Tag Archives: Investing

10 Paths To Wealth?

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Ken Fisher is a well-known money manager – I know, because I’ve had to endure phone call after phone call when I stupidly signed up for one of his ‘free’ reports!

However, watching this video (and, maybe even buying his book) seems like a fairly non-threatening way to learn some of his wisdom.

Personally, I think you need to mix’n’match some of these methods to have a bats-chance-in-hades of making your Large Number / Soon Date.

On the other hand, I’m all for marrying into wealth, but who’d have me? 🙂

What price security?

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How do you put a price on security?

Well, in this post I’m going to try and do exactly that but, first MoneyMonk asks the question that all people have at the back of their minds:

As a woman, I just want to say that “to each it’s own” Women love security.

If you are not a person that love investing, and you have the cash to pay off your mortgage (considering that you plan to live their forever)

Adrian- not everyone is business oriented. Some just don’t have the business acumen to run a business. Therefore, that group SHOULD pay off the mortgage

This is the dream of home ownership: own your home outright and you have nothing to worry about.

But, do you?

Let’s say that you own a $150,000 home today … what will it be worth in 30 year’s time?

About the same as a $150,000 home today, but in future dollars!

So, let me ask you; when your kids grow up, move out, and you retire, what are you going to move into?

Probably the same, or another $150,000 home … a smaller condo or newer townhouse that will probably not give you too much change, if any, from $150,000, a retirement home that (with fees) will cost you far more than $150,000.

Your home is not your financial security; your realizable net worth is. Put it another way: you can’t live off your home, but you can live off your cash and investments.

True security comes from knowing that you can pay your monthly bills for the rest of your life, without needing to work or get handouts from friends, relatives, or the government, through up markets and down (war, pestilence, and other Acts of God aside).

I hope that you see my point …

So, let’s look at two scenarios for a $150,000 house that you just bought and locked in a 30 year fixed rate loan at 6% (a bit higher than today’s actual rates, which are still between 5% and 5.5%):

1. You pay off your mortgage early

Note: We will assume that you are allowed to pay off as little / much as you like on your loan (not the case with some fixed rate loans in the USA, and certainly not the case with most fixed rate loans in most other countries!) because it makes the math simpler.

This is great, because you ‘earn’ 6% on your money [AJC: remember, a dollar saved – in interest – is the same as a dollar earned], better yet:

– The amount you ‘earn’ is guaranteed; every year that you are no longer paying that 6% loan, you are in effect earning 6% … simple and guaranteed!

– Unlike an investment that pays you 6%, there is no tax to be paid on the 6% mortgage that you save (although, there can be a negative benefit of losing the tax deduction on your home loan interest … but, I’m trying to keep this simple), so it’s more like earning 7.5% – 8.5% (depending on your tax rate) in any other investment.

– Let’s say that you plonk the entire $150k down in one hit, you save the entire $175k INTEREST (yes, a house that you buy for $150k in 2010 will have cost you $325k, just in principal and interest, by the time you have paid off the 30 year loan in 2040).

2. You do not pay off your mortgage early

Note: Paying the loan off slower will, naturally, save you something greater than $0 and less than $175,000 … but, is too hard to calculate, here, so we will continue to use the assumption that somehow, you were able to pay that entire $150k loan off in one hit.

Well, it’s a fairly simple calculation then, isn’t it: what can you invest $150,000 in that will return more than $175,000? Let’s run some numbers and see:

Business: If Michael Masterson is right, and we gain 50% (or more) from our own business, then after 30 years you would have earned $29 Billion on your $150k ‘seed capital’.

But, MoneyMonk is right: there is extreme risk and skill involved in being successful in business … just a shame the potential reward is so low 😉

[AJC: just a tad more than the $175k interest that you would have saved if you used the money to pay off your mortgage instead of starting a business]

Real-Estate and Stocks: Again, if Michael Masterson is right, and we gain 30% by investing in a mixture of buy/hold real-estate and stocks (naturally, continually reinvesting the rents and dividends), then after 30 years you would have $392 million …

… if that sounds a lot, remember that Warren Buffett built up a $40 Billion+ fortune over 40 years at not much more than 21% compounded.

