomers from abroad waited for medical and legal inspections that would permit them to settle in America. They had come with a sense of responsibility and a lofty dream. Today, in a growing part of the developed world, citizens believe the government is there to help, provide, and secure their well-being no matter what. That’s a big promise, and a risky assumption.

Today, U.S. Social Security offers full benefits starting at the age of 66-67, while average life expectancy is around 80 years. That’s very different than the retirement age of 70, and the life expectancy of 45 under Otto von Bismarck’s first retirement pension almost 150 years ago.  Today, the number of retired workers grows by a whopping 10,000 every day. According to the Social Security Administration (2017 Annual Report). benefits in the U.S. will start running deficits in three short years, and deplete its reserves by the 2030s.

The younger generation today, with their distrust of institutions, may instinctively grasp how their future could be very different from that of their parents, and how they will have to be more self-reliant. FIRE (Financial Independence, Retire Early) proponents that recently brought new interest and excitement around saving and investing, also choose to grow their nest eggs on their own, striving for their financial independence at a young age instead hoping for government checks later.

On one hand, the benefits will be under pressure, while on the other hand, we live longer and longer, thus needing more income for more years. Meanwhile while the biggest expense of later years – health care costs — is rising. The Centers for Medicare and Medicaid Services report that the annual health care spending for those 65 and older is 5 times higher than spending per child.

Dreaming big!

The pressure on government entitlement programs like Medicare and Social Security might be reason enough to opt for self-reliance. We could actually take this thinking a step further, and think of our baseline living expense as a benchmark. It’s helpful to know that the average Social Security benefit for retired workers is around $17,000 a year. How much would we need to maintain a lifestyle we are accustomed to? Will the government pension match our expectation?

For anyone enjoying the blessings of sudden wealth at any point of their life, it’s worth asking – how much do I need to feel comfortable? And how long might I need to make that last?

If our healthier lifestyles add few more decades to our life expectancy, and technological innovation makes healthcare increasingly cheaper, your nest egg will not go to waste. Instead, it will serve you longer, and you will have more to leave behind or give away. What a great feeling it is to have that kind of choice, that kind of freedom!

2. For your loved ones: Why pass it on?

We all wish the best life possible for our loved ones, especially in the next generation. The immigrants waiting in that cramped room on Ellis Island in New York Harbor sought new opportunities for their children and communities. Those selling a business today, cashing a large pay package or nurturing a family nest egg, have the same hopes and wishes for the next generation.

The biggest advantage: education

In many conversations with entrepreneurs, wealth creators, and inheritors, we at Sicart Associates hear how much they value education. In my own family, my parents and grandparents always told us that education was something that we would have even if we lost everything else. There was no question that I had to finish college, and once I got going, I walked away with two Masters degrees from two different countries. I was lucky enough to get generous scholarships, and benefit from public education in Europe. However, my experience is very different from that of many American friends. With the cost of college education skyrocketing over the last 30 years, at the same time as wages stagnated, affordability becomes an issue. To address this problem, many U.S. students take out loans which recently reached a grand total of $1.5 trillion for 44.7 million borrowers. The current trend seems unsustainable, but unless something major changes, we can expect the next generations to be burdened with ever higher cost and bigger loans.

Gainful employment

Worse yet, as young people are trying to gain educations and develop marketable skills, the jobs they are preparing for may not even exist. Last year’s study from Gartner Consulting suggests that as many as 4 out 10 jobs could be replaced by Artificial Intelligence in the next 10 years.

What’s more, labor markets are consolidating. A Brooklyn-based web designer faces competition from all over the globe, and rates for work delivered are becoming more international rather than local. Where work is done may soon be irrelevant. That doesn’t bode well for wage growth. Trade wars and the decline of manufacturing have captured the public imagination but the international service economy may face even bigger challenges. There might be no way to avoid them, but it might be wise to stay agile, and adapt.

Expensive education, disappearing jobs

Given the changing global employment picture, in the not-too distant future young people may begin their careers with less-favorable conditions than what their parents found. Some believe we are already there. If that’s the case, and if we want to ensure that the next generation has the best life possible, leaving something behind suddenly sounds like a much better idea!

