Net Worth comes in many forms, but without cash flow, it is worthless

In any Jane Austen novel net worth is never mentioned. But income! – that was everything. “He has 10,000 a year” is how Mr. Darcy’s wealth is measured in Pride and Prejudice. To our way of thinking at Dock Street, Jane Austen had it right.

Of course, in the early 19th century, the vast majority of wealth was in land ownership which was mostly inherited. And estates that produced income were rarely, if ever, sold. There was no active market for land, so no one thought about what it was “worth”, only what it could produce. Therefore, “10,000 a year”.

An investment portfolio has very little in common with an income producing estate from 200 years ago. 1) It can be sold with a couple of clicks—Schwab even provides “investors” with a “Sell All” button! 2) It can be sold in small pieces, not something that was available to a land owning rich guy in 1825.

Here’s how this works in the 21st century.

We believe that a reasonable definition of “income” for a Dock Street client is 5% of the value of the portfolio per year. Some of that can come from dividends and interest earned in the account. But the rest will come from selling stocks or bonds to fund that “income”.

If you are mentally stuck on net worth as a measure of your financial well-being then spending some of that each year might feel like a loss. Of course, it is not a “loss”; it’s actually the amount your portfolio owes you each year for saving and risking your cash in the investment markets.

So we urge clients to think more like an 18th-century land owner: divide the value of your investment portfolio by 20 to arrive at its income potential, in other words, 5% pre-tax. That’s what you “have” if you’re thinking like Mr. Darcy.

Best regards,

Daniel A. Ogden