Stocks: I agree with Michael Masterson, that if you buy stock in just a few good businesses when they are are going cheap (as the market does from time to time) and wait 30 years, you should have no trouble getting a 15% compounded (pre-tax) return so, after 30 years you would have nearly 10 million.

But, all of this has some risk / skill associated with it … so, maybe paying off the mortgage and snaffling that $175k is still the way to go for all of those risk averse people [AJC: Like me. True!] out there?

But, wait, what if we just do the ‘no brainer’ thing and plonk that entire $150k in a set-and-forget-low-cost-Index-Fund?

Here’s the good news: paying off your mortgage is a 30 year investment (you have forgone 30 years of being locked in to a loan and paying 6% interest year in, year out), so it’s only fair that we buy $150k of Index Fund units and don’t even look at our portfolio for 30 years, right?

Well, that’s an ideal strategy – THE ideal strategy – for Boglehead set-and-forget investors! So …

Index Funds: Over 30 years, the markets (hence the lowest cost Index Funds) have averaged something more than 12% – set and forget (!) – so, after 30 years you would still gain close to $3.5 million!

But, wait … we’re all about security here: you can’t live off averages, right? What happens if there’s another crash like 1929 and 2008 the day after I plonk my entire $150k into an Index Fund?

Well, you lose half your money immediately 🙁

But, we don’t care what happens immediately, this is a 30 year set-and-forget plan … and, there has been NO 30 year period where the stock market hasn’t returned AT LEAST 8%.

Now, isn’t 8% (since we have to pay tax on it) exactly the same as the equivalent after-tax 6% mortgage (give or take 0.5%)?

Yes!

The lowest possible return that we can get with any reasonable investment strategy that we can come up with is exactly the same as the best possible return that we can get by paying off our mortgage early.

Now, isn’t that interesting?

When is cheap debt expensive?

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Dave Ramsey says to use Gazelle Intensity to pay down all debt, before even thinking about investing. Yet, would he consider running his (rather large) business without an overdraft, or leased cars, equipment, and/or furniture?

I doubt it … he needs to preserve his capital, and put it to better use by growing his business investment (more stock; better marketing; more staff; more training; etc.; etc.)

So, why should personal finance be any different?!

But, Dave Ramsey would argue to pay off all debt, whether it is ‘good’ (e.g. produces income) or ‘bad’ (e.g. credit card loans for consumer goods, like that LCD TV that you just bought).

If you are a regular reader of this blog, by now you will know that my view differs markedly; I say:

Once the debt is incurred, it is no longer ‘good’ or ‘bad’ … it becomes either ‘cheap’ or ‘expensive’.

And, as I mentioned in a previous post …

You should only pay off your ‘expensive’ debt!

What makes a debt ‘cheap’ or ‘expensive’? What is the yardstick interest rate? 2%? 5%? 11%? 19%?

Any, all, or none of the above. You see, it’s relative:

– Debt only becomes ‘cheap’ when you have something that produces a better after-tax return [AJC: probably, a MUCH better return to account for the fact that paying off the debt is a GUARANTEED return].

– Otherwise, by default, all debt becomes ‘expensive’ and you should do as Dave Ramsey suggests.

Fortunately, finding suitable investments to offset the need to pay off relatively low-cost debts such as student loans and home mortgages is as easy as finding some great value stocks, a cashflow positive real-estate investment or three, or a small business to buy or begin …

… provided that these are things that you are:

1. Passionate about,

2. Educated in, and

3. Convinced are needed in order to achieve your Required Annual Compound Growth Rate to reach your Number.

I recommend that – if you are pursuing a Large Number / Soon Date – you must pursue your investments with Cheetah Focus … a great example is provided by Eric [AJC: emphasis added]:

I graduated college 2008 from the University of Texas. worked at an oil and gas company in Houston named Flour Daniels. they had massive lay offs in 2009. I worked for a year and managed to save well over 50% of my pay. I reinvested it all into the stock market. I set up a regular investment account and a Roth IRA.

