Saturday, January 28, 2017

A Tale of Two Kingdoms

My friend Bill at Wealth Well Done writes some true-ish stories as a creative way to communicate financial wisdom. So, in honor of Bill and of the parables of Jesus (many of which had to do, at least on the surface, with money), I've created a parable of my own:

A Tale of Two Kingdoms
There once was a kingdom with a very powerful army. One day, the king realized that he could make money while also providing protection for the nations he had conquered: he would allow the conquered nations to maintain their existing social orders, including their own forms of government. In return, each nation could choose one of a few different levels of protection—the amount of the conquered nation’s annual tribute depended on the level of protection they selected.

Excited by this possibility, the king called a meeting of his advisors. They liked the plan, though they advised the king to implement a new department in his own government, to handle day-to-day administration of this plan.

When the king announced this plan, his subjects agreed that this was a fair law. After it was implemented, the king found that the plan was even more successful than he had thought—his coffers grew, and unrest in the conquered nations was at its lowest point in years! Some nearby nations—even some that had not been conquered—opted into this plan!

And, for a while, it worked well. Though the department to administer this pay-for-protection plan swelled to become one of the largest departments in his government, the king did not mind, since it was such an effective money-maker.

But the independent nation of Vanguard scoffed at this plan. Though their armies were not as powerful as those of the king, they were nonetheless strong enough that the king was unable to conquer them. Bogleheads, as the residents of Vanguard called themselves, stubbornly maintained that they could take care of their own defense. Though many surrounding nations were happy to pay this faraway king to protect them, people in the nation of Vanguard knew that nobody would look out for their well-being better than themselves.

One sad day, invaders from a distant land swept through this region. The invaders swiftly overtook the tributary kingdoms, which enraged the king. He pulled many of his troops back in defense of the main kingdom. However, it took too long to regroup, because his armies were spread too thin. To his dismay, the kingdom was overrun and the king’s powerful armies were unable to stop the invading forces. The king took his remaining wealth and his closest advisers, and retired to a remote and luxurious home in the countryside, where nobody would think to look for him.

But when the invaders ran up against the nation of Vanguard, they found much fiercer resistance. The invaders discovered that, no matter how hard they fought, the Bogleheads fought just a bit harder. Though the nation of Vanguard obviously suffered much damage in the attacks, it could not be conquered. In the end, the assaults of the invading force stopped altogether.

Vanguard had won. Despite the far more massive armies of its competitors, Bogleheads maintained the vigilance and the discipline to ensure their freedom, weather the storm, and emerge into a period of prosperity once again.

What few people realized is that the king had also won. Though he was no longer a king, he nonetheless lived in comfort to the end of his days. If only the same could be said of his former subjects...

In this story, "the king" represents the traditional investment companies, which come up with an investment—sometimes a good one, other times one that isn't so goodand then charge people a relatively high fee to put their money in that investment vehicle. And “the invaders” described in this story represent hard economic times, such as massive inflation or war.

As in this story, Bogleheads flock to Vanguard, because they firmly believe that a simple, low-cost investment strategy is the most effective way to manage their retirement funds. Would you rather pay a high fee to a distant ‘king’ on Wall Street to decide what will be best for you and your money? Or would you rather take the matter into your own hands, realizing that nobody will care about your money more than you do?...