Lessons from Downton Abbey
A British costume TV drama, set almost 100 years ago, has a lot to teach us about finances. Namely, don’t put all your assets in one place, lest it blow up and destroy you.
Downton Abbey, the television series that chronicles the wealthy Crawley family and their estate in post-Edwardian England, has many themes including romance and social mobility. Yet the driver for much of the plot is money.
Downton Abbey plots center on who has money, who doesn’t, how to manage it, who inherits it and who loses it. The Crawleys often turn their noses up at Americans for being so unrefined and frank about financial matters. Still, money and inheritance obsess the Crawleys.
The show explores both potential financial ruin from investments gone bad and bungling the managing of a large estate. The Crawley family’s story can serve as a good parable of how poor financial planning can ruin even well-to-do aristocrats.
Investments Behaving Badly
From the very first episode, we understand that the glory and expense of Downton Abbey draws on the ample funds Lady Grantham, an affluent American, brought to the marriage. This phenomenon of British upper-class men marrying rich American women appealed to both sides of the Atlantic. She got a title and he got money.
But all is not well. We’re not even up to the stock market crash of 1929 when Lord Grantham, head of the Crawley family, is summoned to London to hear his investment advisor tell him that most of his fortune is lost. Grantham sank too much money into a Canadian railroad scheme that went bankrupt. He is stunned and demands to know how a solid, promising investment could fail, since seemingly everyone knew this was a surefire wager.
His advisor quietly tells him the Canadian firm’s management was incapable and most of Lady Grantham’s fortune was concentrated in this one holding. Lord Grantham becomes agitated. Flushed with panic, he asks his advisor why so much was put into one single investment. The advisor soberly reminds him that it was Lord Grantham’s own idea to concentrate their wealth largely in a single investment.
Once the news breaks out, this becomes a hushed subject of discussion by Crawley family – and some of the servants get wind of the family’s problems.
Lack of diversification is a boneheaded move that, sadly, many investors make. He risked his entire fortune on what his unqualified friends said was a sure bet. We saw the same thing in the Dutch tulip craze, the South Sea bubble, Enron, the dot-com crash and the sub-prime mortgage mania. Everyone follows the herd, unable to see the cliff ahead until it’s too late.
The investment world calls diversification the only free lunch accessible to all investors. Returns are smoothed and volatility declines when a portfolio is diversified. Due to increasing correlation amongst assets, it’s a little harder to diversify than it used to be. But a well-diversified portfolio is always better than too many eggs in one basket.
Managing a Large Estate
The Crawleys are reeling from the Canadian railroad bankruptcy. Then this family and the marvelous Downton Abbey estate miraculously are rescued. The new son-in-law, Matthew Crawley, gets an unexpected inheritance. He invests his windfall in Downton Abbey and reluctantly reviews the estate accounting records, at Lord Grantham’s request.
Downton Abbey is a vast estate teeming with family and servants. It also rents parcels of land and buildings to farmers. Young Matthew quickly realizes the estate is poorly managed and broaches the subject with Lord Grantham. The stage is now set for a possible confrontation about money and management between the older man and the new, hot-blooded heir apparent.
Will a new generation of modern management trounce the old-fashioned ways? There are plenty of parallels to this in corporations today. Investors need to be vigilant about lazy, overpaid management. One should not invest in companies whose entrenched executives are unwilling to accept modern reforms.
In the series, which has reached the beginning of the 1920s, even bigger problems lie ahead: the 1929 stock market crash and the Great Depression. The characters don’t know that, of course. We should keep this in mind today and be careful not to take on too much risk.
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Eve Kaplan, CFP, is a fee-only advisor in Berkeley Heights, N.J. Kaplan Financial Advisors is a Registered Investment Advisor in New Jersey and New York.
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