To date my Reg. Stock account is up 30%+ and my Roth IRA is up over 60%. and I still have another month to increase my yearly gains for it

I have had no prior experience with investing/trading. I played safer stocks/ETFs .. Bought on dips and sold when it would pop.

Oh and I also took out a loan from Citi bank.. who sent me a 10,000 loan offer in the mail with a 2% interest for the life of the loan. LOL.. I had to take it. I threw that into stocks also.

Any how my point is. If i had focused on paying off my $28,000 college debt I would have missed all of last year gains. I just made it a goal to beat my debt interest. and I did!

Currently I have enough money to pay off all my debt. but of course i’m not going to do it. I took out 2K from my portfolio to invest in an online woman’s clothing site. We have great style at affordable prices. we are not making huge profits.. but we are selling and that is encouraging.

Did you notice in the image (above) why the gazelle has such intensity?

It’s because the cheetah is coming up fast and furious on his tail 😉

Punch Buggy Blue!

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Let’s say that you do agree that real-estate is one of the best MM301 (wealth preservation) strategies … although, many of my readers would disagree …

[AJC: I’m happy to meet all the dissenters in, say, 50 years – at a very cheap restaurant, as they won’t be able to afford much more – to discuss how they went with their TIPS, bonds, cash and stocks-based retirement strategies. Then I’ll meet Scott, Ryan and all the other RE and business-based retirees on their private golf-course in Palm Beach for a second debrief 😉 ]

… but, what type of RE would fit the bill?

After all, many of my readers, Evan included, have had mixed experiences with RE:

I have watched my dad deal with C R A P for years. He owns 2 properties:
1) CASH COW – 2 family residential unit income exceeds mortgage payments. They always pay on time and there mostly are no problems

2) 2 family unit with a bar attached. I have listened to him say for YEARS, that if the bar paid its rent things would be different. I feel like the stress associated with this property is going to kill him eventually, and that is the commercial part.

In NY it takes 9 to 18 months to get someone out, so even if you try to evict you are looking at legal and time costs that could literally eat 6 months profit.

As I said to Evan:

That’s why we keep TWO YEARS’ buffer 😉

But, we all have a Reticular Activating System (RAS) that attracts us to whatever it is that has caught our attention … for example, have you ever played the Punch Buggy / Slug Bug game with your friends and / or kids?

If not, it’s a bundle of fun – and, pain. Actually, mainly pain 🙁

It works like this: who ever sees a VW ‘bug’ first calls out “Punch Buggy [insert color of choice: yellow, green, red, etc.] !!” and gets to whack the other person on the arm … as hard as they like [AJC: usually me. ouch!] …

It’s amazing how many VW Beetles there are on the roads, these days!

We used to play a similar game – many, many years ago – when I was on the school bus: we used to look for Chrysler Chargers, and whomever saw one first would yell out “Hey, Charger!” and hold up their hand with a Richard Nixonesque V-For-Victory sign.

The winner for the day was the one who scored the most ‘victories’ …

It’s amazing how many Chrysler Chargers there were on the roads, in those days 🙂

Of course, what’s happening is that our RAS is simply filtering IN Chargers (or VW Beeltes) and filtering OUT other types of vehicles, making it SEEM as though Chargers / Beetles are everywhere … of course, there are no more / less than there were before we started looking out for them.

Similarly, with RE – or other – investments:

Our view tends towards our first direct – or, even indirect – experiences; which helps to explain why my generation is more conservative (we went through some down cycles in the late 80’s and early 90’s) and younger folk were more bullish, having had 15 to 20 good years … until resetting their RAS’ in the current cycle.

