Tag: Investing

This Chart Taught Me Some Mindblowing Lessons About Wealth

On By Dean BrooksLeave a comment

Stocks and mutual funds won’t make you rich. Starting your own business will.

Source: https://www.visualcapitalist.com/chart-assets-make-wealth/

So, I discovered this chart by a post from James Camp, a guy I follow on X, who specializes in “nanoflips.” Check out his bio for info on those.

The graph comes from Visual Capitalist, a clever website that takes complex information and distills it into to easy to understand (and colorful) charts.

The chart displayed above is based on a Federal Reserve Survey of Consumer Finances from 2016, and it contains some illuminating aspects about how people in different net worth tiers manage their wealth.

Like many, I’ve always been under the impression that stocks and mutual funds are the best ways to build and maintain wealth for the average person. Over the last few years, I’ve diligently maxed out my 401(k) and IRA funds. I contribute regularly into a personal brokerage account. Even through the Covid Crash and the 2022 drawdown, I kept plugging away, dollar-cost averaging into the market like you “should.”

The returns have been solid, for sure. While I’m not close to retirement anytime soon, I’ve built up a decent net worth. I like to think I’ve “secured the bag.” Meaning that even if I never contributied another dime to my investment accounts from now until age 65, compound growth alone would get me to a comfortable retirement. And that’s NOT taking into account potential Social Security payments.

I say “potential” because who knows if Social Security will exist by then, or pay out what it’s supposed to. It’s never a good idea to bank your life on a government program, especially when the government is over 30 trillion dollars in debt.

However, the above chart has made me completely reevaluate my relationship with invesing and money in general.

Source: https://unsplash.com/photos/woman-in-gray-shirt-holding-fan-of-us-dollar-bills-OyDZRZOlENw

For starters, the chart shows that the higher a person’s net worth the more they have invested in “business interests.” These are businesses someone owns personally. They could be anything from a franchise, a laundromat, a service company, all the way up to a controlling stake in a Fortune 500 company.

Elon Musk has a 20.5% stake in Tesla, for example.

What’s surprising, however, is how little percentage-wise wealthy people are invested in stocks and mutual funds relative to their net worth. The chart combines net worths together and works out an average. So in the row where it says $10K, it’s grouping all the people with $10K through $100K together. Then in the $100K row, it’s everyone with a net worth between $100K and a million. So on and so forth.

People in the $1 million to $10 million range look to have close to 40% of their net worth in retirement accounts, stocks, and mutual funds. This makes sense give that most people in that range are retirees who spent years contributing to company 401(k) plans, pensions, and their own IRAs. About 30% of their net worth is in their primary residence.

However, going further up in net worth on the chart shows that the wealthy have increasingly less in stocks and personal homes, and vastly more locked up in their own businesses.

For those in the $10M+ group, stocks are no more than about 30% of their net worth, and their personal homes aren’t even 15%. Their wealth is mainly all in their own businesses.

This may seem obvious. But almost everywhere you turn, you only ever hear about the importance of investing in a diversified portfolio of mutual funds and ETFs.

Dave Ramsey touts mutual funds like a religion to his millions of listeners.

But are index funds and mutual funds really the best ways to build wealth?

If you were to ask most people how they think they can get rich through investing, most would probably say by getting lucky on a stock or cryptocurrency.

This is not impossible, of course. A mere $10K in Apple stock 20 years ago would be worth almost $5 million today. Buying Bitcoin or Ethereum just five years ago would have given you substantial returns.

People may remember the “meme stock” craze from just a few years ago with Gamestop and AMC. The whole internet was gripped with trying to ride the next big thing “to the moon.”

Let’s not even talk about the NFT nonsense.

Point is, everyone thinks stock investing = getting rich, except people who actually are rich. They know stocks and mutual funds won’t make you rich. They can make you financially secure. But if you want to become truly wealthy, you’re best bet is by starting your own business.

Think about it. Stock picking is unreliable unless you know what you’re doing. If you decide on the safer, diversified route of index funds, ETFs, or mutual funds, it could take decades to build anything substantial. It’s also highly unlikely you’ll break into the top 1%.

To get to $5 million, for example, you’d have to invest $18,000 a year every year for 40 years at an average annual return of 8%.

Wait, only $18,000 a year? That doesn’t sound too bad.

Well, according to the National Board of Labor Statistics as reported by USA Today, the average salary in the United States in Q4 of 2023 was less than $60,000. So, the typical person would have to stock away almost 1/3 of their income for basically their entire working life to get to that $5 million. That’s a pretty tall order considering they still have taxes and bills to pay.

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This information may sound sobering, or even despairing. Especially to 401(k) and IRA maxers like myself, stock market junkies, or those in the FIRE (Financial Independence Retire Early) camp.

It’s important to keep some perspective. A $1 million net worth is still a lot more than most people will ever have. I’d argue you probably don’t even need half of that to retire, provided you manage your money well and are prepared to live modestly. And those are certainly attainable amounts for those who prefer the more traditional route of diversified index fund investing. Investing $3600 a year over 40 years at 8% gets you to a million.

