Your Survival Guy

Preparing your investments and family for when disaster strikes.

Disclosure

  • Home
  • Your Survival
    • EMP Threat
    • Tucker Explains
    • Newport Gas Outage
    • Water
      • Let There Be Water
    • Get Your Gun and Your Training Now
    • Satellite Phones
    • Communications
    • Navy SEAL Survival Kit
  • Your Money
    • Where to Keep Your Cash
    • Paris
    • Dead or Alive? The Future of Long-Term Investing
    • Is Vanguard too Big?
    • Cryptocosm and Life After Google
    • The Last Intelligence Report
    • The Truth Behind the S&P 500
    • RAGE Gauge
    • How Many “Retirees” Will Keep Working?
    • Your Retirement Life
  • Weapons
  • About Me
    • My Videos/Pics
    • Music
    • One of My Favorite CDs
  • You
    • Our Cabin on Kodiak, Alaska
    • If You Are in Pain, this May Help. It Helped Me.
    • How to Save for a Grandchild
    • FIRE! Financial Independence, Retire Early
    • Compound Interest
    • Arithmetic of Portfolio Losses
    • Maximum Portfolio Withdrawal Rate
    • An Efficient Frontier
    • Retirement Compounders
    • Counterbalanced Total Returns
  • Survive & Thrive
    • November 2019
    • October 2019
    • September 2019
    • August 2019
    • July 2019
    • June 2019
    • May 2019
    • April 2019
    • March 2019
    • February 2019
    • January 2019
    • December 2018
    • November 2018
    • October 2018
    • September 2018
    • August 2018
    • July 2018
    • June 2018
    • May 2018
    • April 2018
    • March 2018
    • February 2018
    • Welcome

Rich Grandchild, Poor Grandchild

November 29, 2019 By E.J. Smith - Your Survival Guy

By nuvolanevicata @ Shutterstock.com

This is one of my favorite investment pieces by the late Richard Russell:

Rich Man, Poor Man

By Richard Russell

The most popular piece I’ve published in 40 years of writing these Letters was entitled, “Rich Man, Poor Man.” I have had dozens of requests to run this piece again or for permission to reprint it for various business organizations.

Making money entails a lot more than predicting which way the stock or bond markets are heading or trying to figure which stock or fund will double over the next few years. For the great majority of investors, making money requires a plan, self-discipline and desire. I say, “for the great majority of people” because if you’re a Steven Spielberg or a Bill Gates you don’t have to know about the Dow or the markets or about yields or price/earnings ratios. You’re a phenomenon in your own field, and you’re going to make big money as a by-product of your talent and ability. But this kind of genius is rare.

For the average investor, you and me, we’re not geniuses so we have to have a financial plan. In view of this, I offer below a few items that we must be aware of if we are serious about making money.

Rule 1: Compounding: One of the most important lessons for living in the modern world is that to survive you’ve got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation — and money. When I taught my kids about money, the first thing I taught them was the use of the “money bible.”

What’s the money bible? Simple, it’s a volume of the compounding interest tables.

Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.

But there are two catches in the compounding process. The first is obvious – compounding may involve sacrifice (you can’t spend it and still save it). Second, compounding is boring — b-o-r-i-n-g. Or I should say it’s boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating!

In order to emphasize the power of compounding, I am including this extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306. In this study we assume that investor (B) opens an IRA at age 19. For seven consecutive periods he puts $2,000 in his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions — he’s finished.

A second investor (A) makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he’s 65 (at the same theoretical 10% rate).

Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A’s 33 additional contributions.

This is a study that I suggest you show to your kids. It’s a study I’ve lived by, and I can tell you, “It works.” You can work your compounding with muni-bonds, with a good money market fund, with T-bills or say with five-year T-notes.

Rule 2: DON’T LOSE MONEY: This may sound naive, but believe me it isn’t. If you want to be wealthy, you must not lose money, or I should say must not lose BIG money. Absurd rule, silly rule? Maybe, but MOST PEOPLE LOSE MONEY in disastrous investments, gambling, rotten business deals, greed, poor timing. Yes, after almost five decades of investing and talking to investors, I can tell you that most people definitely DO lose money, lose big time — in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in their own business.

RULE 3: RICH MAN, POOR MAN: In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN’T NEED THE MARKETS. I can’t begin to tell you what a difference that makes, both in one’s mental attitude and in the way one actually handles one’s money.

The wealthy investor doesn’t need the markets, because he already has all the income he needs. He has money coming in via bonds, T-bills, money market funds, stocks and real estate. In other words, the wealthy investor never feels pressured to “make money” in the market.