Similarly, Evan’s views may be colored by his Dad’s experiences albeit mixed.

But, Evan’s Dad could have avoided many of his RE problems by buying well … now, for MM301, buying well is NOT the same as buying well for MM201:

While we are still building towards our Number, we need to buy RE that will appreciate strongly, with rents just covering cashflow (of course, we wouldn’t say “no” to more!) …

… but, when we have reached our Number, we need to generate INCOME, so buying well really means that we need to:

Buy to protect our future income / rental stream

As I have shown you, it’s easy to get a positive cashflow from RE; just pay cash!

And, live happily from 75% of the rents (less taxes), knowing that the other 25% will cover all of your ‘normal’ costs (management fees, vacancies, repairs and maintenance, etc.), and will keep up with inflation.

It’s the last part that is key: since we are never selling these properties [AJC: lucky kids!], we don’t really care how much/little the RE itself appreciates, we just care how much the rents appreciate, and our benchmark for this is:

The rents must appreciate at least as much as inflation

That is through both UP and DOWN markets …

… so, I would keep away from bars and other retail EXCEPT for counter-cycle retailers such as dollar stores, groceries / food stores (food staples only), and – of course – Walmart and Walgreens [AJC: if I could get my hands on the freehold!].

Remember, we’re not looking for extraordinary capital growth (any more), but protection in down-cycles.

[AJC: oh, and if you were going to buy stocks (again, for retirement capital protection and dividends); these types of retailers and food businesses would be great ‘protection stocks’ to own, as well]

And, moving away from retail, I would also happily buy small offices, say, housing a number of separate professionals (e.g. doctors, attorneys, etc.), as these professions are required in all markets and my risks are well spread.

But, I would avoid large offices – or industrial showrooms and warehouses – housing SME’s, as these are prime candidates for simply shutting shop in a down cycle, and I may only have one tenant per property (even though buying 6 or 7 of these would certainly help to insulate the ‘shock’)

And, you might be surprised to find that I am not all that excited about residential (even multi-family) for MM301, simply because the rental returns are usually not that great (but, they can make a fantastic MM201 strategy).

Remember, RE isn’t the only MM301 Wealth Protection strategy that you can base your retirement (or, life after work) around, it’s just that I am struggling to find another one that has both income and capital that can keep up with inflation, fairly consistently, through at least the 30 to 50 years that I still plan to be around …

… can you?

What would you do with $5 million … or $50 million?!

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Even if you are NOT a poker fan, scroll forward to exactly the 5 minute mark (once the video has had a chance to buffer) to hear Kara Scott ask some poker young – and, old – guns what they would do with $5 million (or, $50 million) …

… you might be surprised how little it seems to mean.

But, if I asked you the same question, you would [AJC: I hope by now] instantly answer:

That’s easy, I would [insert: Your Life’s Purpose]!

But, if you want to understand why these guys are seemingly so relaxed/flippant about $5 million (or, even $50 million for a couple of them) you first need to realize that the question actually means: “what would you do with another $5 million?”

So, it shouldn’t surprise you that my answer would equally be:

Nothing special …

… it would simply make me a little more comfortable that I could live my Life’s Purpose, since I’ll just buy another $5 million of [insert Perpetual Money Machine of choice: 100% paid for by cash real-estate; annuities; TIPS; bonds; etc.; etc.] and live off 75% of the net proceeds.

The Golden Faucet

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Ordinary folk don’t plan their finances during their working life, so what chance do they have in retirement?

None.

But, that doesn’t apply to us smart folk who read personal finance blogs …

… WE plan our retirement according to either Poor Man methods, or Rich Man methods known only to a few i.e. The Rich!

By the end of this post, you will know the difference; whether you choose to believe me and what you choose to do with this information is entirely up to you 😉

So, here goes:

Conventional Personal Finance wisdom – clearly ascribed to by the majority of my readers – says that you pick a so-called ‘Safe Withdrawal Rate’ …

…. that is, the percentage of your retirement Nest Egg that you can withdraw to live off each year that you feel will be small enough that your money will last as long as you do.

