Wealth of Experience
real investors on what works and what doesn't by
Abdrew S. Clarke

Chapter One
SAVE YOUR MONEY

If you don’t save, you can’t invest. It’s that simple. The 600 investors who responded to our 2002 “What Works” survey were nearly unanimous—and surprisingly forceful—in their opinion that saving is the single most important key to investment success. “This is vitally important: saving today so you can have financial success tomorrow,” wrote a middle-aged investor now living overseas. “Be consistent when it comes to saving. Don’t touch savings. You don’t need to have three TVs, two VCRs. Make do with one of each. A good investor has to find happiness with what’s around him. You don’t need to purchase material things to be happy.”
The simple act of regularly setting aside money outweighs the importance of asset allocation, investment selection, tax management, and every other element of investing. Selecting an appropriate mix of stock and bond funds and cash investments, keeping a lid on costs—certainly, these things are important, and the larger your portfolio grows, the more important they become. But first you need to grapple with the reality articulated by a midcareer executive near Chicago: “You can’t invest and grow money that you don’t have. There is no better way to build wealth than saving.”
A good savings program also compensates for the inevitable mistakes that all investors make. We heard from investors who lost every dime they invested in limited partnerships, risky initial public offerings (IPOs), and oddball tax shelters, often destroying big chunks of their net worth. If regular saving is a habit, however, these mistakes rarely prove fatal.
Saving can provide some emotional benefits, too. Results from the ‘What Works” survey and from academic research indicate that those who began saving early, as well as those who made it a habit, reported less anxiety about future financial uncertainties: health care costs, retirement income, and stock market declines. Many also got a sense of satisfaction and accomplishment from saving.
Saving is the foundation on which every other investment lesson in this book rests. In this chapter, “What Works” investors recount their efforts to make saving a high priority, including their attitudes toward a practice that, in essence, means forgoing today’s wants for tomorrow’s needs. The findings of a recent academic study about the role of savings in building wealth are also discussed. This research emphatically corroborates the observations of the “What Works” investors. At the chapter’s end, the investors suggest simple steps you can follow to enhance your own savings.

Everyone Can Save More
There are thousands of reasons not to save. Most people are familiar with the general dilemma (if not all the specifics) described by one investor. “At 20 years of age, it’s 45 years to retirement, an eternity. Plus there is no way to really know how much you should be saving, because you have no way of knowing how much your investments will earn in 45 years, what the rate of inflation will be, what your lifestyle will be in retirement, and how much you will need to finance it. Then there is competition for your income—family, marriage, divorce, remarriage.” There’s just not much left to save, and every year there’s less, as illustrated by the collective actions of the nation’s savers and spenders in Figure 1.1.



FIGURE 1.1 Americans are saving less.
Source: Federal Reserve Bank of St. Louis.

That’s the conventional wisdom, at least. But some “What Works” ulvestors learned a different lesson in their unconventional reality. One Texas investor said his greatest investment experience was “watching iy mother save money living on Social Security while seeing a N.Y.C. bwyer friend barely make ends meet on $500K in annual salary. ‘Spend kss than you earn and invest the rest’ is true regardless of the number of zeros in your paycheck.” In fact, academic research has shown that people of just about any income level have the means to save their way impressive levels of wealth. Saving no doubt requires some changes in consumption and behavior, but the notion that most people earn just enough to get by isn’t supported by the data.
Steven F. Venti, an economics professor at Dartmouth College, and David A. Wise, a Harvard University economist, recently studied the ?fferences in wealth accumulation for close to 4,000 households with milar lifetime incomes.1 Even among workers who took home similarsized paychecks, there were big differences in the amount of wealth accumulated.
Many of those with the lowest lifetime incomes—meaning the sum total of their lifetime paychecks placed them in the bottom 10% of all earners—finished their working lives with zero wealth. Not surprising. However, about 10% of those low earners accumulated an average of almost $200,000, and a small handful boasted more than $500,000 in wealth.
At the other end of the wage scale, the professors found a number of high earners with very little to show for years of big paychecks. About 10% of these high-income households finished their working years with less than $200,000, though the richest 10% amassed millions of dollars in wealth.
The primary reason for these differences in wealth is simple: saving. Those who saved the most accumulated the most wealth, while those who saved the least wound up with very little. Other factors had minimal bearing on the amount of wealth accumulated. An inheritance from a rich aunt, a costly medical crisis, or even whether a household had children made a relatively small impact on the amount of wealth acquired over a working lifetime.
Neither, surprisingly, did the way those savings were invested. A household’s exposure to higher-risk, higher-returning assets such as stocks didn’t explain much of the differences in wealth. Venti and Wise concluded that most of the difference between the wealth of those with similar incomes “must be attributed to differences in the amount that households choose to save.”
Our survey found that 16% of high-net-worth investors (with Vanguard assets of at least $250,000) who were still in the workforce had household incomes of less than $100,000 a year. That threshold allows for a nice income, but it’s by no means a king’s ransom. Modest income and immodest wealth don’t need to be a contradiction in terms. “It doesn’t matter how much you make,” a California retiree told us, “it’s how much you save.”