The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the “give away” table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are.

And if no outstanding values are available, the wealthy investors waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn’t mind waiting months or even years for his next investment (they call that patience).

But what about the little guy? This fellow always feels pressured to “make money.” And in return he’s always pressuring the market to “do something” for him. But sadly, the market isn’t interested. When the little guy isn’t buying stocks offering 1% or 2% yields, he’s off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he’s spending 20 bucks a week on lottery tickets, or he’s “investing” in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).

And because the little guy is trying to force the market to do something for him, he’s a guaranteed loser. The little guy doesn’t understand values so he constantly overpays. He doesn’t comprehend the power of compounding, and he doesn’t understand money. He’s never heard the adage, “He who understands interest — earns it. He who doesn’t understand interest — pays it.” The little guy is the typical American, and he’s deeply in debt.

The little guy is in hock up to his ears. As a result, he’s always sweating — sweating to make payments on his house, his refrigerator, his car or his lawn mower. He’s impatient, and he feels perpetually put upon. He tells himself that he has to make money — fast. And he dreams of those “big, juicy mega-bucks.” In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this “money-nerd” spends his life dashing up the financial down-escalator.

But here’s the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he’d have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser.

RULE 4: VALUES: The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value. I judge an investment to be a great value when it offers (a) safety; (b) an attractive return; and (c) a good chance of appreciating in price. At all other times, the compounding route is safer and probably a lot more profitable, at least in the long run.

Here’s how you can put Rich Man Poor Man to work for your grandchildren:

By wavebreakmedia @ Shutterstock.com

The short answer is, early. The earlier you can start saving for your grandchild, the greater the impact you’ll have on their life.

Take a trip with me. Let’s say you help a grandchild get into the savings game when they’re born by contributing $525 per year to an account you establish for them. (I favor UGMAs for this purpose). You diligently save each year for her first 21 years.

Then when she turns 22, she continues along the same path, saving $525 on her own each year until she’s 64.

Look at my table below to compare her success to someone who begins his investment savings at age 22 at double the savings rate of your granddaughter, saving $1,100 each year. Even though he’s saving twice as much each year, when he turns 64 he’ll have half as much as your granddaughter simply because you helped put time on her side with your early generosity (I’ve used a long-term expectation for stocks of 6% growth per year).

So, how do you save money for your grandchild? Easy, put time on their side.

The following two tabs change content below.
  • Bio
  • Latest Posts
My Twitter profileMy Facebook profileMy Instagram profile

E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com
My Twitter profileMy Facebook profileMy Instagram profile

Latest posts by E.J. Smith - Your Survival Guy (see all)

  • Your Retirement Life: “My life Has Always Been One of Very Good Fortune” - December 5, 2019
  • America’s Silent Army with 423M Guns - December 5, 2019
  • Banks Are Selling Your Private Info to Strangers - December 4, 2019
  • Survive and Thrive December: Rich Grandchild, Poor Grandchild - December 3, 2019
  • Here’s Why You Should Treat Your Disaster Cash like Gold - December 3, 2019

If you enjoy this post, email it to a friend:

  • Email

Related Posts

Trending

  • Is Your Cash Safe? Probably not This Safe
  • Navy SEAL Survival Kit: Assemble Yours Right Here Today at Yoursurvivalguy.com!
  • Phone Scams are Getting Better: Here's How to Protect Yourself
  • Rich Grandchild, Poor Grandchild
  • First Responders Say in a Big Disaster: "We're Not Coming"
  • Vanguard Founder Jack Bogle Sounds the Alarm on Index Funds
  • Vanguard is Telling You the Problem with Indexing
  • Liz Warren’s 158% Tax Rate
  • Where You Won’t Find Liz Warren
  • RIP Jake Burton

YOUR SURVIVAL GUY MUST READS

  • The Best States for Retiree Taxation
  • How Many “Retirees” Will Keep Working?
  • Is Vanguard too Big?
  • Fidelity Investments: Why it’s #1
  • Tucker Explains: Poverty Doesn’t Cause Instability. Envy Does.
  • Is an EMP Attack Imminent?
  • Your Retirement Life: Choosing Where to Retire
  • Living Your Best Life: FIRE! (Part I)
  • This Money Market Fund is Paying 47 Times More than its Competition
  • Air Force Tells Americans They Aren’t Taking the EMP Threat Seriously Enough

Copyright © 2019 | Terms & Conditions

loading Cancel
Post was not sent - check your email addresses!
Email check failed, please try again
Sorry, your blog cannot share posts by email.