In September of 2008, financial markets began their tumble down.
On September 14th, Merrill Lynch agreed to sell itself to Bank of America at a firesale price to avoid collapse.
On September 15th, Lehman Brothers went bankrupt, becoming the largest bankruptcy filing in U.S. history.
On September 16th, the Federal Reserve gave AIG an emergency $85 billion credit line to stay afloat.
On September 18th, the President’s top appointed officials met to design a bailout of the banks.
On September 19th, money market funds, long considered one of the safest investments, experienced a “bank run” — with withdrawals jumping from $7.1 billion to $144.5 billion in the space of a week.
And as the economic storm rained down, Americans were looking for help, and helped us form the foundations of Wealth Factory’s philosophy, mission, and world outlook.
Within 6 months, the Dow Jones fell 43% on the New York Stock Exchange.
The CBS investigative TV show 60 Minutes asked viewers:
“What kind of retirement plan allows millions of people to lose 30-50% of their life savings just as they near retirement?”
And just like that, the Wealth Factory revolution began.
Is This Any Way to Grow Wealth?
The financial industry had spent decades pounding myths into our collective heads. Myths like:
1. To get high returns, you need to accept high risk.
2. Don’t worry if you’re losing money right now, it’s a marathon, not a sprint!
3. Cut back today, so you can enjoy life in the future.
Because of these myths, financial planning has become synonymous with stuffing money into 401(k)s and IRAs full of mutual funds — then waiting 30 years for the magic of compound interest to kick in.
It’s a 30-year-long bet on the markets that, if you get wrong, there’s no time left to start over.
And recent events show it’s a dangerous time in history to make this bet.
The Truth About Markets in 2016
Since the stock market crash of 2008-09, you may know that markets have climbed their way back with the help of unprecedented money-printing.
Even so, markets are not living up to the legend.
Retirement planners will tell you the stock market averages 8-11% returns per year — or 5-8% per year inflation-adjusted. That may have been true last century, but this century has seen that turned into fiction.
From 2000 to 2015, the Dow Jones was up just 8.4% total when adjusted for inflation, or 0.56% per year.* And that was after a substantial market rally. So not only was the Dow not returning 8% per year, it barely returned 8% total after 15 years. (That’s even more devastating when you remember that 15 years is half of your 30-year bet.)
It gets worse. In the early months of 2016, the Dow Jones gave up all of its inflation-adjusted gains since the year 2000.**
There’s no disputing it — the stock market is barely even keeping up with inflation this century.
Wwe’ve observed that many individuals who allocate funds to the stock market often lack clarity about their investments. They’re unsure about the potential returns, lack strategies to minimize risks, and are often in the dark about the real-world value they’re contributing to.
The typical approach resembles a casino-goer placing bets based on others’ wins. Yet, many financial experts still label these individuals as ‘investors’. These ‘investors’ find solace in following the crowd, sparing them the need for deeper reflection. The problem is, that’s just gambling, not investing. Our definition of investing revolves around activities where we have significant control, deep knowledge, and the ability to reduce risks substantially, ensuring a safe and profitable outcome.
And then there are the fees…
401(k)s usually come with more than a dozen undisclosed fees: legal fees, trustee fees, transaction fees, stewardship fees, bookkeeping fees, finder’s fees and more.
Then the mutual funds inside a 401(k) or IRA have their fees, too. They take around 2% right off the top, so if the fund earns 7%, you only get 5%.
That doesn’t sound so bad, until you do the math. The chart below shows the interest earned on a $100,000 investment over a person’s lifetime, starting at age 20.
At age 50, a 7% return earns more than double a 5% return, and none of it goes to you. It goes to the mutual fund.
At age 70, a 7% return is so much greater than a 5% return that the mutual fund actually ends up with two-thirds of your gains.
Jack Bogle, the founder of Vanguard says this about mutual funds: “Do you really want to invest in a system where you put up 100% of the capital, you take 100% of the risk, and you get 30% of the return?”
Fortunately, as an entrepreneur and business owner, it’s easy for you to reject this system.
How the Entrepreneur’s Advantage Beats the Markets
As an entrepreneur and business owner, you have a unique advantage over everyone else when it comes to wealth.
Your entrepreneurial instinct makes it easier for you to avoid tumbling markets.
There are two reasons why:
First, the whole world told you to go to college to learn to be a good employee who faithfully funds a 401(k) or IRA.
But somewhere along the way, you broke the mold. You took the road less traveled and started a business.
While everyone else got in a single-file line and did as told, you stepped out on your own. And even today, you don’t do anything just because “everybody’s doing it.”
That’s reason #1.
Reason #2 is that, as an entrepreneur, you have a deep understanding of cash flow. Cash flow, not net worth, is a better indicator of your financial health.
You know that cash flow is the lifeblood of your business and must be watched closely.
So when a retirement planner asks questions like, “How much money do you need to save to retire?”, you know that they’re expecting you to save a big pile of money to be spent down in retirement.
But as a business owner, you know that living off savings means negative cash flow. That would mean your expenses are higher than your income, and that’s the definition of insolvency.
This faulty model is nothing but planned bankruptcy, and yet it’s popular with retirement planners everywhere. No wonder so many people fear outliving their money.
There’s a Better Way
Rather than taking money out of your business and investing in someone else’s business through the markets — you can invest in your strengths, your value creation abilities, and enhance your cash flow.
And an investment in yourself is an investment in your business and your ability to produce — which grows your prosperity, not the prosperity of big banks or Wall Street.
Plus, when you invest in yourself, you create wealth today rather than wait for it to appear in 30 years:
So instead of cutting back, sacrificing and delaying happiness to save a big pile of money, consider the impact of investing in your ability to produce more, to provide more value to others, to grow our cash flow and to live wealthy today — not 30 years down the road.
Think about it. Talk it over with a spouse or friend.
And then be on the lookout for more financial wisdom from Wealth Factory that you won’t find anywhere else.
* The Dow Jones reached as high as 11,722 in the year 2000, doing so on January 14th. Fifteen years later, on January 14, 2015, the Dow closed at 17,427 — or 12,707 inflation-adjusted to year-2000 dollars. That’s an 8.4% increase.
(Note that the calculation was done on January 14, 2015, using the BLS inflation calculator. Today, you will get a slightly different number due to the calculator utilizing inflation data from all of 2015, not just January.)
** On February 11, 2016, the Dow Jones closed at 15,660, or 11,382 in year-2000 dollars. That’s lower than the January 14th, 2000 high of 11,722
