As I have mentioned many times, we don’t discuss secret stuff at Chautauqua. There is no “special sauce” revealed for investing or life not available here on the blog or in my book.
But we do kick around ideas and I sometimes explore concepts rattling around in my brain with the exceptional attendees Chautauqua always seems to attract.
The story goes, this idea originated with the Iroquois and is based on creating sustainability over the generations. It is commonly applied to environmental stewardship today, but it occurs to me that it applies equally to matters financial.
As I discuss in the Stock Series post on asset allocation and in the book chapter on the subject, one’s choice on this is very personal.
My allocation percentage has been 75/25 stocks/bonds which, given my age, is considered very aggressive. More recently, I have increased this to 80/20. More aggressive still.
But this is a matter of perspective. Here’s mine:
- I have long been an aggressive investor and the volatility that comes with this doesn’t bother me.
- I am not just investing for my lifetime, but also for my wife’s. I expect her to outlive me by a couple of decades.
- Even beyond her life expectancy, we are investing for our heirs. That adds many decades more.
Taking the next step, and thinking Seven Generations out, suddenly we are thinking not about investing for decades, but centuries. A perpetual Wealth Accumulation Stage, if you will.
At this point in the Chautauqua conversation attendee Bret, who was a returning alumni, said: “If that’s the case, shouldn’t you already be in 100% stocks?”
It was a bit of a challenge and, given my writings on this stuff in the past, he was spot on. More so even, given some additional factors I’ll get to shortly.
But first, is managing wealth across seven generations, or even a couple, a realistic goal? After all, “rags to riches to rags in three generations” is a common cliche.
I think it is, or at least it is worth attempting. While seeing fortunes squandered by irresponsible heirs makes for compelling story telling, my guess is the successes are more frequent. They are certainly more quietly achieved. This is likely especially true with the relatively modest amounts we are talking about.
After all, it worked for Benjamin Franklin. In 1794 he bequeathed an endowment of 1000 pounds to each of the cities of Boston and Philadelphia for the next 200 years. The results were spectacular.
So how would this work?
It starts with me. I no longer think of this money as mine. No longer is the objective to invest just for my lifetime. I think of myself as its custodian. Certainly, I am free to benefit from it, but only to the extent of staying well within the 4% rule. My first role is to nurture it and see it grow.
My second role is to educate my heirs in these principles:
- This money you will inherit is not your money.
- You are its custodian.
- It belongs to future generations.
- You have the benefit of it, consistent with staying well within the 4% rule.
- You have the obligation to nurture it and pass it on to the next generation.
- You have the obligation of educating the next generation as to their responsibilities for it and to the future generations.
- If at some point there are no children/heirs, it will be the responsibly of the last to arrange for the charitable distribution of the money.
I am already teaching my daughter that, whatever part of it comes to her, it is not hers either. She is merely the custodian of it for the next generation. And it will be her responsibility to teach her heirs the same.
Will this be foolproof and last “forever?” Of course not.
Is it a concept and approach worth implementing? I think so.
In a practical sense, this means my family and I can enjoy the fruits of the portfolio, but we must always tending it for the future and those who come after us.
So, back to Bret’s question. If I am thinking this long-term, why do I still hold 20% in bonds?
A few reasons, none of them especially good:
- I like having some “dry powder” for market drops. That’s how I went from 75% to 80% stocks: Selling off some VBTLX to buy more VTSAX during the December bear market.
- By all normal measures, 80/20 is already seriously aggressive for someone my age.
- Research shows an 80/20 allocation closely tracks the performance of 100% equities over time. Occasionally it even slightly outperforms.
- Inertia while I continue to think this thorough.
The first is bogus for the same reason dollar cost averaging any lump sum is. The second is too, based on just my immediate family’s probable lifespans. Although, the third redeems it a bit. So I cling to that, and to my inertia.
But, as I teased in this post above, there are still more reasons to have already gone 100% stocks.
Back in 2016, two remarkable things happened. One, I published The Simple Path to Wealth. Two, I finally got serious about monetizing the blog. So far, both have exceeded my expectations. Between the two, we no longer draw on the portfolio at all.
So why haven’t I acted? Because both the book and the blog revenue feel temporary. Book sales remain strong, but who knows for how long? Just recently, the blog lost one of its major sources of revenue. Although, we are planning to bring a new one on board.
But while those might be less than fully secure, we also have Social Security coming on board. My wife is already taking hers early and because she will in all likelihood outlive me, I’m delaying mine till age 70 for the bigger benefit. That is only a few short years away.
Once both are on stream, and with our increasingly modest spending as we age, blog and book revenue can drop considerably and, all combined, still cover our needs without tapping the portfolio.
Clearly, if we wanted to, moving to 100% equities is a sound option. But it is not the only one. I see three:
- Remain at 80/20. This is still very aggressive, provides excellent long-term growth and even, in some cases, outperforms 100% equities.
- Move to 100% equities. This would be the soul of simplicity, as easy as transferring our VBTLX holdings to VTSAX.
- Move to 100% equities with the Go Curry Cracker twist: 80% VTSAX and 20% international equities.
The first two are fairly obvious in their impact. But the third is worth a closer look. It would certainly give all those who’ve questioned my take on international investing a delightfully warm surge.
In considering such a move, am I signaling a change of heart on the need for international investments? Not really. My stand is still the same as in that post: Investing solely in the US has distinct advantages. However, the world is changing and at some point a world fund will be the best choice. Indeed, this is already my suggestion for my non-US based readers.
The US is the only market in the world that allows for this investing only domestically bias, and that is simply because the US is so dominant on the world economic stage. I expect this to remain the case for sometime and very likely for the rest of my lifetime. However, I tell my daughter to be alert because in the future this may well no longer be the case.
This doesn’t mean I expect the US to decline. Rather I expect the rest of the world to continue to improve, for the overall pie to continue to grow and for the US slice, while also growing, to simply become a smaller percentage.
So that’s what makes the GCC option intriguing:
- It moves the portfolio to 100% stocks.
- It introduces a world stock fund to replace the bonds. More volatility, but better performance over time.
- Vanguard’s VTWAX (the fund I’d use) is ~50% US market, so market exposure outside the US would be a very modest ~10% of the portfolio.
- With VTWAX in the portfolio, increasing the percentage in it when the time comes is that much easier.
- The ER for VTWAX is a modest .10% and Vanguard has been reducing it.
So that’s what’s rattling around in my brain just now.
No decisions as yet, but when I do I’ll add an addendum here.
In this post I say, “I expect the rest of the world to continue to improve…”
This, of course, runs counter to all the negativity we are constantly bombarded with in the media. Is the world perfect? Clearly, no. Is it vastly better than any other time in history? Absolutely. Given the choice, is there any other time you would chose to be born than now?