Becoming a Saver
Saving comes easier to some people than to others. Some people we spoke to developed the savings habit in youth, were inspired by a family member, or were shaped by the unique circumstances of their time and place. Others seemed to be natural-born savers, instinctively husbanding resources for the future.
“I was born in 1926, and I remember when the banks closed,” one West Coast investor told us. “In the school system, Bank of America had some kind of savings program for kids. I had a small bank account. During the Depression my father was a salesman, and an axle broke on his car, and he took the money out of my account. So it all started with school.” During World War II, this investor earned $50 a month in the U.S. Navy, and used $18.75 of it to buy War Bonds. Saving 38% of your income sounds extraordinary today, but people of the same generation told us similar stories. “Saving is a virtue for people of the Depression,” another respondent said. “We tried to teach our children to spend wisely. That was different for me. I was taught to save and hang on to it.”
Some people were inspired by the example of a family member or the counsel of a public figure. A city worker, now retired, told us, “There are various things in your life that make a life-changing impact. Earl Nightingale was a motivational speaker back in the 1 950s and 1960s. He said ‘10% of what you earn is yours to keep.’ Since then, we’ve always tried to save 10% and give 10% to the church or charities.”
This investor’s father-in-law was another important influence. “He invested in stocks and bonds every month from the 1 950s until his death in 1996. He was just a floor supervisor at Ford Motor Company. He had a modest income, but he was able to leave $1.9 million in his estate.”
Sometimes the savings impulse represents a combination of instinct and conscious effort. “In the 1950s, I would mow lawns around the neighborhood. And I would be paid in coins. I would put them in a can and melt candle wax on them, so if I wanted to get at the money, I’d have to boil the coins. It was forced saving.”
These savers owe some of their success to chance: the good luck of being born into a family that set a good example, or the paradoxical luck of coming of age during a tough time in the nation’s history. But what if you grew up in easier times? Or never learned much about saving from your family or other role models? There are a number of time- tested methods for increasing your savings. You might need to kick some old habits and adopt new ones, but these strategies work precisely because they’re not terribly painful. The first step is coming to terms with the anti-savings: debt.

Tips for Saving
The “What Works” investors suggested that everyone can trim his or her daily, weekly, and monthly expenditures to save cash for the future. The respondents were aware of the temptations; they understand the powerful inducements to spend. “It is very easy to buy too expensive a house, too expensive a car, too much of everything at the sacrifice of a regular investment program,” wrote a retired professor. Another investor commented: “People don’t save. They don’t live within their means. Why? They’re encouraged to spend by their environment: ads, sitcoms, co-workers. They don’t see people living frugally.”
The “What Works” investors debunked the notion that thrift means painful sacrifice. “I like to buy good things. I don’t buy cheap things, but I wait until they’re on sale. We’re still very frugal, but not to the point that we deprive ourselves.” This man retired early, and now spends his time “trying to repay my debts to society. I’ve had cancer, and I’ve started the largest cancer support group in northern California.”
Another woman told us, “We invested in IRAs when they first became available, maxed out our 401(k) plans, started medical savings accounts. We took advantage of every savings opportunity. The things that we like to do don’t cost a lot of money. Hiking, swimming. That’s not why we do them, it just happens that they don’t cost a lot of money.”
In short, we encountered very few savers writhing in their hair shirts. After all, if you cut back too much on what you truly value, sooner or later your resolve will weaken, and your savings will disappear.
After you’ve identified opportunities for saving, you need to make it a habit. “You must start saving early and get into the habit, or you will spend it on frivolous things,” one woman wrote. The “What Works” investors offered a number of other tips.
“Pay yourself first. That way you don’t miss it. You don’t know you have it to start with.” This is easy to do with retirement plans at work or automatic investment programs at mutual fund companies and brokerages. The money is deducted from your paycheck before you can lay your hands on it. You never see the money, so you’ll never miss it.
“Take all pay raises and invest the raise. Live on a fixed income and invest the raise.” If you’re getting by on your current income, it should be easy to save the raise.
“Regular investment should be budgeted just like house payments, electricity, car payments, etc.” When you write the bills, make out a check to your savings or investment account. Better yet, have the money deducted directly from your checking account through an automatic investment program.
“Invest a little as often as you can, and reinvest dividends.” Don’t spend the dividends paid out by stocks, stock funds, bond funds, or money market funds. Reinvest them in new shares, which will accelerate the rate at which your savings grow.
“Whatever money I received, I would invest about 10% or 20% of it.” Invest extra money such as overtime, bonus pay, income tax refunds, and inheritances.
“Invest every penny you can early. Brown-bag lunch and use the money to purchase great companies.” The savings can be substantial, and you might wind up eating better.