You can tell how well an audience liked your speech if, as you walk back from the podium, you look at those seated at the end of the aisles. If you’ve done well, most of them will be looking at you, smiling. If you’ve done poorly, they’ll look away, like a jury does to the accused when they return with a guilty verdict.
There were about 400 people in attendance. Mostly older folks. They were there to learn “how to create a $10 million portfolio.” In his introduction, the emcee had told them that the speakers were going to give them a bunch of “million-dollar ideas.”
Not surprisingly, they were visibly disappointed by what I had to say.
What I said was something I’ve been saying for as long as I’ve been writing about building wealth: Unless you have at least 30 years for compound interest to work its magic, you are not going to become wealthy by investing in stocks.
Here’s how I put it many years ago:
The investment business – and in that I include brokerages, private bankers, and insurance agents, as well as investment publications – is a huge and hugely profitable industry that provides a generally useful service. But it is populated with smart, ambitious people who promote one teensy-weensy lie.
The lie is that you can grow wealthy in less than 30 years by investing in stocks and bonds.
It’s not a big, black lie. There is plenty of evidence that strategic investing can provide returns that exceed costs (brokerage fees, management fees, subscription fees, etc.) and even produce positive returns after inflation. But for that to work, you need time.
Say you start with $50,000. And you follow a tax-deferred investment strategy that has been proven to deliver 10% annually, year after year.
At the end of 10 years, your $50,000 will have increased to $129,687. At the end of 20 years, it will have grown to $336,375. And at the end of 30 years, it will be $872,470.
$872,470 will give you $87,200 of income for 10 years, which might come to about $65,000 after taxes. That’s okay. But it’s hardly wealthy.
Besides, you probably don’t have 30 years to wait before you would want to begin spending that income.
So what’s an earnest wealth seeker to do?
In that essay I talked about the fundamentals of building wealth. I said that there are basically five things you must do:
- Master your debt. Borrow only to build wealth, not to spend. And never borrow more than you can easily manage.
- Increase your income. It’s not enough to get the occasional salary hike. You’ve got to increase your income steadily and significantly. That usually means creating additional income streams.
- Limit future spending. As you add to your income, you should reward yourself by spending some of it on something you enjoy. But the lion’s share of that extra cash (70% to 90%) should be set aside for growing your wealth.
- Set aside a start-over fund. You could lose your job. Your side gigs could disappear. Put enough money aside so that if all your income stopped, you’d have enough to not only pay your living expenses but to start up your extra income streams again.
- Go beyond Wall Street. Stocks and bonds are fine. But they are not enough if you need ROIs in excess of 10%. There are many options that can give you higher yields as safely as Wall Street’s favored products.
My speech focused mostly on that last strategy – going beyond Wall Street to get higher yields safely.
I told the audience that I like to categorize investments in terms of how much of your time and attention they require:
- Passive investments require very little time and attention. These include mutual funds and managed stock and bond accounts. Assuming your main concern is the return of your capital, rather than the return on your capital, this is the safest category of them all. Also provides the lowest ROI.
- “Semi-active” investments require some time and attention. In this category are things like direct lending, super-safe options (e.g., selling puts on Warren-Buffett-type stocks), rental real estate, and tax-liens bought and sold by you but managed by someone else.
- Active investments require a lot of time and attention. These are primarily investments in entrepreneurial businesses. The key here is to buy into only businesses you truly understand and over which you have total or at least considerable control. (This usually means businesses you’ve owned or managed before.)
I then told them that each of these categories has its own “natural” range of ROIs:
- Passive investments will give you 7% to 10%. You will average, long-term, about 9% on your managed stock accounts and about 7% on your bonds. (Maybe 4% with tax-free bonds.) If you mixed them equally, for extra safety, your ROI would be about 8%.
- Semi-active investments will give you 8% to 16% (and sometime more) safely.
- Active investments – if you hold to the rule of buying into only businesses that you understand and can control – can give you (and often do) several years of 100% growth followed by several more at 25% to 50%.
Yes, I told my audience, you can lose your money in any investment. But if you invest wisely, you can reasonably expect to earn the “natural” range in each of these three categories.
This is not what they wanted to hear. These retired or nearly retired ladies and gentlemen, exhausted as they were from working so hard and investing so poorly for so many years, were there to learn “how to create a $10 million portfolio.” They wanted “million-dollar ideas.” They wanted the promise of that 10,000% ROI – the one they’d been chasing all their lives. They wanted it now. And the best I could offer was an idea with the potential for growing their money over several years by 100%.
No wonder they looked the other way.