But why cap your financial potential with just mutual funds?

What I’ve taken from this chart is that to become wealthy you’ve got to get creative and entrepreneurial. While I’m going to keep investing in stocks and my retirement accounts, of course, moving forward, I’d like to start thinking beyond them. I’m going to start allocating some of my income toward experimentation with businesses. This will prove a tough adjustment for me, as someone who’s never had his own business or been much of a risk taker. No doubt there will be some failures and surprises along the way. But I think it will be good mindset shift in the end, and hopefully a lucrative one, too.

The Number One Thing I Wish I Knew Before Investing in Cryptocurrency

On By Dean BrooksLeave a comment
Photo by RODNAE Productions from Pexels

No, it’s not investing in Dogecoin or Shiba Inu, or any other meme coin that rocketed to the moon and beyond. Though I do remember seeing Shiba offered on a decentralized exchange long before it went parabolic, chuckling at the dog symbol, and then simply scrolling past it. That’s the easiest 1000x bagger I’ve ever missed.

It’s not learning about DeFi platforms, such as PancakeSwap, and the numerous other liquidity pools on UniSwap, etc.Though I do remember hearing about PancakeSwap sometime in early 2021 on Twitter before it became super popular. CAKE was all of a few dollars at the time, and you could stake it for an APR of like 800%. It has since fallen back in price to about where it was when I first learned about it. And the APR is around 38% last I checked. 

Here’s the deal: You’re almost certainly going to miss out on like 99.9% of the greatest investment opportunities out there. There’s no point in beating yourself up over that. Just accept it.

But that’s actually great news. Because the truth is that you also have a 99.9% chance of finding a few great investment opportunities BEFORE they get big and deliver those nice, multi-X gains.

The biggest question isn’t whether you can find those opportunities. If you keep looking for them, it’s practically a mathematical certainty that you’ll eventually find one sooner or later. “Seek and ye shall find,” as the Bible says.

The real question is whether you’ll fully take advantage of the opportunity when you do find one.

In probably no other asset class is this rule more apparent than in cryptocurrency. The asset class where a coin or token can skyrocket 100–1000% and higher in a matter of weeks or days.

But you don’t have to luck out with meme coins, or sh*t coins, or risk rug pulls on dubious dex coins, or anything ridiculous like that.

When I look back at my crypto investments, my biggest regret is simply not investing enough in solid, reputable projects when they were cheaper, and when I had the chance.

In my article on Polkadot, I mentioned first starting to buy it in July of 2021, after it had tumbled from its initial high in the $40s, to as cheap as $10-$11 per DOT. I knew it was a solid project with a lot of developers, and a rapidly growing ecosystem. So, of course, I only invested a few hundred on the outset. Gradually dollar-cost averaging in, as you’re supposed to for proper risk management. DOT then proceeded to climb to over $50 later in November before falling briefly back down to the mid-teens this past January. It’s now in the early $20s, and still pays roughly 14% in staking rewards.

For Bitcoin, I had a similar experience. My first purchase was for all of $25 worth back in September, 2020, when Bitcoin was “only” about $10,000. I probably only managed to put in a few hundred more before it started really climbing in early 2021. Same deal with Ethereum, which I started buying initially that December when it was in the $700s.

It’s not like I didn’t have more money to invest into those coins at the times I discovered and vetted them as risk-worthy assets. If anything, I was overcautious, allocating far below what I could have and should have, proportional to my income and net worth. 

I didn’t lack funds. I lacked conviction. I was too timid. And that difference of temperament may have been what separated me between mere modest gains and possible financial independence.

Of course, to be fair, that overly cautious temperament of mine could also have been the difference between solvency and ruination, had those coins not broken out to the upside.

Look, I’m not saying to go out and plunk down tens of thousands on the first good investment you come across. And I’m certainly not saying to go all in on anything, no matter how much of a sure thing you think something is.

What I’m saying is sometimes all that stands between you and getting wealthy, or at least scoring big on an investment, is balls (or ovaries). 

Sometimes you’ve got to go in BIG on a conviction.

Imagine if the Winklevoss twins hadn’t committed heavily into Bitcoin when they first learned about it in Ibiza in the summer of 2012. They probably wouldn’t be among the first crypto billionaires today. Even worse, they’d still be known as the guys Mark Zuckerberg screwed over in that movie. In fact, you could even say that because they didn’t fully commit to their social network ConnectU, that they gave Zuckerberg the opportunity to take advantage of them.

Asset diversification has its place. My retirement funds are diversified, for sure. But diversification is also, as Michael Saylor puts it, “Selling the winners for the losers.”

Proper asset concentration, on the other hand, can make you wealthy.

As I continue my investing journey, one thing I’ve learned more and more is that it’s not so much about numbers or dollars. It’s more about psychology. It’s about being able to fight through the fear of loss, and committing strongly to a good asset or opportunity when you find one.