6 Financial Lessons from America’s Founding Fathers

In theory, the founding fathers should be the ultimate financial role models. After all, they’re literally on the money. Warren Buffett might be every investor’s hero, but even he can’t count his earnings without seeing the faces of Washington, Hamilton, Franklin, and Jefferson. Even John Adams, perhaps the most neglected of the founding fathers, has been commemorated on the dollar coin.

What can the men who adorn our currency teach us about our own finances? Quite a lot, actually, but not because they were all as good with money as they were at creating a nation. Jefferson, for example, amassed a great fortune but later squandered it and ended his life all but penniless (despite, of course, the economic advantages of being a slaveholder). But others, including Washington — a shrewd and even ruthless businessman — died very wealthy men.

Here are some of the lessons, still applicable today, that can be drawn from these historic financial lives.

1. Have a Backup Plan 

1792: The first Wall Street bailout: Alexander Hamilton (1755-1804)

© Jerry Tavin/Everett Collection Alexander Hamilton (1755-1804)

Alexander Hamilton may have been the greatest financial visionary in American history. After the Revolutionary War, as Washington’s Treasury Secretary, Hamilton steered the fledgling nation out of economic turmoil, ensured the U.S. could pay back its debts, established a national bank, and set the country on a healthy economic path. But it turned out that he was far better at managing the country’s finances than his own.

When Hamilton was killed in a duel with vice president Aaron Burr, his relatives found they were broke without his government salary. Willard Sterne Randall, biographer of multiple founding fathers, recounts that Hamilton’s wife was forced to take up a collection at his funeral in order to pay for a proper burial.

What went wrong? Hamilton’s law practice had made him wealthy and a government salary paid the bills once he moved to Washington, but he also had seven children and two mistresses to support. Those expenses, in addition to his spendthrift ways, left Hamilton living from paycheck to paycheck.

The take-away: Don’t stake your family’s financial future on your current salary. The Amicable Society pioneered the first life insurance policy in 1706, well before Hamilton’s demise in 1804, and term life insurance remains an excellent way to provide for loved ones in the event of an untimely death. Also, don’t get into duels. Life insurance usually doesn’t cover those.

2. Diversify Your Assets

General George Washington - portrait of the first President of the United States (1789?97). 22 February 1732 - 14 December 1799. Painted by Charles Willson Peale, American painter, 15 April 1741 - 22 February 1827.

© Mountain Vernon Collection/Photo by Culture Club/Getty Images General George Washington – portrait of the first President of the United States (1789?97). 22 February 1732 – 14 December 1799. Painted by Charles Willson Peale, American painter, 15 April 1741 – 22 February 1827.

Conventional wisdom holds that investors shouldn’t put all their eggs in one basket, and our nation’s first president prospered by following this truism.

During the early 18th century, Virginia’s landed gentry became rich selling fine tobacco to European buyers. Times were so good for so long that few thought to change their strategy when the bottom fell out of the market in the 1760s, and Jefferson in particular continued to throw good money after bad as prices plummeted. George W. wasn’t as foolish. “Washington was the first to figure out that you had to diversify,” explains Randall. “Only Washington figured out that you couldn’t rely on a single crop.”

After determining tobacco to be a poor investment, Washington switched to wheat. He shipped his finest grain overseas and sold the lower quality product to his Virginia neighbors (who, historians believe, used it to feed their slaves). As land lost its value, Washington stopped acquiring new property and started renting out what he owned. He also fished on the Chesapeake and charged local businessmen for the use of his docks. The president was so focussed on revenues that at times he could even be heartless: When a group of revolutionary war veterans became delinquent on rent, they found themselves evicted from the Washington estate by their former commander.

3. Invest in What You Know

A statue of Benjamin Franklin is seen at The Franklin Institute in Philadelphia.

© Matt Rourke/AP Photo A statue of Benjamin Franklin is seen at The Franklin Institute in Philadelphia.

Warren Buffett’s famous piece of investing wisdom is also a major lesson of Benjamin Franklin’s path to success. After running away from home, the young Franklin started a print shop in Boston and started publishing Poor Richard’s Almanac. When Poor Richard’s became a success, Franklin reinvested in publishing.

“What he did that was smart was that he created America’s first media empire,” says Walter Isaacson, former editor of TIME magazine and author of Benjamin Franklin: An American Life. Franklin franchised his printing business to relatives and apprentices and spread them all the way from Pennsylvania to the Carolinas. He also founded the Pennsylvania Gazette, the colonies’ most popular newspaper, and published it on his own presses. In line with his principle of “doing well by doing good,” Franklin used his position as postmaster general to create the first truly national mail service. The new postal network not only provided the country with a means of communication, but also allowed Franklin wider distribution for his various print products. Isaacson says Franklin even provided his publishing affiliates with privileged mail service before ultimately giving all citizens equal access.

