**Principles of Wealth #29* **

*There are proven ways to safely achieve a higher-than-average ROI for certain asset classes under certain conditions. One can, for example, safely double the ROIs on income-producing real estate by using bank financing wisely. The same is true for many business transactions, some stock strategies, and a handful of other asset classes. *

There is a perfectly understandable reason why investors care so much about ROI (the rate of return they get on their invested money). Consider the difference between making 10% versus 20% on a grubstake of $20,000 over 40 years. At 10%, you would end up with $905,000. At 20%, you’d have $29 million!

Here’s the problem: It’s basically impossible to get a 20% ROI over 40 years. When individual investors try to get those sorts of returns, their actual average ROIs are less than 3%.

So the real difference isn’t between $905,000 and $29 million. It’s between $905,000 and $65,000.

Nine hundred grand is not a fortune, but it’s a heck of a lot better than $65,000.

Sixty-five grand will get you just about nothing. Nine hundred grand will give you a theoretical return of about $90,000 a year. Most financial planners agree that taking out 4% every year is safe. Four percent of $905,000 is $36,000. That’s how much you could take out without depleting the base.

This brings us to a related principle…

*Although it’s foolish to try to double the natural (historical) ROI for any market, there are reasonable ways to achieve modestly higher gains safely. *

** **There are ways in almost every market to outpace the averages by, say, 20% safely. For example, if the average ROI is 10% (as allowed for above), it is sometimes perfectly reasonable to shoot for 12%.

The difference between 10% and 12% may sound like very little. The math may surprise you.

That same $20,000 invested over 40 years at 12% will effectively double the end result, taking the retirement nest egg from $905,000 to more than $1.8 million. Four percent of $1.8 million gives you $72,000 a year. A big difference!

To recap:

If you try to turn that $20,000 into $29 million, you will likely end up with $65,000. Which will be worth, after inflation, no more than you started out with.

If you are happy to get a historical market return of 10%, you’ll end up with $905,000 in your retirement account, from which you can take $36,000 a year.

If you tweak your investment strategy to get just 20% more than the average – in this case, 12% – you will end up with a retirement nest egg of $1.8 million and the ability to withdraw $72,000 a year safely.

** In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost. *