A sensible objective, wouldn’t you think?

You can pick any % between 2% and 7% (even up to 10%, if you believe all of those Get Rich Quick books) and find some expert or study that supports your choice.

You then have a choice to

a) make that % a fixed amount of your initial retirement portfolio (e.g. let’s say that you retire with $1,000,000 and choose 4%, giving you an initial retirement salary of $40k p.a.), then increase that salary by c.p.i each year regardless of how your portfolio rises or falls [AJC: it’s called the “close your eyes and hang on tight” approach to retirement living], or

b) choose your preferred ‘safe’ withdrawal % and let that rise and fall according to the rise and fall of your your portfolio’s value … so, if you happen to retire a year before the next stock market crash, you could be withdrawing 4% of $1 mill. in one year, then 4% of $500k the next year [AJC: no problem, as long as you can stifle the urge to jump off a ledge when your income halves, as well]

Optimists will choose a withdrawal rate in the 5% to 7% range and pessimists will choose a withdrawal rate in the 3% to 5% range …

… Rich people will do neither!

Why?

Well, before you retire (i.e. now, while you are still working) you could draw a curve of your likely salary moves between now and retirement and you could pick a living standard that corresponds to that curve, using actuarial tables to basically create an inflation indexed annuity for yourself throughout your working life.

But you don’t.

Instead, you live according to your means – and, adjust as necessary – and, build up various safety nets (via cash reserves and insurances) as you deem prudent and necessary.

Why would you do any different after you retire?

Poor people who retire put their money in a bucket and a little trickles in (interest, dividends, capital appreciation) and a lot gushes out (inflation, taxes, expenses, disasters).

You have a bad year or three, overspend a little, a couple of health issues, and you’re screwed [AJC: it even happens to retired sports stars, movie stars, and musicians. Ever heard of MC Hammer?].

But it doesn’t happen to smart Rich people, because they don’t drink from a bucket … they drink from a golden faucet:

They create – then live from – an income, both before retirement and after!

Think about our energy crisis past, present and future … all resolvable (we hope!) by switching to an abundant source of clean, green, renewable energy.

Now, think about all of your spending crisis past, present and future … all resolvable (you hope!) by living within your means a.k.a. creating an abundant source of renewable income!

That income can come from a family business that you retire from but retain “passive” part-ownership of; from venture capital activities; from real-estate investments; and, so on … in fact, from any investment that produces a reliable income stream that tends to grow at least in line with inflation.

Here is how I planned it:

1. I used the Rule of 20 strictly for planning purposes [AJC: this sounds like a 5% withdrawal rate, but who said that I’m actually going to withdraw the 5% each year?!]

2. I started creating a Perpetual Money Machine: something that will produce income that I can live off; in my case, it was RE bought with (or, for which I already have built up) plenty of equity or cash to ensure a healthy positive cash flow.

3. To cover ‘bad years’ and other contingencies, I retain at least 25% of the income stream until I have built up enough for TWO YEARS of living expenses and then I reinvest whatever is left over (i.e. buy another property every few years).

So, what if something goes wrong as it did for me when the GFC hit leaving me with too much house, another house I can’t get rid of, and $2.5 million of unavoidable stock losses [AJC: part payment for my business came in UK stock … yuk!], resulting in not enough income?

You go back to MM201 and start again (hence, my commercial property development activities) …

… after all, history has shown that your first fortune is by far the hardest 🙂

I’m diversified …

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Applications for the new $7 Million 7 Year Wealth System Guided Learning Experience are now closed. Thanks to all of those who applied … and, congratulations to those 30 who made it!

I’m not going to encourage my other readers to join, as I can’t see the point of paying $97/year for something that you could have got for free (well, for $1 a year). Anyhow, no advertising allowed on this blog … and, that even applies to me!

