The Tragedy of the Million-Dollar Inheritance
By: Brian A. Magnan CFP®, AIF®, CEPA®
Director – Magnan Family Wealth Management
It was the beginning of 2015. Harry’s only interactions with anyone about his finances up until this point were with the advisor at his bank. His mother had passed away in 1999 and left him $1 million. He loved her very much and prior to her passing, vowed to her not to lose any of it. So, working with the bank advisor, they decided to leave it in a money market fund. Harry also could never bring himself to spend any of the inheritance. That’s not essential to the lesson of the story, but it illustrates the stranglehold the inheritance had on him. Harry, being the good son he is, thought he was doing everything right. Keep in mind, this was 2015, so his pride in avoiding the 99-02 and 07-09 declines in the S&P 500 of 50% each, was overflowing.
Then he met me.
The tragedy of the story is Harry’s definition of conservative. He should not be ashamed though. The society we live in and my compliance department call this “Conservative” as well. Not that you asked, but I call 100% in money market over 15 years “Dying a Slow Death”.
You see, his “preservation” strategy that he was so proud of, was actually being destroyed by the hidden enemy of inflation. The Consumer Price Index (our measurement of inflation) from the end of 1999 through 2014 averaged 2.24% yearly. His bank hadn’t tracked his historical total return (I wonder why, wink) but money market funds on average returned less than 2% per year over this time frame. It is worth pointing out that interest from a money market fund is taxed as income - not the favorable rate of dividends or capital gains. After taxes and inflation, Harry’s net return was less than ZERO!
I ran a hypothetical illustration for Harry. It illustrated that had he invested his inheritance into a diversified global portfolio of companies of various sizes and styles at the end of 1999 instead of money market, his one million dollars would have grown to $2.4 million by the end of 2014, or about 6% a year.
Keep in mind, this 15-year period encompasses two of the worst declines equities have ever experienced. Remember the aforementioned 99-02 & 07-09 declines of greater than 50% occurred in this span. Yet, despite these two massive declines, the diversified equity portfolio wins out.
The lesson for all of us is - preserving units is a wealth-destroying mistake!
Do you know anyone with too much cash or CDs?
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Magnan Family Wealth Management is a separate entity from WFAFN.
Director – Magnan Family Wealth Management
I have changed the names to protect the identity of the folks involved in the story. I do believe broken things stay broken in the dark. So in that spirit, if we bring this story to light, maybe we can help someone that you care about.
It was the beginning of 2015. Harry’s only interactions with anyone about his finances up until this point were with the advisor at his bank. His mother had passed away in 1999 and left him $1 million. He loved her very much and prior to her passing, vowed to her not to lose any of it. So, working with the bank advisor, they decided to leave it in a money market fund. Harry also could never bring himself to spend any of the inheritance. That’s not essential to the lesson of the story, but it illustrates the stranglehold the inheritance had on him. Harry, being the good son he is, thought he was doing everything right. Keep in mind, this was 2015, so his pride in avoiding the 99-02 and 07-09 declines in the S&P 500 of 50% each, was overflowing.
Then he met me.
The tragedy of the story is Harry’s definition of conservative. He should not be ashamed though. The society we live in and my compliance department call this “Conservative” as well. Not that you asked, but I call 100% in money market over 15 years “Dying a Slow Death”.
You see, his “preservation” strategy that he was so proud of, was actually being destroyed by the hidden enemy of inflation. The Consumer Price Index (our measurement of inflation) from the end of 1999 through 2014 averaged 2.24% yearly. His bank hadn’t tracked his historical total return (I wonder why, wink) but money market funds on average returned less than 2% per year over this time frame. It is worth pointing out that interest from a money market fund is taxed as income - not the favorable rate of dividends or capital gains. After taxes and inflation, Harry’s net return was less than ZERO!
How did I help Harry? By changing his definition of conservative. For long-term dollars - it’s not preserving units of currency (principal) - it’s preserving your purchasing power. Ownership in companies has provided the greatest margin of long-term total return in excess of inflation. (Remember, equities also happen to be taxed at a lower rate, but that’s just piling on). If my compliance department is listening - and you know they are - this is my case for an equity portfolio designated for lifetime income to be deemed “conservative”.
I ran a hypothetical illustration for Harry. It illustrated that had he invested his inheritance into a diversified global portfolio of companies of various sizes and styles at the end of 1999 instead of money market, his one million dollars would have grown to $2.4 million by the end of 2014, or about 6% a year.
Keep in mind, this 15-year period encompasses two of the worst declines equities have ever experienced. Remember the aforementioned 99-02 & 07-09 declines of greater than 50% occurred in this span. Yet, despite these two massive declines, the diversified equity portfolio wins out.
The lesson for all of us is - preserving units is a wealth-destroying mistake!
Do you know anyone with too much cash or CDs?
Index returns do not represent investment returns or the results of actual trading nor are they forecasts of expected gains or losses a portfolio might experience. Index returns reflect general market results, assume the reinvestment of dividends and other distributions, and do not reflect the deduction of fees, expenses or taxes applicable to an actual investment. index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Magnan Family Wealth Management is a separate entity from WFAFN.