Many of our clients refer to themselves as “wealth managers.” For that reason alone, it’s important to define what financial wealth really is and how it is obtained. Fortunately, there is a very relevant article on MarketWatch today by Jennifer Waters that is a good basic discussion. First up, a basic definition of wealth:
“Wealth is what you accumulate, not what you spend,” according to Thomas Stanley and William Danko, the authors of the seminal tome on America’s wealthy “The Millionaire Next Door,” first published in 1996.
The emphasis is mine. I think this part is so often overlooked—not by the truly wealthy, but by the general public. The big spender is usually not actually wealthy, but merely has a high current income. In fact, people are often wealthy precisely because they don’t overspend:
…most of those with big bucks live well under their means — think about Warren Buffet still living in that modest Omaha home — and they put their money instead toward investments that help them stockpile more wealth.
“It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes,” the authors wrote. “Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline.”
Is this shocking to anyone? No—but it’s a good reminder. You might get lucky with an inheritance, but wealth is rarely gained by winning the lottery. Wealth is achieved by working hard, living under your means so that you can save, and then putting the money toward investments that help you stockpile more wealth.
Having a high income can obviously help you save, but a high income alone is no guarantee of eventual wealth, as the article points out:
People with high incomes who spend all that money are not rich; they’re just stupid.
A wise advisor once pointed out to me that, “Making the first million is difficult. Making the second million is inevitable.” What he was getting at, I think, is the point that the first million requires discipline, patience, and investing acumen, especially when you’re starting with nothing. It takes quite a while for the snowball to accumulate as it rolls downhill. If you are fortunate enough to acquire the first million, your saving and investing habits are well-established and ingrained, so the next million is relatively easy. The second million is typically a lot faster than the first—that’s the way compounding works.
Once earned, wealth needs to be protected. Intelligent portfolio construction is one way that advisors can add a lot of value to clients:
“The wealthiest clients have very, very diversified portfolios that go way beyond just stocks and bonds into hedge funds, currencies, commodities and emerging markets,” said Leslie Lassiter, managing director of the JPMorgan Private Wealth Management.
Flexible exposure to good asset classes at appropriate times can go a long way toward enhancing client wealth. Whether you use something like our Global Macro strategy, or mix-and-match separate accounts or mutual funds is not so important. The critical idea is making those investments work together toward the client’s end result.
The biggest objection of most clients boils down to this: they are very concerned that they won’t have fun if they live below their means. I think this reflects a fundamental misunderstanding of what makes us feel good about our lives. In the long run, spending more on a nicer car or another pair of shoes isn’t going to help. In study after study, what gives meaning and enjoyment to our lives is the number and quality of our personal relationships. That’s where real wealth is found.