Wealth of Wisdom

CHAPTER 28Monitoring Financial Capital with the “Four Horsemen” Graph

Scott Peppet

A family's “wealth” is not limited to or primarily about its financial capital. Much more important than its dollars are its members' physical and emotional health (human capital), relationships and decision-making (social capital), intellectual momentum (learning or intellectual capital), and purpose and service (legacy or spiritual capital).

At the same time, financial capital does matter. If a family hopes to succeed over multiple generations, thoughtful stewardship of its financial capital is critical to support these other types of wealth. What does such thoughtful stewardship require, and how can a family's success with its financial capital be measured?

In this chapter, I offer a simple graph that can help a family monitor its stewardship of financial capital over time. The goal of this graph is to create a “stewardship snapshot” on one page by condensing a great deal of information into a simple visual. In particular, the graph shows how a family's financial capital is performing—in terms of investment gains or losses—against the effects of four factors that typically deplete a family's financial capital in the long term: taxes, fees, spending, and inflation. I call these factors the “Four Horsemen of the Apocalypse” because of their often-devastating effect on financial capital. Thus, the graph is called the “Four Horsemen Graph.”

To use this graph, a family must track the following ...