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West Australian
3 days ago
- Business
- West Australian
THE ECONOMIST: How to invest your huge inheritance. Don't make mistakes of Gilded Age with generational wealth
What do you stand to inherit? It still feels like a question from a different age, despite its growing importance today. In 2025 people across the rich world will inherit some $US6t, or around 10 per cent of GDP — a figure that has climbed sharply in recent decades. French bequests have doubled as a share of national output since the 1960s; those in Germany have tripled since the 1970s; Italian inheritances are now worth around 20 per cent of GDP There are two entirely reasonable responses to this. One is to worry about the new inheritocracy harming society: how it could corrode incentives to work, say, or widen inequality and distort the marriage market. The other, if a windfall is coming your way, is to rub your hands in glee and ponder what you ought to do with it. The typical inheritance is closer to the value of a typical home than to a Vanderbilt-style fortune. Even so, a rising number of people are in line for a bonanza. UBS, a bank, reckons that 53 people became billionaires in 2023 by inheriting money; many more will have received amounts in the hundreds of millions. Asset prices have climbed so high in recent decades, and inheritance taxes have fallen so low, that the number of very wealthy scions is growing all the time. Descend from the stratosphere, and a sizeable cohort is set to receive far lower sums that will nevertheless be life-changing. In Britain, for instance, a quarter of 35- to 45-year-olds are expected to inherit more than £280,000 ($586,000). For these lucky people, the experience of the Vanderbilts and their contemporaries offers a cautionary tale. At the turn of the 20th century, America's census recorded about 4,000 millionaires, note Victor Haghani and James White, two wealth managers, in their book, 'The Missing Billionaires'. Suppose a quarter of them had at least $US5m (the richest had hundreds) and had invested it in America's stockmarket. Had they then procreated at the average rate, paid their taxes and spent two per cent of their capital each year, their descendants today would include nearly 16,000 old-money billionaires. In reality, it is a struggle to find a single one who traces their fortune back to the first Gilded Age. That is not down to inflation or the 20th century's wars, but to poor investment and spending decisions. After all, spending 2 per cent of $US5m ($7.68m) in 1900 — that is, $US3.8m in today's money — would not exactly have consigned anyone to penury. The big question for a 21st-century heir is how to avoid the mistakes of those of the past. In other words, how can you enjoy a nice life while ensuring your inheritance lasts for ever? Silver spoons for all Some cheery news is that the question of how to invest, which sounds like the hardest part, need not be solved perfectly. In theory, this would mean finding the blend of risky assets with the best volatility-adjusted return, and comparing it with the 'safe' return on inflation-protected government bonds. You would then solve for an optimal split between the two, which would vary with market conditions. Thankfully, far simpler procedures can produce spectacular results. Our putative 20th-centurymaires just plonked everything in America's stockmarket, and did very well. Today, we know they could have done even better without much more effort. A simple rule-of-thumb known as the 'Merton share' can approximate the optimal split between stocks and inflation-protected government bonds, by comparing their expected returns and volatility. Messrs Haghani and White have calculated the annualised returns on such a strategy since 1900 (using a proxy for inflation-linked bonds for before 1997, when they were first issued). Had the Gilded Age crowd and their descendants invested in this manner, they would have scored an annualised real return of 10 per cent, compared with 6.6 per cent from the all-stock strategy. Remarkably, it would also have been 40 per cent less volatile. That would have produced vastly more old-money billionaires today. The worse news is that deciding how much to spend is trickier than it sounds. Popular rules for drawing down retirement savings, such as spending a largish fixed percentage of the initial value each year, are definitely out. In truth, these are not wise even for pensioners. Suppose you had kept a classic 60/40 split between American stocks and government bonds, starting in 2000, and drawn down 5 per cent of the value of your initial savings a year. You would have run out of money in 2019, despite earning an annualised return of 5.25 per cent, since you would have depleted too much capital in the market's 'down' years. Even if you spent only 4 per cent of the initial value each year — well below the portfolio's return — you would run a high risk of going bust. Simulate many different market outcomes, based on the 60/40 portfolio's expected return and volatility, and the 4 per cent spending rule leads to ruin within three decades about a third of the time. To avoid this trap, the optimal amount to spend each year must be a percentage of the portfolio's value at that point (the 'spending ratio'), not of its initial value. In other words, if you want to take the risk required to generate outsize returns, you must vary your (maximum) spending from year to year. That way, after a bad spell for the markets, you will not deplete too much of the remaining pot, allowing it to recover. Each year you could, for example, spend a proportion of the portfolio's value equal to its annualised expected