This department is designed to help readers to a better understanding of the general business conditions which affect their investments. It is obviously impossible to give advice as to specific investments.
by MERRYLE STANLEY RUKEYSER
JIM BLAKE 1 handled the money he drew out of his business more cautiously than he had formerly treated his savings, because he now felt that he was taking enough risk in the business.. Accordingly, he began putting 70 per cent of his new investment funds into high-grade bonds. With the residue, he continued buying dividend-paying stocks of leading companies in industries that were progressing.
Meantime, his son and daughter had entered college. The educational-fund endowment policies he had taken out at their birth matured, and for four-year periods the company was ready to pay sums to meet the aggregate demands of the bursar for educating each of the Blake children. Fortunately Jim did n’t need this money and was able to pay his children’s tuition out of his own current earnings. Accordingly, at fifty-five, he took this $10,000 cash fund and bought a joint and survivorship annuity for his wife, aged fifty, and himself. This would pay them $488.88 a year for life, as long as either or both of them lived.
In addition, Jim had the $563.35 he formerly paid each year in premiums on the educationalfund policies, to provide an extra measure of security for his wife and himself. He did this by taking out two retirement income policies, one on his own life and one on his wife’s. Using the $280.45 annual premium which for eighteen years he had paid on the matured educational-fund policy for the benefit of his son, he purchased, at the age of forty-nine, a retirement income policy which, beginning at the age of sixty-five, would pay him $36.42 a month, or $437.04 a year, for life.
Moreover, two years later, when the educational-fund policy on his daughter matured, Jim allocated the annual premium of $282.90 to a new retirement income policy for his wife, who was at that time forty-six. The policy provided a monthly income for her beginning at the age of sixty of $25.61, or $307.32 a year, for the remainder of her life,
Thus he began arranging his affairs in preparation for the day when he should retire. That day came when Jim reached the age of sixty-five, in accordance with a schedule which he had laid out long in advance. His investment and insurance estate by this time totaled approximately $100,000, and he felt he could afford to shift some of his responsibilities to younger shoulders. So he turned over the active management of his store to his children, remaining only in an advisory capacity without salary. His son-in-law represented his daughter in the store.
At this juncture, Jim made a final reshuffling of his personal finances in order to be able to live comfortably for the rest of his life on his investment income. This represented a fulfillment of a boyhood ambition.
By this time Jim had attained philosophic objectivity. He no longer yearned to become an ultra-wealthy man. He did n’t think it worth while to risk the security which he had and needed for the promise of exceptional affluence, which he did n’t have and did n’t crave. Whereas, earlier in life, growth and accumulation were the important objectives, now his point of view was almost the opposite: he wanted to hold on to what he had. He sought to minimize risk and establish an assured income.
Having made his children secure with the business, he aimed to get the highest possible income, consistent with safety, out of his investment fund. In this spirit he sold securities in order to buy another joint and survivorship annuity, on which, at the current respective ages of his wife and himself, he could get safety and 6 per cent. Of course he knew that this high return represented not only interest but also a gradual extinction of principal. But he was attracted by the company’s promise to maintain the income payments as long as the couple or either one of them survived.
However. Jim was too canny to put all his eggs in one basket. He recognized that the insurance company was investing his funds primarily in high-grade bonds and mortgages. While this method would assure him and his wife a stipulated number of dollars for life, it provided no guaranty that the cost of living would remain constant and that the dollars of the future would be equal in purchasing power to the dollars of the present.
He recalled that in post-war Germany thrifty annuitants, after a lifetime of patient saving, were frustrated by the inflation which made their remittances in marks worthless. He was interested not merely in nominal security, but in real security. He knew that what he wanted was purchasing power, rather than a mere arbitrary number of dollars, and he realized that common stocks are more likely to fluctuate in accordance with changing values in the dollar than are highgrade bonds. In other Words, a portfolio of diversified prime common stocks synchronizes better with future purchasing power than do high-grade bonds.
