The “Come-Up” Myth
Recently a friend had a small accident at a commercial establishment. While she suffered some bruises and a short hospital stay, fortunately, she made a full recovery. She contacted an attorney about the possibility of a lawsuit against the owner of the establishment, and after some time and due diligence, it was determined that the establishment had no issues of negligence, and such she had no possibility of successful litigation. My friend was extremely disappointed. While she was still shaken by her fall, she was more upset because she has already been counting on a major cash inflow from this possible lawsuit. We older folks like to call this a windfall, the young folks call this a “Come-Up”.
Talk to people in our communities, young and old, poor and less poor, and you will see the Come-Up culture at work. For those who see little hope of upward mobility in employment prospects, or wealth accumulation, it is natural to hope for some one-time event which will help springboard oneself to financial freedom. Even if it means being hurt in a fall or accident.
The Come-Up mindset manifests itself in behaviors such as get rich quick business opportunities, falling victim to pyramid schemes and investment hoaxes, and spending on the lottery. In a survey to examine the characteristics of household members who lost money playing the lottery, the least wealthy and African-American respondents lost a higher proportion of their incomes purchasing lottery tickets than wealthier and white respondents. The Census Bureau's information for all 50 states for 1976-1995 concluded that a significant portion of the increase in income inequality (i.e., the discrepancy in real income between the wealthiest and poorest segments of the population) over the 30 years was attributable to the increasing prevalence of state lotteries. Households with the lowest income showed the most pronounced effect of a state lottery.
I don’t buy the argument that African-Americans or poor people are less careful with money, or more inclined to take risks. We have been “making a dollar out of fifteen cents” for the entirety of our history in this country. However, I believe it is more difficult to hope for a positive outcome from something intangible, like an index mutual fund with big results in 10, 20, or 30 years, and far easier to hope for the more tangible payoff at 7:00pm tonight or in six weeks for a money wheel.
The power of compound investment returns is a simple concept, yet abstract in a lot of ways. I can remember as a child, family members discussing Certificates of Deposits, and how insignificant the interest was, but I can never remember being taught about consistent and over time investment vehicles such as index mutual funds. When posting the photo that accompanies this post, I got push back from a reader. She corrected me that $420 x 120 months was only $50,400. I used it as a teachable moment to let her know about compound interest. How many more people don’t understand this simple concept? How many people remember interest the way I was taught, which was that CD’s didn’t pay much interest?
Normal investment models use 10% as an average yearly return when making investment plans. While 10% is the average, the returns in any given year are never exactly 10%. In fact, between 1926 and 2014, returns were in an “average” range of 8% to 12% only six times. The rest of the time they were lower or, usually, much higher.
Part of the consistency needed is also to hold on and be patient with the ups and downs of the stock market. But even when the market is volatile, returns tend to be positive in a given year. While, it doesn’t rise every year, over time the market has gone up in about 70% of years.
Here are a few numbers to consider. I used 8% for shorter time frames, and then 10% for longer time frames. I hope these numbers will get you excited about being an investor and not just a consumer!
$250 per month, for 10 years, could turn into approximately $45,000
$350 per month, for 10 years, could turn into approximately $63,000
$500 per month, for 10 years, could turn into approximately $90,000
Look at you winning in just 10 years, assuming 8% return!
$250 per month, for 25 years, could turn into approximately $308,000
$350 per month, for 25 years, could turn into approximately $431,000
$500 per month, for 25 years, could turn into approximately $616,000
Look at you in just 25 years assuming 10% return!
And you didn’t need a winning ticket, a pyramid, or a trip and fall in your local retailer to get it.