Picture This
IN THE ANCIENT WORLD, before the invention of the printing press, a strategy for remembering information was to build a so-called memory palace. The idea was to associate words with images. Even today, this is how participants in memory competitions can achieve feats like reciting a thousand digits of pi.
Similarly, when it comes to personal finance, I’ve found that certain images can help illustrate important concepts. These are the ones I rely on the most:
1. On Jan. 31, 1940, the very first Social Security check was issued to a woman named Ida May Fuller, who had just turned 65. Her first monthly check was just $22.54, but she continued to collect benefits for the next 35 years, until she died at age 100. Over the course of her long retirement, she collected nearly $23,000 in benefits. If you’re wondering whether it makes sense to delay Social Security so you receive a larger check—guaranteed for life, with adjustments for inflation—it may be worth keeping Ida Fuller in mind.
2. In his book The Psychology of Money, Morgan Housel notes that the concept of compound interest is difficult because the math defies easy mental arithmetic. “If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72).” But, Housel says, “If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode.”
What’s another way to visualize the concept of compound interest? Hard as it is to believe, if you fold a piece of paper in half and then fold it again, and continue folding it 40 more times, the resulting stack of paper would be so high that it would reach the Moon. This illustrates the importance of continuing to stay invested—even during periods of market volatility—so your portfolio can benefit from the power of compounding.
3. In summer 1789, George Washington fired his postmaster general, Ebenezer Hazard. Looking for a new profession, Hazard started an insurance company, which he called the Insurance Company of North America (INA). It’s been through a number of acquisitions over the years, but it still exists today, more than 200 years later. And while INA is the oldest, many insurance companies are 100 or more years old.
What explains this longevity? Credit a financial strategy known as asset-liability matching. To avoid shortfalls, insurers earmark specific funds for each set of expected future claims. While this may be an overly engineered solution for everyday household finances, the concept of earmarking funds is nonetheless useful for financial planning.
4. In the late 1920s, when the stock market was booming, Yale University economist Irving Fisher declared that the stock market had reached a “permanently high plateau.” Just nine days later, the market crashed, ultimately dropping 89% from its peak. Fisher’s proclamation is, in my mind, the best illustration of the danger of recency bias, which is the tendency to extrapolate from recent experience.
5. If you’re in retirement, and the stock market declines, how can you avoid selling when the market is down? The best approach, in my view, is what’s known as the bucket strategy. Instead of thinking about your portfolio as one large pile of savings, segregate it into two or three mental buckets. When the stock market is doing well, you can sell stocks to meet your living expenses. When the market is low, you can lean on your bonds. And when both stocks and bonds are down, as they were in 2022, you can draw from the cash bucket.
6. You’ll notice that the three buckets I proposed don’t include commodities, such as gold. Why not? Warren Buffett once provided this illustration: “If all of [the gold in the world] were melded together, it would form a cube of about 68 feet per side.” At the time, Buffett said, that cube would have been worth about $10 trillion. For that same $10 trillion, an investor could buy all of the farmland in the U.S., plus a fair number of public companies, all of which would produce substantial income each year. By contrast, the cube of gold wouldn’t produce anything.
Gold, Buffett says, “just sits there.” This cube of gold illustrates a concept known as intrinsic value, which refers to the ability of an asset to produce income. Because gold—like cryptocurrency—doesn’t produce income, it’s worth only what the next person is willing to pay. That can make its price volatile and unpredictable.
7. You may be familiar with the Breakers, the 125,000-square-foot Newport mansion built in the 1890s by Cornelius Vanderbilt. At the time, the Vanderbilts were the wealthiest family in the U.S. But just 50 years after Cornelius’s death, the family’s wealth was essentially gone, owing to overspending. The Breakers is thus a reminder that financial planning can be important even for the wealthiest families.
8. When she died in 2016, a Brooklyn woman named Sylvia Bloom left behind an estate worth $9 million. More remarkable than the number, however, was the fact that Bloom had worked as a secretary and never earned a high income. Stories like this appear from time to time. Invariably, the phenomenon is attributed to extreme frugality.