At the same time, at his age, he no longer wanted to assume the risks of investment management. He didn’t want to have his security upset by hazards in particular enterprises. Therefore he effected a compromise. To the extent of 60 per cent of his fund, he obtained an assured return in dollars through annuities and highgrade bonds. To the extent of the remaining 40 per cent, he continued in dividend-paying common stocks with a future.
He divided his $100,000 as follows: $40,000 in dividend-paying common stocks; $10,000 in highgrade bonds; $10,000 in joint and survivorship annuity purchased when he was fifty-five; $40,000 in another joint and survivorship annuity, which, taken out at his present age of sixty-five, his wife now being sixty, would pay them $2421.12 a year as long as either of them lived.
Out of his maturing life insurance and building and loan shares, he added to his capital fund. As he turned sixty-five, his first policy — the $2000 endowment policy taken out at the age of twenty-two — fulfilled its purpose.
At this juncture, desiring to free income for current uses rather than for future saving, he canceled all but $5000 of bis $13,000 ordinary insurance policy, taken out at the time of his marriage. This provided another $4396.08 as its cash surrender value. This sum lie added to his security portfolio and it helped to make up his $50,000 in stocks and bonds. The remaining $5000 he continued in effect, paying $111.80 in gross annual dividends. His objective was to provide a cash fund on his death to pay funeral expenses and to clean up any current debts that he might, leave, including allowance for death duties, which he estimated at $3000.
After this reshuffling of the family finances as Jim Blake went through the transition period from activity to retirement, the total resultant income on which Ids wife and he could live in their old age consisted of the following: —
$2000 — dividends from $40,000 in stocks at an average of 5 per cent
$400 — interest from $10,000 in bonds at an average of 4 per cent
$488.88 — income from the $10,000 joint and survivorship annuity purchased when Jim was fifty-five
$2419.20 — income from the $40,000 joint and survivorship annuity newly purchased at age sixty-five
$744.39 — income from his own and his wife’s retirement income policies purchased when he was forty-nine and site forty-six
$6052.44 —annual total
In addition to his cash income, Jim had other resources. First, he owned his home tree and clear, and therefore had to pay no rent, but only taxes and maintenance. Secondly, he had a hidden asset in his profitable business, which he had already given to his children as a gift. He intended to take no further income from the business, but the children definitely understood that, in case of an upset in his investment plans, the business was to be considered a backlog for their parents.
Even without this resource, Jim believed that he had assured his wife and himself a steady income with respect to the number of dollars to be received each year. At the same time, the common stocks in his portfolio made his investment plan flexible enough to take care of important fluctuations in living costs and to provide a hedge against inflation. He felt that he had assurance not only from the standpoint of dollars, but also from the criterion of purchasing power.
For the first time. Jim found nearly 100 per cent of his income available for spending. Until now he had always deducted a substantial portion as reserves against the contingencies of the future.
Jim also discovered that he had a new ingredient in his income — namely, an abundance of leisure. Thus he found himself able to indulge his yearning for world travel. His income, though too moderate for flamboyant expeditions, was ample enough for the relatively simple requirements of his wife and himself.
To his devoted children, who had already reached maturity, Jim was leaving not only the business and his $50,000 in stocks and bonds (after both parents passed on), but also — and more important, in his opinion — his habits of frugality, systematic thrift, and planned investment.
Although he had lived through six or seven panics, had made mistakes and incurred losses, these principles had endured and constituted his most cherished assets: —
The habitual reinvestment of dividends and interest; the systematic purchases and attempts at longterm planning; the principles of diversification and insurance; the determination to convert each year a specified portion of income into capital, even at the cost of temporary self-denial; and rugged insistence I that it is a personal obligation to proride against the contingencies of old age and retirement.
- This is the concluding installment of a series presenting the life story of an investor as he moves around the circle from youth to old age. — EDITOR↩