In any Jane Austin 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 Austin 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.

Then there’s the old rule: Don’t touch Principle!

All this results in a poisonous attitude toward income derived from a growth oriented stock portfolio. We believe that a reasonable definition of “income” for a Dock Street client is 5% of the value of the portfolio per year. But that means selling stock or bonds to fund that “income”.

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

When it comes to spending, the vast majority of our conversations with clients have to do with urging them to spend more, not less.
If that portfolio is invested in growth businesses your income can rise over time–this is where Dock Street comes in.

Net worth is how wealth has been measured since John Jacob Astor became the first “millionaire” in the 1840s. Millionaire and billionaire are goals that define levels of wealth and economic success today. But it wasn’t always how wealth was defined.

We think net worth is a less useful measure of wealth than income. A small business throwing off $2 million a year in income is worth $40 million to its owner. Why? Because that business owner would need that much in stock and bonds to safely produce that $2 million a year. (5% percent withdrawals from an investment account.)

The business owner focused on net worth instead of income often looks forward to selling the business. A buyer of that business would not pay $40 million. The best the business seller could expect is $20 million—and then he gets to pay taxes on the gain. Now he’s left with $15 million which will safely produce $750,000 in income — using the same 5% rule on withdrawals.

If you view an investment portfolio as a collection of businesses, you have some idea of how income defines wealth.