Instead, I hope that you will keep reading this blog, and that it will inspire and help you to make millions the good, ol’ fashioned way 🙂

_____________________________________

Yes, I am well and truly diversified …

… and, it sucks!

Here are my current holdings, roughly:

$5.0 million – House in Australia

$1.5 million – House in USA (soon to be a rental)

$2.5 million – Cash in Bank/s

$1.0 Stock in UK (actually, 70% has just been converted to cash)

$1.0 million – Equity in 5 condos

$1.0 million – Equity in two development sites (could be up to $3 million – $6 million once permits are issued)

$1.0 million – Value of business (I still have a finance company running on ‘auto-pilot’)

… aside from the fact that I’ve over-invested in my Aussie house [AJC: see this post for the problem and how I intend to fix it], you can see why I am not happy:

– Too much in cash,

– Too much overseas, in chunks too small to be meaningful

– Too many ‘small’ chunks of $1 million

Ideally, I would like to bring some of those small chunks together, merge them with my cash (like so many drops of mercury) and do something useful with them …

…. by ‘useful’, I mean plonk as much as the bank requires into my two development projects, then use the proceeds to buy as many investment properties in the $1 million to $3 million price range that I can find, as long as the net result is free cashflow of $500k+ p.a.

Nowhere here do you see me saying:

– 30% in cash,

– 30% in real-estate,

– 30% in stocks

– 10% in venture capital

Mine will look more like:

– 80% – 90% real-estate (albeit, over a number of properties, rather than just one big’un),

– 5% – 10% cash for contingencies (up to approx. 2 year’s living expenses or $500k to $1 million, whichever is the lesser)

– 5% – 10% for ‘fun projects’ (e.g. venture capital investments).

Why so much in RE?

[AJC: It doesn’t have to be RE; how I invest my money is not how you should invest yours … but, the principle of NON-diversification is what’s important, here. And, I should clarify that, too: for you, non-diversification could be 95% in TIPS; 80% in AN index fund; 90% in just 4 or 5 stocks … in other words: it means, avoiding spreading across asset classes]

I can’t find the online reference, but Warren Buffett was asked at the 2008 Berkshire Hathaway AGM (which I attended, so I am paraphrasing exactly what I heard, here) how much of his net worth he would place into one position (Berkshire Hathaway doesn’t count, because it’s really a conglomerate).

Warren said that his biggest problem right now is that his investment war chest is so large that he is forced to buy many investments, however, he did point out that he was very happy in days long gone, when his investment in AMEX comprised nearly 60% of his net worth.

Charlie Munger (Warren’s long-time business partner) said that he would be equally happy to have close to 100% of his net worth in just one outstanding investment.

BTW: Charlie is a real ‘character’; short on words … long on wisdom!

Having sat on both sides, I can tell you that – right now – I am NOT happy being so ‘diversified’ … it annoys me, and I feel hamstrung in that I can’t bring my full financial weight to bear on any project.

But, each to their own … it’s just that certain rich peoples’ “own” = non-diversification 🙂

_______________________________________

Adrian J Cartwood is on FaceBook … come and be friends!

_______________________________________

The Ultimate Gift – Part II

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If Monday’s post didn’t spur you to start early, this one sure should!

First, here is something that will upset you if you are already 55 and figure that you need another 10 years to retirement:

Not bothered?

Well, let’s see if we make the same comparison, starting with a much earlier retirement age:

If you used to think that a lifetime of work was good for you, think again – this chart [AJC: the blue line is the important one] shows:

The longer you work, the shorter you live!

From another article:

Generally, it is found that people retiring early live more, but how long do they live? Or what is the average number of years they live after retirement? Well, now 49-50 is usually not considered to be a retirement age in most countries. However, if a person plans everything well and retires at the age of 50, he is expected to live for at least another 35-36 years, which increases the life span to almost 85-86 years! People retiring in their early 50s, normally live up to their late 70s or early 80s and people retiring at their early 60s, live till their early or mid 70s.

