Question of the Week #1! Vampires are Really Rich.

Welcome to Filthy Rich Animal’s Question of the Week. We plan to have some fun while learning more about investing. 

Each week, we’ll ask you a question related to the basics of investing and trading or investment news. Either way, it’ll be fun to read.

This week, let’s talk about Vampires.

To my knowledge, vampires do not have jobs. They also appear to lead extravagant “lives.” Sure, they save money by catching their own food, but they also hang out in castles and wear fancy clothes. Most of us would be bankrupted by their lifestyle.

How do they do it?

I have a theory.

The first vampire was a 15th-century Wallachian Prince named Vlad the Impaler. As a prince, he was rich and received the best financial advice. In fact, his bankers steered him towards investments that offered a solid combination of low risk and reasonable return. 

Vlad likely bought an early version of a mutual fund that was diversified across stocks and bonds. The stocks grew his wealth faster than inflation. The bonds offered annual income that he could use to support his extravagant lifestyle.

Over time, Vlad’s wealth increased. As he found new victims, so, too, did the number of vampires that this portfolio had to support. Kind of like a vampire pension.

Question

Let’s assume that Vlad had a cool $10,000 to invest back in 1495 and earned 5% annually, across both his stocks and bonds that he owned. $10,000 was a lot of money in those days.

Let’s also assume that Vlad spent 20% of each year’s returns to fund his extravagant lifestyle and that today’s vampires do the same. Put another way, of the 5% return he earned, he only saved 4% (his money only grew by 4% each year). How much wealth would today’s vampires control? And how much could they spend in 2025?

1. The portfolio is currently worth $1.7 billion, and the vampires can spend $34 million in 2025
2. The portfolio is currently worth $10.7 trillion, and the vampires can spend $102 billion in 2025
3. The portfolio is currently worth $1.7 quadrillion, and the vampires can spend $17 trillion in 2025
4. The portfolio is currently worth 1 million pints of blood, and the vampires can spend 100 bat wings in 2025

ANSWER

This isn’t an easy question to start with. It requires a lot of math! But here’s the thing. This is the most important concept in all of investing.

The vampires are so rich because they let their money grow over time. Remember how we said that the secret to getting rich is time? Well, the undead have got plenty of time.

Vlad’s portfolio has been growing since 1495. He put his $10,000 nest egg into a safe portfolio of stocks and bonds that has returned about 5% yearly.

If Vlad never spent a dime of his original $10,000 capital, he would have about $1.7 Quadrillion. Eat your heart out Elon! Or let Vlad do it for you!

But remember, Vlad had to spend money each year to maintain his “lifestyle.” The question says that he’s going to spend 20% of each year’s gains. In other words, when Vlad’s portfolio was worth $10,000, his 5% gain was $500. Vlad could spend 20% of that, or $100. That left $400 to be reinvested and earn more money.

In 2025, Vlad would have around $10.7 trillion and would be able to spend $102 billion this year. The answer is 2.

That’s a ton of money.

How did I get there? A couple of ways.

First, I built a spreadsheet that looks like this (the green arrows skip 500+ years):

It begins in 1494 with Vlad’s $10,000, which grows by 5% each year. Except that the Vampires take 20% of each year’s earnings to spend. So, in 1495, the portfolio grows by $500, of which the Vampires take $100 to spend in 1496.

We do this for 530 years until the end of last year. At the start of this year, the vampires can spend around $102b and start 2025 with almost $10.7 trillion. (each year’s ending value is the same as the next year’s starting value)

Alternatively, there's a much simpler way to do it in a spreadsheet, but that's beyond the goal of this lesson. (Hint, you can use the Future Value function.)

So, what’s the point? None of us has 530 years to invest. But investing a lesser amount over the course of the 40 years that you can expect to be in the workforce will make you well off.

So be sure to start saving as soon as you can.