Contributed by Lewis J. Walker, CFP®
In the political battles to come, we will hear about poverty versus wealth, who has it, who does not, and "what's fair?" How should you view wealth per se?
Professor Steven Pinker is a psychologist at Harvard. In a short but thought-provoking column in The Wall Street Journal, "The Second Law of Thermodynamics, Why Things Fall Apart," 12/31/16, he noted that at some point in any system, "things fall apart., A contemporary observation applied to life, money, wealth, planning, etc., is that "stuff happens." Order and success are not natural. They must be worked for, attained, preserved, constantly. If there is an upside, there must be a downside.
Whether from war, famine, accidents, disease, business failures, personal choices, poverty is more widespread than wealth. We can debate how to measure wealth. For a person preparing to retire in a comfortable suburb or urban core, often considered is the "4% theory," i.e., with 4% plus inflation as a return, one should be able to maintain retirement income. Using that formula, someone wanting $40,000 in annual pre-tax cash flow from their portfolio would need a nest egg of (40,000/ .04=) $1,000,000. If you have $1 million, do you feel wealthy? Comfortable? Lucky? "Wealth" is a function of comfort levels, confidence in or fear of the future, lessons about money learned from childhood, debt levels, consumption habits, values, trust in God, etc.
A couple in parts of Africa may feel wealthy with little money, but owning a small house with a concrete floor and tin roof, a few goats and chickens, along with healthy children. Wealth is relative.
Professor Pinker observes, "Matter doesn't spontaneously arrange itself into shelter or clothing, and living things don't jump onto our plates to become our food. What needs to be explained is not poverty but wealth." Poverty is more of a natural condition than wealth.
Early hunter I gatherers took incredible risks to find basic necessities food, water, shelter. Ample supplies of sustainable food, water, and shelter may be seen as the first component of wealth. Eventually, some figured out how to grow food, purify and transport water, and assemble materials and skills to build shelter. If they did that, they could get paid. Initially, barter and trading was the rule. But that was burdensome and inefficient. If I wanted some of your chickens for dinner, trading one of my goats would not work if you had goats, did not want a goat, hated goat meat, etc.
So we had to figure out more portable instruments of trade. Maybe beads, beaver pelts, a spear for a knife. Still inefficient. So we came up with shiny pieces of metal, and eventually pieces of paper representing units of metal. Being even more civilized, now we have paper that is money just because someone says it is, like a central bank. Our money declares, "In God we trust," but financially, for now we have to trust Janet Yellen.
Since we depend largely on paper- or digit-based modern wealth for piece of mind and survival, plus Kroger, Publix and the local water system, we need to cheer wealth, appreciate wealth, and provide for the creation of more wealth. Means of production constitute wealth. Only 1% of the U.S. population is engaged in farming, so we must depend on a very small minority to supply our food, fiber, etc. All of the other aspects of farming-supplying farmers with seed, equipment, buildings, tractors; harvesting, transporting, and processing food; distributing food via warehouses and food stores- every element of the food chain, including farming itself, required an entrepreneur, a person -willing to put it on the line, take a risk.
Every enterprise necessary to our wellbeing started with a risk taker. If they were not rewarded, they would not have continued, failure would have ensued, and widespread failure leads to poverty. We must reward risk taking with profit, or it all collapses. Cheer profit. We need a tax code that promotes risk taking, that does not penalize risk taking by confiscating too much of the individual and business wealth pie. Government does not create wealth. Risk takers create wealth.
When you own stock in a company that makes a profit by meeting the needs of consumers, you are part of the wealth chain. Enterprises do not incubate and grow without people investing and lending capital. Investing and lending must be rewarded. You are sharing in the risk dynamic and you will not continue to do so 'without a fair return. Wealth does not happen without risk.
Not every risk is rewarded. That's why you diversify, spread the risk. Not every venture succeeds. Cheer those who persevere, don't give up, keep searching for a better way. Don't overly burden them with red tape, incomprehensible rules and regulations. Even a beaver knows not to dam up the whole stream!
Wealth and wealth creation... the antidote to poverty. Celebrate wealth.
Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group.