But that’s only part of the story. The more important element, I think, is time. Mrs. Bloom lived to 96. It’s been the same with other notable cases, where someone of modest means was able to leave a huge fortune. While frugality doesn’t hurt, it’s not necessarily the path to wealth. Sometimes, it’s longevity that plays the larger role.
9. Why are exchange-traded funds (ETFs) typically more tax-efficient than traditional mutual funds? With traditional funds, investors can redeem their shares for cash at any time. That’s a good feature, but this can force a mutual fund’s manager to sell holdings, incurring a tax bill that must be shared pro-rata with all of the fund’s shareholders.
This doesn’t happen with ETFs. The way to think about an ETF is that it’s like a basket of investments that’s passed around among investors but, importantly, is never handed back to the issuing fund company for redemption in cash. That means there is never forced selling in an ETF, and that’s a key advantage.
10. On April 1, 1976, Steve Jobs and Steve Wozniak founded Apple. What’s less well known is that they initially had a third partner, a fellow named Ronald Wayne. But Wayne quit just a few weeks after the company got started, and also sold his 10% stake. When he sold his shares, Wayne received just $2,300.
While it’s easy to criticize Wayne’s decision with the benefit of hindsight—some have called it the worst stock trade ever—the reality is that most financial decisions have an element of uncertainty. That’s why I recommend, wherever possible, a “center lane” approach. In Wayne’s case, for example, he could have sold just half his shares.
11. One of the reasons the stock market is endlessly frustrating is because its movements often seem random. At the same time, we’re told there’s a connection between stock prices and corporate profits. To help square this circle, Benjamin Graham, the father of investment analysis, offered this illustration: In the short term, he said, the stock market is like a voting machine. In other words, it’s a popularity contest and not necessarily rational.
But over the long term, the market is more rational. It becomes a “weighing machine,” Graham said. Especially during times of uncertainty, I find this illustration helpful. It gets us to look beyond the news of the day, so we stay invested long enough for compounding to work its magic.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Similarly, when it comes to personal finance, I’ve found that certain images can help illustrate important concepts. These are the ones I rely on the most:
1. On Jan. 31, 1940, the very first Social Security check was issued to a woman named Ida May Fuller, who had just turned 65. Her first monthly check was just $22.54, but she continued to collect benefits for the next 35 years, until she died at age 100. Over the course of her long retirement, she collected nearly $23,000 in benefits. If you’re wondering whether it makes sense to delay Social Security so you receive a larger check—guaranteed for life, with adjustments for inflation—it may be worth keeping Ida Fuller in mind.
2. In his book The Psychology of Money, Morgan Housel notes that the concept of compound interest is difficult because the math defies easy mental arithmetic. “If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72).” But, Housel says, “If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode.”
What’s another way to visualize the concept of compound interest? Hard as it is to believe, if you fold a piece of paper in half and then fold it again, and continue folding it 40 more times, the resulting stack of paper would be so high that it would reach the Moon. This illustrates the importance of continuing to stay invested—even during periods of market volatility—so your portfolio can benefit from the power of compounding.
3. In summer 1789, George Washington fired his postmaster general, Ebenezer Hazard. Looking for a new profession, Hazard started an insurance company, which he called the Insurance Company of North America (INA). It’s been through a number of acquisitions over the years, but it still exists today, more than 200 years later. And while INA is the oldest, many insurance companies are 100 or more years old.
What explains this longevity? Credit a financial strategy known as asset-liability matching. To avoid shortfalls, insurers earmark specific funds for each set of expected future claims. While this may be an overly engineered solution for everyday household finances, the concept of earmarking funds is nonetheless useful for financial planning.
4. In the late 1920s, when the stock market was booming, Yale University economist Irving Fisher declared that the stock market had reached a “permanently high plateau.” Just nine days later, the market crashed, ultimately dropping 89% from its peak. Fisher’s proclamation is, in my mind, the best illustration of the danger of recency bias, which is the tendency to extrapolate from recent experience.