Franklin’s domination of the print industry paid off big time. He became America’s first self-made millionaire and was able to retire at age 42.

4. Don’t Try to Keep Up With the Joneses

Thomas Jefferson (1743 - 1826), the 3rd President of the United States of America. Born in Virginia, he drafted the Declaration of Independence, signed 4th July, 1776. Original Artwork: Engraving by A B Hall of New York

© Hulton Archive/Getty Images Thomas Jefferson (1743 – 1826), the 3rd President of the United States of America.

Born in Virginia, he drafted the Declaration of Independence, signed 4th July, 1776. Original Artwork: Engraving by A B Hall of New YorkEveryone wants to impress their friends, even America’s founders. Alexander Hamilton blew through his fortune trying to match the lifestyle of a colonial gentleman. He worked himself to the bone as a New York lawyer to still-not-quite afford the expenses incurred by Virginia aristocrats.

Similarly, Thomas Jefferson’s dedication to impressing guests with fine wines, not to mention his compulsive nest feathering (his plantation, Monticello, was in an almost constant state of renovation), made him a life-long debtor.

Once again, it was Ben Franklin who set the positive example: Franklin biographer Henry Wilson Brands, professor of history at the University of Austin, believes the inventor’s relative maturity made him immune to the type of one-upmanship that was common amongst the upper classes. By the time he entered politics in earnest, he was hardly threatened by a group of colleagues young enough to be his children. Franklin’s hard work on the way to wealth also deterred him from excessive conspicuous consumption. “Franklin, like many people who earned their money the hard way, was very careful with it,” says Brands. “He worked hard to earn his money and he wasn’t going to squander it.”

5. Not Good With Money? Get Some Help

John Adams (1735 - 1826), second president of the United States of America.

© Stock Montage/Getty Images John Adams (1735 – 1826), second president of the United States of America.

In addition to being boring and generally unlikeable, John Adams was not very good with money. Luckily for him, his wife Abigail was something of a financial genius. While John was intent on increasing the size of his estate, Abigail knew that property was a rookie investment. “He had this emotional attachment to land,” recounts Woody Holton, author of an acclaimed Abigail Adams biography. “She told him ‘Thats all well and good, but you’re making 1% on your land and I can get you 25%.’”

She lived up to her word. During the war, Abigail managed the manufacturing of gunpowder and other military supplies while her husband was away. After John ventured to France on business, she instructed him to ship her goods in place of money so she could sell supplies to stores beleaguered by the British blockade. Showing an acute understanding of risk and reward, she even reassured her worried spouse after a few shipments were intercepted by British authorities. “If one in three arrives, I should be a gainer,” explained Abigail in one correspondence. When she finally rejoined John in Europe, the future first lady had put them on the road to wealth. “Financially, the best thing John Adams did for his family was to leave it for 10 years,” says Holton.

As good as her wartime performance was, Abigail’s masterstroke would take place after the revolution. Lacking hard currency, the Continental Congress had been forced to pay soldiers with then-worthless government bonds. Abigail bought bundles of the securities for pennies on the dollar and earned massive sums when the country’s finances stabilized.

Despite Abigail’s talent, John continued to pursue his own bumbling financial strategies. Abigail had to be eternally vigilant, and frequently stepped in at the last minute to stop a particularly ill-conceived venture. After spending the first half of one letter instructing his financial manager to purchase nearby property, John abruptly contradicted the order after an intervention by Abigail. “Shewing [showing] what I had written to Madam she has made me sick of purchasing Veseys Place,” wrote Adams. Instead, at his wife’s urging, he told the manager to purchase more bonds.

6. Make A Budget And Stick To It

MONTICELLO: Aerial view of Monticello.

© Thomas Jefferson Foundation at Aerial view of Monticello.

From a financial perspective, Thomas Jefferson was one giant cautionary tale. He spent too much, saved too little, and had no understanding of how to make money from agriculture. As Barnard history professor Herbert Sloan succinctly puts it, Jefferson “had the remarkable ability to always make the wrong decision.” To make matters worse, Jefferson’s major holdings were in land. Large estates had previously brought in considerable profits, but during his later years farmland became extremely difficult to sell. Jefferson was so destitute during one trip that he borrowed money from one of his slaves.

