There’s wide evidence showing that wealthy families tend to lose their fortune by the third generation. One of the most famous examples of squandering generational wealth comes from the Vanderbilt family, which is chronicled in the book, Fortune’s Children: The Fall of House Vanderbilt.

The Vanderbilt story is a classic case of the old adage, “Shirtsleeves to shirtsleeves in three generations.” Cornelius Vanderbilt, known as “The Commodore”, built his fortune first as a shipping magnate in the early 1800s before turning his attention to the rapidly expanding railroad industry when he was in his 60s.

Though he had 13 children, he left 95 percent of his fortune (estimated at $100 million) to his eldest son Billy. His surviving children received much less, with his four other sons receiving a few million apiece while his daughters were given amounts up to $500,000.

Billy continued to run the railroad empire and more than doubled the family fortune (to $232 million) before his death nine years later in 1885. Despite Billy’s business success, less than forty years after his death no Vanderbilt was counted among the world’s richest people.

Fortune's Children: The rise and fall of the Vanderbilt family

Fortune’s Children traces the dramatic rise and fall of this iconic American family, from the rise of “The Commodore” to the fall of his spendthrift heirs who eventually squandered a massive fortune.

Why this three generation cycle where the grandchildren blow through the wealth obtained by the grandparents and parents? As the Scottish say, “The father buys, the son builds, the grandchild sells, and his son begs.”

One explanation is that the first generation often comes from financial hardship and is willing to make sacrifices for a better life. The efforts pay off later in life, so the second generation grows up witnessing their parents’ struggle and has an appreciation for the hard work and sacrifice. By the third generation there’s no memory of that struggle, they only know a life of plenty and lack the understanding of what went into building the family fortune.

Of course, this is an oversimplification. The Commodore had 13 children, and Billy had eight children. The fortune gets divided up, there are family squabbles, philanthropic gifts (the Vanderbilts were very charitable), divorces, bad investments, and the like.

When it comes to leaving an inheritance, perhaps Warren Buffett said it best:

“The perfect amount to leave to your kids is enough money so that they would feel they could do anything, but not so much that they could do nothing.”

This Week’s Recap:

Earlier this week I started a new series called the Money Bag, where I’ll answer reader questions about personal finance, investing, and retirement. This week’s Money Bag featured questions about expected future investment returns, as well as an investing strategy known as the Smith Manoeuvre.

Thanks so much for your questions and comments. I’ve got plenty of material to turn the Money Bag feature into an ongoing series.

Next week I’ll look to piece together the retirement income puzzle and show how various income streams fit into your retirement plans.

Promo of the Week:

Travel rewards collectors should take a look at the CIBC Aventura Visa Infinite Card. Apply now and you’ll get 15,000 Aventura points, a $100 travel credit, plus a first year annual fee rebate. That ticks all the boxes for me when it comes to new credit card promotions. I applied and received this card last week.

Weekend Reading:

Michael James answers a reader question about how to manage a GIC ladder in retirement. I like that he shares how he handles the cash and GICs in his own portfolio, and lets the readers decide if that approach works for them.

Preston McSwain calls on investment firms to stop promoting private equity investments as a superior investment to public markets. Although some private equity investments do outperform, individual investors are rarely compensated for the extreme risk they take.

Retired actuary Fred Vettese says the extinction of defined benefit pension plans is almost upon us.

Incredibly, mutual-fund investors still aren’t clear on how much they pay for advice:

“The vast majority of investors haven’t noticed any changes in their reports since CRM2 came out. Just because information is provided, doesn’t mean people will actually pay attention to it … and it also doesn’t necessarily mean they understand it.”

Ellen Roseman explains how mutual funds grew to be a $1.5-trillion industry in Canada.

Gordon Pape takes a shot at Ontario finance minister Vic Fedeli with this piece on how the Ontario government betrayed investors.

Check out Rob Carrick’s three-part “retirementality” podcast called Looking Ahead:

  • Episode 1: Young and Careless w/ Shannon Lee Simmons
  • Episode 2: The School of Hard Knocks w/ Dan Bortolotti
  • Episode 3: Walking the Plank into Retirement w/ Rona Birenbaum

How much money should you have left when you die? The experts agree, you can’t take it with you.

What if stocks don’t crash … for a while? Ben Carlson says the stock market can go long stretches without an enormous market crash.

Nick Maggiulli from Of Dollars and Data neatly explains why you shouldn’t let your investments be defined by exceptions.

Frugal Trader from Million Dollar Journey updated this post on the best provinces to retire early on dividend income.

Finally, Barry Choi set up his frugal parents with a new Endy mattress – the online mattress in a box company. I reviewed the Endy, Casper, and Bear mattresses a while ago and thought Endy was the most comfortable of the three.

Happy Thanksgiving, and have a great weekend everyone!

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