return. This is similar to the spending rule adopted by university endowments, which aim to solve the same problem. The median outcome is that the fund's value, and hence annual spending, stays roughly constant with time (provided you have not been overly optimistic about your returns). Nice — but hardly enough to start a dynasty. Ideally, you want to increase your portfolio's value, which means spending less to let the returns rack up. The trade-offs here are difficult to parse. You will get pleasure (or, in economists' jargon, 'utility') from spending more today, albeit with diminishing marginal returns as you get more and more profligate. Doing so will also trim your descendants' purchasing power, especially if the portfolio has a large expected return, which you in part forgo by spending now. Yet such returns are inherently uncertain. In any case, it is only human to prefer an immediate pay-off to a delayed one ('time preference'). The solution is to plug these dynamics into a mathematical model, simulate possible paths for financial markets and calculate the utility derived from each for a given level of spending. You can then calculate the expected utility for each rule and pick the one that maximises this. Unsurprisingly, the procedure is hard, and generates results that are sensitive to the inputs. Maybe spend some of your money on an excellent financial adviser. Yet there are straightforward lessons that everyone can absorb. Although greater expected returns allow you to spend more, they do not do so by as much as you might think. With higher returns, the gap between these and the optimal spending ratio widens (since there is more value in sacrificing spending to let the portfolio grow). Higher volatility means lower spending, since it drags on your annualised return. The more reluctant you are to vary year-to-year outlays, the less you can tolerate investing in stocks, since their value fluctuates. The smaller your minimum spending requirement, the more risk you can take, meaning your expected returns, and hence your overall spending, can rise. A more important lesson is that making your inheritance last for ever means spending far less than its expected return. Exactly how much less depends on market conditions and your risk and time preference. But under reasonable assumptions, a near-optimal portfolio might have an expected annualised return of 4.1 per cent and an optimal pre-tax spending ratio of 2.4 per cent per year. Even that is before allowing for how much your family tree might grow, cutting whatever you pass on into smaller chunks. 'People often want to know how much they need to have to give each member of their family's next few generations a modest income,' says Mr Haghani. 'The answer is: a lot more than most anyone thinks.'
BBC News
02-04-2025
- BBC News
Secret doors and a golden mansion: the Vanderbilts' New York
At their peak, the Vanderbilts were akin to royalty in the United States. Today, their properties and legacy buildings in New York hide the secrets and lesser-known facts of a dynasty that shaped America. In this episode of The SpeciaList, Consuelo Vanderbilt Costin take us on an exhilarating tour of the Vanderbilts' New York, from the vestige of the largest ship sank during WWII to the hidden passageways of Grand Central.
New York Times
08-03-2025
- Entertainment
- New York Times
If You Have to Ask About This Harlem Dinner Party, You're Not Invited
The lobby lacks the swirly marble flooring and chandeliers of finer residential buildings. The long hallways are almost dingy. But behind one of the apartment doors on a recent night, the mood was anything but dull. Butterflied branzino was about to go in the oven. A pan of glistening buns rested on the stove. Fariyal Abdullahi, executive chef at Marcus Samuelsson's restaurant Hav & Mar, and the private chef Nana Araba Wilmot were hovering over the dishes. At the bar, a punch of bourbon, sweet tea, mango juice, ginger liqueur and fresh mint was being poured. The jazz singer Dee Dee Bridgewater arrived after a long evening at the recording studio. Her dog, Daisy, a fluffy Maltese-Shih Tzu mix, perched valiantly atop her wheeled suitcase. The party's host, Alexander Smalls, perused the scene. 'This is an interesting place to hang out,' he boomed in a baritone that rose above the party chatter. The guests erupted in laughter. In New York, members-only clubs with steep fees and private restaurants in luxury towers have become powerhouses for socializing and networking over food and booze. So many have opened in recent months that the monetization of community seems practically like a new business strategy. But there are some spaces you can't buy your way inside. Mr. Smalls's cozy apartment in West Harlem is one of them, its own humble seat of power. There, guests find a setting for community and connection. They can generate buzz for a new idea or project and sometimes even find investors who are eager to listen. 'The Vanderbilts used to do that, and the Astors,' said Mr. Smalls, a well-known chef and former opera singer. 'They created these enclaves of power and elevated air to breathe. They relished in bringing in creatives. The celebrities, they all pass through here on their way somewhere, and I feed them and nurture them.' Last month's dinner party organized by Mr. Smalls was partly a celebration of his new cookbook, 'The Contemporary African Kitchen,' and partly a birthday bash: He had just turned 73. And it was a chance for Mr. Smalls to let two chefs, Ms. Abdullahi and Ms. Wilmot, show off their skills (he made one dish himself, a black-eyed pea and poached-pear salad). The guests were successful or up-and-coming painters, dancers, curators, musicians and chefs, many of whom have multi-hyphenate titles. But mostly, it was just another evening at the home of an artist whose work in both cooking and music has earned James Beard, Tony and Grammy Awards. 