Yet, despite his dismal economic abilities, Jefferson also kept meticulous financial records. Year after year, he dutifully logged his earnings and expenditures. The problem? He never balanced them. When Jefferson died, his estate was essentially liquidated to pay his creditors.

Written by Jacob Davidson of Money

(Source: Time)

2015 Mid-Year Update: 5 Things to Do

Provided by bohed/Pixabay
Provided by bohed/Pixabay

1. Favor Stocks Over Bonds, But Be Choosy

Stocks are still the preferred asset class.

The lackluster performance of U.S. stocks so far this year makes sense. Economic data have not met expectations, the strong dollar is hurting company earnings, and consumer spending is sluggish. Adding to these challenges, U.S. stock prices range from fully valued to expensive, especially relative to other developed markets.

But know this: Bonds are even more expensive, and that means stocks are still the preferred asset class. The trick (or the wisdom) is to be choosy. At this stage in the cycle (six years into a bull market) and in light of the economic backdrop, we would be cautious on segments of the U.S. stock market that are most affected when interest rates go up, such as utilities. Greater value can be found in sectors positioned to benefit from economic growth, such as technology and financials.

Key Takeaway: Stocks still look better than bonds, but seek out sectors offering relative value.

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2. Look Overseas for Opportunities

Are you tapping into all the world markets have to offer?

This year has served as a reminder of why it makes sense to include international stocks in your portfolio. Through May, stocks in Europe and Japan had gained nearly 13% and 20%, respectively, while the U.S. was up just over 2% (all in local currency terms). Even emerging markets, which have lagged the U.S. for some time now, have outperformed the U.S. this year.

While it’s true that Europe is no longer cheap, and faces political challenges, and emerging markets remain volatile, we still expect them to notch decent performance relative to pricier U.S. equities. Europe and Japan, in particular, should also continue to benefit from market-friendly central bank easing. We have long been proponents of increasing international exposure, but even more so these days.

Key Takeaway: Dollar strength makes American goods expensive and less competitive overseas, dragging down earnings growth prospects for U.S. companies. The earnings picture looks brighter elsewhere.

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3. Watch Your Step in Bonds

Not all bonds are created equal. Know what you own, and be flexible.

Navigating the fixed income markets remains challenging. The expected Fed rate hike has caused the yields on shorter-term bonds to rise in recent weeks. And although longer-term bond yields also have risen (and their prices dropped) recently, we still see few bargains for buyers of bonds.

We suggest looking to the high yield sector, which is typically less sensitive to rate movements, and to tax-exempt municipal bonds, which currently offer attractive yields—before and after tax. Most of all, income seekers must keep in mind that rates around most of the world will remain low for some time despite the Fed’s action, so flexibility and selectivity are critical in fixed income asset allocation.

Key Takeaway: Even though the Fed will raise rates, don’t expect abundant income opportunity in the short term. Income seekers should broaden their reach, but with a discerning eye in fixed income.

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 4. Resist the Urge to Exit

Staying the course is often the best advice.

There are any number of reasons why investors may want to head for the exits: higher volatility, fears of a bubble, or concerns over what the Fed may do. In addition, we’re seeing episodes where stocks and bonds are moving more in sync as investors anticipate higher interest rates in the U.S.

Despite the temptation to abandon the markets, we believe the better strategy for long-term investors is to stay the course. Yes, adjust your portfolio to be better prepared for what lies ahead, and we’re not opposed to using some cash as an important ballast during times when stock and bond correlations are high. But overall, it is still preferable to weather volatility than attempt to time the ups and downs of the market.

Key Takeaway: Evidence shows that time in the market produces better results than trying to time the market.

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5. Seek Growth in a Low-Growth World

Equip your portfolio with differentiated sources of risk and return.

What’s an investor to do in a slow-growth world where many traditional assets are looking pricey? Cast a wider net in pursuit of your financial goals. International stocks (including emerging markets), infrastructure or real estate can add growth to a portfolio. You might even consider alternative investments. These additions can help to diversify a portfolio while providing greater growth opportunities.

Diversification doesn’t guarantee profits or prevent loss (nothing does), but it does allow you to spread your risk across a broader set of instruments that may respond differently to a given set of market conditions. And in a world that still offers little in the way of screaming opportunities, mixing it up may be one of the best things you can do.

Key Takeaway: Expand beyond traditional assets in an effort to optimize your portfolio’s results.

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For the full report, please click on the source link below.

Written by Russ Koesterich of BlackRock

(Source: BlackRock)