We had a pretty important reason to aim to Get Rich(er) Quick(er) i.e. so that we could have the time and money to finally live our Life’s Purpose …

…. but, if you don’t have a clearly defined purpose, then let me give you just one real clear, real simple reason to get Rich(er) Quick(er):

If you retire before 50, you will live 20 years longer than if you wait for normal retirement age.

No longer is the idea that “business/investing is too stressful … I’ll just wait it out in my nice stress-free post office job” valid …

…. I don’t care whether you intend to retire with $1 million or $10 million, as long as you reach your Number much sooner than you otherwise would.

By reaching my Number at age 49, I not only gave myself the gift of finally having the means to truly live my Life’s Purpose, but I also gave myself the gift of 20 years extra in which to live it …

… this, too, is my gift to you.

Don’t waste it!

Do the rules need to change?

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Please keep sending your questions and comments either via e-mail [ ajc @ 7million7 . com ] or via the comments; I answer as many personally and/or here as I can …

… for example, Mike asks:

Are your rules of thumb like making 15% year on year in the stock market still true in an environment when treasuries and inflation is so low?

One of the reasons pension funds are blowing up left and right is that there are assumptions on portfolio rises of 8% per year… so should you be pulling down those numbers of expected returns?

This is a great question … so much so, I’m wondering why anybody hasn’t challenged them before, considering the current market.

Yet, my answer would be – and was – and is:

We’re not concerned, here, with what stock markets are doing now, [not] like pension fund managers and traders are …

The reason is simple: we’re not trying to invest to achieve the greatest possible returns now, as traders and pension fund managers hope to achieve …

… we’re here simply to reach our [large] Numbers by our [soon] dates.

By ‘large’, we’re talking $7 million (give or take a few million) and by ‘soon’, we’re talking 7 years (give or take a few years).

We’re not talking this year, or even the next, or the next, or …. we’re totally focussed on that end result.

Besides, traders and fund managers who chase the market fail … and, fail miserably 🙁

Here’s what happens to ordinary folk who try and time the market, because they are worried about [temporarily] low returns or are chasing [temporary] high returns:

This shows that no matter what gyrations the market had over the last 10 years – as shown by the green area – the typical investor never managed to keep up – as shown by the blue area – not by a small margin, but by a HUGE CHASM, managing a return of only 1.87%

Think about it: the average investor (that’s you and me) only managed less than a 2% return, over the 10 year period 1998 to 2008, when the market returned over 8%.

That’s worse than simply sticking your money in the bank!

[AJC: to show it’s not just a function of the current market, this huge discrepancy also held true for Dalbar’s earlier study]

And, if you think that’s because the average investor is a know-nothing dolt and you can do better; here’s what professional fund managers managed to achieve:

2.7% … that’s the best that even the professionals could manage.

Why?

Because both professional fund managers and investors (yep, even those who BELIEVE that they are buy/hold long-term investors) switch in and out of the market, altering their strategy [AJC: a nicer phrase than greed and panic] as markets rise / and fall … obviously, timing things terribly.

That’s why when I talk about investing – and, the associated rules of thumb – I look at the average returns over a long period. I sometimes even advocate looking at the lowest average returns over a similar period.

Yes, if your Number is soon, then you will need to look up my references (they are sprinkled thoughout my posts) and choose more appropriate estimates and take your chances along with the rest of the speculating masses …

… but, for planning your Number and then acting out your strategy you can – and, probably will – do much worse than simply following my ‘rules of thumb’.

After all, I have made $7 million in 7 years – and, this blog is all about helping you do the same – using these exact, same strategies that I teach here.

* Footnote: in the interests of full disclosure, here’s what I told a reader on Monday:

I hope that everything here rings true; I try and give all stories from personal experience. But, not everything happened for me in a nice, clean order: for example, I only found out about the 20% Rule a couple of years ago.

Sometimes, I simply have no choice but to talk from personal experience about ‘rules’ that I found out about a little too late 😉