5. If you’re in retirement, and the stock market declines, how can you avoid selling when the market is down? The best approach, in my view, is what’s known as the bucket strategy. Instead of thinking about your portfolio as one large pile of savings, segregate it into two or three mental buckets. When the stock market is doing well, you can sell stocks to meet your living expenses. When the market is low, you can lean on your bonds. And when both stocks and bonds are down, as they were in 2022, you can draw from the cash bucket.
6. You’ll notice that the three buckets I proposed don’t include commodities, such as gold. Why not? Warren Buffett once provided this illustration: “If all of [the gold in the world] were melded together, it would form a cube of about 68 feet per side.” At the time, Buffett said, that cube would have been worth about $10 trillion. For that same $10 trillion, an investor could buy all of the farmland in the U.S., plus a fair number of public companies, all of which would produce substantial income each year. By contrast, the cube of gold wouldn’t produce anything.
Gold, Buffett says, “just sits there.” This cube of gold illustrates a concept known as intrinsic value, which refers to the ability of an asset to produce income. Because gold—like cryptocurrency—doesn’t produce income, it’s worth only what the next person is willing to pay. That can make its price volatile and unpredictable.
7. You may be familiar with the Breakers, the 125,000-square-foot Newport mansion built in the 1890s by Cornelius Vanderbilt. At the time, the Vanderbilts were the wealthiest family in the U.S. But just 50 years after Cornelius’s death, the family’s wealth was essentially gone, owing to overspending. The Breakers is thus a reminder that financial planning can be important even for the wealthiest families.
8. When she died in 2016, a Brooklyn woman named Sylvia Bloom left behind an estate worth $9 million. More remarkable than the number, however, was the fact that Bloom had worked as a secretary and never earned a high income. Stories like this appear from time to time. Invariably, the phenomenon is attributed to extreme frugality.
But that’s only part of the story. The more important element, I think, is time. Mrs. Bloom lived to 96. It’s been the same with other notable cases, where someone of modest means was able to leave a huge fortune. While frugality doesn’t hurt, it’s not necessarily the path to wealth. Sometimes, it’s longevity that plays the larger role.
9. Why are exchange-traded funds (ETFs) typically more tax-efficient than traditional mutual funds? With traditional funds, investors can redeem their shares for cash at any time. That’s a good feature, but this can force a mutual fund’s manager to sell holdings, incurring a tax bill that must be shared pro-rata with all of the fund’s shareholders.
This doesn’t happen with ETFs. The way to think about an ETF is that it’s like a basket of investments that’s passed around among investors but, importantly, is never handed back to the issuing fund company for redemption in cash. That means there is never forced selling in an ETF, and that’s a key advantage.
10. On April 1, 1976, Steve Jobs and Steve Wozniak founded Apple. What’s less well known is that they initially had a third partner, a fellow named Ronald Wayne. But Wayne quit just a few weeks after the company got started, and also sold his 10% stake. When he sold his shares, Wayne received just $2,300.
While it’s easy to criticize Wayne’s decision with the benefit of hindsight—some have called it the worst stock trade ever—the reality is that most financial decisions have an element of uncertainty. That’s why I recommend, wherever possible, a “center lane” approach. In Wayne’s case, for example, he could have sold just half his shares.
11. One of the reasons the stock market is endlessly frustrating is because its movements often seem random. At the same time, we’re told there’s a connection between stock prices and corporate profits. To help square this circle, Benjamin Graham, the father of investment analysis, offered this illustration: In the short term, he said, the stock market is like a voting machine. In other words, it’s a popularity contest and not necessarily rational.
But over the long term, the market is more rational. It becomes a “weighing machine,” Graham said. Especially during times of uncertainty, I find this illustration helpful. It gets us to look beyond the news of the day, so we stay invested long enough for compounding to work its magic.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.The post Picture This appeared first on HumbleDollar.
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