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Don't Count on Stocks and Bonds to Make You Wealthy

By Mark Ford, wealth coach, The Palm Beach Letter
Wednesday, August 20, 2014

In my ongoing effort to shock people with contrarian (and sometimes counterintuitive) truths about building wealth, I give you this little nugget to chew on today:
 
You cannot become wealthy by investing in the stock and bond market.
 
(Please keep this on the down low. If my colleagues in the investment-newsletter industry knew I said that, they would have me tarred and feathered!)
 
The investment-advisory industry – and by that, I mean brokerages, private bankers, and insurance agents, as well as investment newspapers, magazines, newsletters, and Internet publications – is a huge multibillion-dollar business based on hard work, clever thinking, and sophisticated algorithms.
 
But also on one teensy-weensy lie...
 
The lie is that you can grow wealthy through investing in stocks and bonds.
 
It's not a big, black lie. There is plenty of evidence that strategic stock investing can provide returns that exceed investment costs (brokerage fees, management fees, subscription fees, etc.) and even produce positive returns after inflation.
 
But to do that, you need time. More time than you probably have.
 
Let's say you have $50,000 to invest. And let's say you invested it according to a really good investment strategy. And let's assume that things go well. And by well I mean that you make, on average, 10%. If you started on January 1, 2012, by December 31, 2021, your $50,000 would have increased to $129,687.
 
That's not bad. But it hardly makes you wealthy. So let's say you were willing to extend your investment horizon to 20 years. Beginning at the same time with the same $50,000, you would have $336,375 on December 31, 2031.
 
That's better, but it's still a far cry from making you wealthy. So let's push the investment horizon to 30 years. By December 31, 2041, you would have $872,470.
 
If you made 10% on that $872,470 nest egg, you'd have a yearly income of $87,200. After taxes, you'd take home about $65,000 per year. That's OK, but it's hardly wealthy. And that's after investing for 30 years!
 
Most of the people reading this essay don't have 30 years to wait. Based on what I know about our readership's demographics, I'd say the average reader's wait period is 10-15 years.
 
So what's a middle-aged (or older) wealth seeker to do?
 
You can start by deconstructing the little lie.
 
Building wealth involves much more than just investing in stocks and bonds. Most rich people get that way by consistently doing the following five things:
 
1.   They understand and manage their debt. They don't let debt manage them.
 
2.   They are abstemious spenders and aggressive savers, far outpacing their peers.  
 
3.   They invest in stocks and bonds with discipline. But they don't expect stocks and bonds to make them wealthy. 
 
4.   Their primary focus is on increasing their active income. Usually, this comes from a business they know inside and out.  
 
5.   They invest in real estate and other "outside Wall Street" opportunities.

As you can see, investing in stocks and bonds is only one of the five strategies you must follow to become rich.
 
In fact – most of the rich guys I know spend little or no time investing in stocks and bonds.
 
Phil, a very wealthy friend in his 40s, invests in stocks and bonds. He favors municipal bonds, and he is a true expert at them. But he didn't become wealthy by investing in bonds. He got wealthy as a marketing and Internet entrepreneur and by leveraging some debts and eliminating others. Nowadays, he buys and sells bonds, but that takes him only a few hours per month. For Phil, investing is a part-time way to increase the value of his savings. It is not – and has never been – his primary road to wealth.
 
Bob, a mega-wealthy friend of mine who lives on my block, also invests in stocks and bonds. He too is a very smart guy and makes good returns on his stock and bond portfolios. But like Phil, he didn't make his fortune that way. He got rich as a commercial real estate developer. He also made millions investing in fine art.
 
It's the same with all my millionaire friends. They all have their own stock and bond investments, but like Phil and Bob, they got rich by putting their money and their time into other investment activities.
 
As for me, I paid only a minimum amount of time and effort into stock and bond investing until I started writing The Palm Beach Letter. Yet I managed to go from broke to having a net worth well in excess of $60 million – mostly by outside-Wall Street investment strategies.
 
Don't get me wrong. I'm not saying that investing in stocks and bonds has no value. It is essential. But it was not and will never be my core strategy for accumulating wealth.
 
It is certainly possible to become wealthy through stocks and bonds. But you have to devote 40-plus hours per week to it. And you have to be very disciplined. And you have to do it for a long, long time.
 
If you don't have that time, you have to take another course...
 
I will never be a full-time stock and bond investor. I am willing to spend an hour or so a week. The rest of the time is devoted to what I've always done. I want to talk a bit about that today...
 
If you want to get wealthy in fewer than 30 years, you should pay attention. Devote a couple of hours per week to managing your stock and bond investments and spend the rest of your working time on the other wealth-building strategies listed above.
 
You may be thinking, "I don't need to be told to limit my spending or manage my debt. I already know how to do that." My response to that: Do you?
 
Or you may be thinking, "I already lost money in real estate. I have no interest in doing that." My response: If you lost money, it is because you did exactly the wrong thing. Real estate investing, if you do it the right way, is the easiest way to build wealth. That is why most self-made billionaires have large real estate portfolios.
 
Or perhaps you don't like my idea that you must – must – increase your income. Most people reading this have been working hard for 30 or more years to raise families and put their children through school. They want to stop working for income. They want to quit their jobs and invest in stocks and bonds. They want to take it easy.
 
Giving up your active income (as I explained in this DailyWealth essay), is the single biggest financial mistake you can make. Your active income is essential to building your wealth. If you want to retire some day and don't have at least $250,000 put aside for that purpose, you need more income.
 
The good news is that there are all sorts of ways to do that. Just as there are all sorts of clever ways to manage your debt, get more value out of your spending, and ratchet up your savings.
 
This is very basic stuff... Wealth-building strategies that your grandmother would understand.
 
But simple – for some people – is not interesting. Some people think complicated works. I know it doesn't.
 
Best,
 
Mark




Further Reading:

Over the past 30 years, Mark Ford has built a reputation as one of the country's foremost experts on wealth building. And one of the most important ways to build wealth, he says, is to never retire... "When you give up your active income," Mark writes, "two bad things happen..."
 
Mark's brilliant at finding unorthodox ways to make a buck... and he loves to share them with readers. In this interview, Mark describes the simple money-management system he has used to generate more than $50 million in wealth.

Market Notes


ANOTHER 'BASICS' WINNER

Today's chart is another reminder that "selling the basics" isn't exciting... it just works.
 
Longtime readers know that when it comes to investing in growing economies like Asia, Africa, and South America, we tend to avoid hot gadgets and Internet stocks. We recommend the "basics" approach of owning dominant global companies that sell things like soda, cigarettes, and fuel. "Boring" products like these enjoy steady, unrelenting demand... and there's scant risk new technology will make having a beer after work obsolete.
 
To see this idea in action, take a look at PepsiCo (PEP). Over the years, Pepsi has become a major conglomerate of popular food and beverage brands. Its products now include the likes of Gatorade, Tropicana, Frito-Lay, Doritos, Quaker Oats, Life cereals, and even Rice-a-Roni. In other words, Pepsi sells products that people use every day.
 
And the chart below shows that "selling the basics" is working. Over the past three years, shares of Pepsi are up more than 65% (not including dividends)... and just hit a new all-time high. Pepsi's business isn't exciting... it just works.
 

premium teaser


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