'I live to throw parties,' said Mr. Smalls, outfitted in dark-rimmed glasses, a black suit jacket and Dolce & Gabbana slip-on loafers. When Mr. Smalls was a child living in Spartanburg, S.C., he wanted so badly to entertain that his father built him a clubhouse in his backyard so he could invite friends over and make food for them. That impulse endured though his early career in opera. 'When I moved to New York and got my apartment, the parties began. It was my way of creating community,' he said. 'What I learned as a child is the person with the spoon wielded the power.' When his opera career took him to Paris and Rome, he held dinner parties there that attracted fashion designers, actors and dancers. His voice coach at one point told him that if he didn't ease up on the dinners, he would never have a career in opera. Eventually, he felt like he had hit the glass ceiling as a Black man in opera. He shifted his focus to food with the aim of making sure Southern cooking had a place in fine dining. He had five restaurants in New York: Café Beulah, Sweet Ophelia's, the Shoebox Cafe, the Cecil and Minton's Playhouse, which he helped to reopen. 'I opened my first restaurant so someone else would pay for dinner,' he said. 'Entertaining was an addiction. I almost forgot what it was like to eat alone. I had to find a way to support my habit.' His establishments drew Gloria Steinem, Maya Angelou and Toni Morrison. George Clooney and the cast of 'Saturday Night Live' showed up at Café Beulah one evening. Catherine Deneuve would sit at the bar. Glenn Close was a regular. Mr. Smalls closed his last New York restaurant in 2018. He has written cookbooks and a children's book and opened an African food hall in Dubai. He plans to start a similar food hall in Harlem. And he hopes to create a nonprofit, Smalls House, which will provide hospitality training and a community kitchen. Meanwhile, he's still throwing dinner parties. His aim these days is to elevate lesser-known Black chefs and chefs from the African diaspora, letting them do most of the cooking. He curates the party playlists and the guest lists. 'I speak the language of music and food,' he said, 'and through those conversations I am able to introduce that circle to new chefs, artists and creatives.' The setting — his apartment — is practically a museum, covered wall to ceiling with framed restaurant reviews, a plaque from Ms. Morrison and paintings, some of which are portraits and caricatures of Mr. Smalls by friends. Tables are piled with art books, cookbooks and novels stacked seven deep. It's the kind of place that begs for annotation, which Mr. Smalls willingly provides. As he divulged family secrets, the photographer Dario Calmese was chatting in the living room with Elijah Heyward III, a scholar of Southern African American culture, and Dr. Darien Sutton, an ABC medical correspondent. Conversation among another set of guests shifted to chatter about the chef and author Lazarus Lynch. Did you hear he plans to get his master's degree in sociology? 'He went to Buffalo State, and I went to Fredonia College,' said Nia Drummond, a jazz and opera singer. Mr. Smalls, hovering nearby, perked up. 'I made my debut with the Buffalo symphony with Michael Tilson Thomas in the late '70s. The photo is right there,' he said, pointing to the wall displaying a photo of the famed conductor and Mr. Smalls. 'I was 24 years old.' 'I didn't know he was in Buffalo,' Ms. Drummond said. Mr. Smalls looked at his empty glass. 'I need some more bourbon before I tell you that story,' he said. At about 8 o'clock, Mr. Smalls stood and beckoned guests toward the dining room hidden by green velvet curtains that he pulled back. 'Please, ladies, take it away,' he said to the chefs who were standing before the table. 'We have quite a spread for you guys tonight,' said Ms. Wilmot, whose parents grew up in Ghana. Among the dishes on the table: Ghanaian buns bread made with nutmeg and evaporated milk, omo tuo (rice balls), nkate nkwan (peanut butter soup) and Ethiopian gomen (collard greens). The branzino was dressed half with Ghanaian green shito pepper sauce and half with doro wat, the national dish of Ethiopia. 'We wanted to create a dish that represented both of us,' said Ms. Abdullahi, who spent her childhood in Ethiopia, the other side of the continent from her co-chef's family ties to Africa. 'As gorgeous as this is, it tells a story of East meets West.' 'Can we eat now?' Michelle Miller, the 'CBS Saturday Morning' co-host, interrupted, and everyone laughed. Guests spread out across the two small living rooms with plates in their laps. A late arrival slipped in, a coconut cake in her arms, prompting whispers. Was that the soprano Kathleen Battle, the one who commanded a standing ovation last year at the Met? (It was.) Plates were cleared, and Jim Herbert, a fashion consultant, slid behind the piano and started playing. Mr. Smalls sat down in the living room and began to riff along. 'This is out of a book,' said ruby onyinyechi amanze, an artist who spells her name in lower case. She had driven from Philadelphia to attend the dinner and marveled at the scene. After a few minutes, Ms. Drummond walked into the room. 'You know, I feel like I want to take the piano. Jimmy, move your ass,' she said before sitting at the keys and launching into a Billie Holiday song followed by a spiritual. She finished and stood up to a stunned room. 'Let the church say amen,' Mr. Smalls said. In unison, the partygoers responded: 'Amen.'
