The Story of Rich

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StoryofRichThe Story of Rich: A Financial Fable of Wealth and Reason During Uncertain Times by J.D.Joyce (2012)

This is an investing story that provides insights into dealing with your money and finding financial security. There is usual things like you must make a plan, have goals, risk tolerance, cash flow etc.

Tom’s brother put almost all of his money into investment portfolio and lived on capital gains and dividend payments. When market crashed, Tom’s brother’s portfolio dropped in value and stopped producing returns. He had to cash out part of his portfolio when it was undervalued just to have money to cover basic expenses.

Tom was not going to make the same mistake as his brother. He and his wife figure that they need a figure of $180,000 a year for living expenses and travel. So they took $720,000 – 4 years worth of cash flow – out of their potential investment funds and set it aside.

The first $180,000 was left in cash for year 1. Then they bought 3 certificates of deposit (CDs) for the remaining 3 years. They put $180,000 in a one year CF for the second year of the ladder, $180,000 in a 2 year CD for the third year, and $180,000 in a three year CD for the fourth year.

At first it was difficult to watch so much of our cash sitting in short- and medium-term fixed income assets, making virtually nothing. Infact, if you look at the real return after inflation, some of it may be generating a slight loss.

From the peak of the market in October 2007 through the trough in March 2009, the S&P 500 dropped 58%, while small caps fell 59% and international holding decline 62%. Tom looked around at his community of retired friends. Many had seen their cash flow dry up because they had everything invested in stock market or real estate.

“I was worried, of course,” Tom said. “But I wasn’t overly concerned because I knew I had over 2 years of cash flow before I needed to rely on earnings from my portfolio.”

The following year 2010 the stock market grew and their financial advisor started pointing out some healthy gains in their small caps. That’s when they revisited their cash flow ladder to prepare for the years beyond their original 4 year plan. They harvested some gains from the small cap assets and put them towards their cash flow savings for year 5 along with $30,000 they had saved in 2009. Three years into their cash flow ladder, they were pretty much set for year 5. Since then, they had been making similar preparations for year 6.

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