Warren Buffett’s wise take on this subject is: “You should leave your children enough so they can do anything, but not enough so they can do nothing.” Providing them with education, safety, and support as they face an ever-changing labor market might be a good place to start.

The last few decades have witnessed the greatest wealth creation in history. The greatest wealth transfer is expected to occur over the next few decades. Many more households than ever will take on the challenge of multi-generation wealth preservation. As investment advisors with half a century of experience guiding family fortunes over many generations, we are happy to help.

3. For your community and your causes, and the world at large – Why give it away?

A thousand ways to give back

At different times, I have donated money to causes large and small: from museums to schools to a group of crazy world travelers raising money to sail around the world. I love the oceans, and when I had the chance few years ago, I volunteered to clean up the bottom of a little bay, picking up plastic bottles and cans on Earth Day while scuba diving in the Caribbean. There are thousands of ways to give back, and time, skills, and effort are just as welcome as money.

You or the government?

Attitudes toward giving vary around the world. In the US, it’s more visible, in Europe, more private. The attitude toward financial success and risk taking varies, too. I can say from first-hand experience that in Europe, many believe that the government is already doing necessary pro bono work through collecting big taxes from everyone’s paycheck. Statistics show that countries with more prominent welfare programs have a substantially smaller level of charitable giving. Europeans tend to believe that government should be a vehicle for redistribution. Are we all off the hook, then?

Philanthropy means love of humanity

But of course, the government can’t take care of everything. In fact, small, nimble organizations can sometimes better support causes that matter to you.  Many borrow the best practices from the business world to bring success in the non-profit arena. When I wrote a series of articles entitled  Blessings and Curses of Inherited Wealth, I interviewed authors, inheritors, wealth creators, and foundation executives. I heard how philanthropy helped many give back, find a fulfilling pursuit, and feel a part of the community. I keep learning how today there are many more ways to give, and we can do it with better transparency.

How to give?

You may decide that your wealth can serve better the world at large, and choose to give most or all away. In 2010, Warren Buffett and Bill Gates announced inspiring the wealthiest people give at least half of their wealth away to philanthropic causes.

Even if you decide to give some or most away, it would be even more helpful if initial gift continued to grow over decades as it serves the causes you hold highly for generations to come.

A 100 years of giving

The example of Andrew Carnegie comes to mind. Once he sold Carnegie Steel, he took on a whole new challenge – giving it all away. Libraries, education and world peace were the most important to him. He donated to a number of organizations in the US and the UK, but his largest donation really stands out. It went to the Carnegie Corporation of New York. At the time, this was the largest charitable trust which started with $125 million in 1911-1912. Despite a hundred years of giving it still has $3 billion (2019) which continue to grow, while it promotes “the advancement and diffusion of knowledge and understanding” – as Andrew Carnegie intended.

As investment advisors, we have had experience not only keeping and growing family fortunes for the benefit of original owners, but also for many generations that followed, and for the communities and causes they hold dearly.

Your Path

When it comes to keeping and growing a family fortune, any combination of the three reasons above is possible, and may feel right for you. Your individual circumstances, your family realities, and your generous giving will help shape the choices you make.

Hope for the best, prepare for the worst?

In life and investing, it pays to be optimistic. If we didn’t believe in a bright future, we’d live paycheck to paycheck without investing. But we’d rather be surprised on the upside than painfully disappointed. If healthcare costs fall over time, and we live healthier lives and need less medical care, we’ll have lower expenses, fewer worries, and more money to spend on travel or new experiences. If education costs drop, and all kids have the same access and opportunities, they’ll use their college funds to travel the world and start businesses. If labor market flourishes with AI, and wages rise, your saved capital will let you invest in new businesses relying on said AI. It’s a win-win. Whatever the future may hold, it pays to plan ahead, building and keeping a family fortune for you, your loved ones, your community and your causes.

Happy Investing!

Bogumil Baranowski | Published: April 18^th, 2019

Disclosure: This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.