How To Build Lasting Wealth

Basketball is by far my favorite sport. I grew up in the 90’s watching some of the greatest players to ever play the game (Shaq, Kobe, Tim Duncan, Michael Jordan, etc). I think the NBA is more exciting today than it’s ever been, but it’s crazy to see how much the game has changed.

Back in the 90’s, everyone wanted a big man with a low post game. The Center position was the cornerstone of a successful team. The smartest play was usually to feed your big guy down low. If you couldn’t get the ball to him, the second option was a midrange jump shot by one of your wings. The last resort if option 1 and 2 failed, was the 3-pointer. It was almost always a bail-out shot. It was something you used if your big man got double teamed or if the clock was running late and you had to chuck something up.

Watch any NBA game today and you’ll quickly realize how much things have changed. The old school Center is a dying breed, and teams are realizing the dominance of strong 3 point shooting. The game has vastly changed and will continue to do so. For teams today – it’s eat or be eaten. It’s adapt or die.

So what does this mean for us?

We need to realize that the personal finance game has changed too.

Things are happening quickly. Entire industries have come and gone overnight. (How many businesses has Amazon single handedly destroyed the past couple decades?) If we want to succeed in this environment, it’s time for us to change as well. For us early retirement dreamers, for us millionaire hopefuls – it’s also time to adapt or die.

There are currently 30 teams in the NBA, and in that group of 30 you see a wide range of success.

Bad teams have terrible offense and terrible defense. Good/decent teams are usually strong at one but weak at the other. But the truly great teams, the real title contenders, have both amazing offense and amazing defense. The same is true with people.

The poor usually make very little and spend almost all their income. The middle class either make good wages but tend to overspend on liabilities, or make average wages and focus on saving/living frugal.

But if you’re reaching for the financial moon, if you want to build lasting wealth, you need to be great at both offense and defense.

Think about it.

If you make $1,000,000 a year but still somehow spend more than you earn, you are doomed to fail. There’s a reason why 78% of NFL players go broke 2 years after retirement. On the flip side, if you are stuck in a near-minimum wage job, no matter how good you are at saving the chances of you achieving financial freedom are slim.

Most people sleepwalk through their finances. They wish for wealth and good things, but have no plan of action. I don’t want that to be me, and I don’t want that to be you. So in this 3 part series, I hope to show you ways you can improve both your offense and defense.

But the first step in getting there, is realizing that just like basketball – the game has changed.

Setting the Stage

Today’s world is vastly different from the one our grandparent’s grew up in.

Back in the 1980s (when many of our grandparents were 30-40 years old), you could invest in U.S. bonds and get a 15% return on your money. 15%! No wonder they told us to save every penny. If I could find a 15% return on my cash today with guaranteed protection of my principal, I’d invest every dollar I had to my name.

Want to know what those rates are today? At the time of this writing, a 30 year US Treasury Bond is payinga measly 2.9% 

How does giving the U.S. Government a 30 year loan and earning 2.9% interest on your money sound? I hope it sounds as terrible to you as it does to me.

At 2.9% you are essentially breaking even after inflation. You might even be losing money if you look at ‘real’ inflation. I am not letting someone hold my hard earned cash for 30 years just to break even.

Okay, so today’s saving environment looks pretty questionable. But what about today’s investing environment? How does that look?

Ask any personal finance “guru” how to build wealth today and you’ll find the overwhelming majority suggest to invest your money in the stock market. Not just invest in the stock market, but to be more precise – invest in low cost mutual funds! Most of these gurus will claim anywhere from 8-10% return on your money if you buy and never sell.

What they don’t account for is survivorship or confirmation bias. What they also don’t tell you is they often cherry pick 40 year ranges to get to that 10% return.

Here’s the actual truth:
No one really knows what kind of returns you’ll get from the stock market.

Even if the returns were 10% over the last 40 years, there’s no guarantee it will be over the next 40.

What if you worked all your life, diligently saving into your choice mutual fund, and right when you turned 65 another Great Recession happened? The market quite literally halved the last time. Would your lifetime returns still be in the double digits? Highly unlikely.

So in order to not be biased, I was curious to see what the average return for the S&P 500 was over it’s entire lifetime. I didn’t want to cherry pick 40 year ranges – I wanted the whole damn thing. Can you guess what the lifetime return was? Hint: it’s not 10%.

4.3%. A whopping 4.3%. That means that if you were to invest your money in the stock market at it’s creation in 1871, and you held through EVERY cycle, every bull and bear, without selling – you would have a 4.3% return on your money. Though a 4.3% return is better than 2.9%, it’s still not anything stellar. But once you adjust for inflation, things get even less rosy.

Once you take into account inflation, your return drops to a paltry 2.2%. Houston, we have a problem.

(Side note: Yes the returns with your dividends reinvested is higher because then your dividend money is also growing at 4.3% or 2.2% adjusted, but the thought experiment here is asking yourself “Can I get better than a 2.2% adjusted return somewhere else?”)

So if the returns from the market are so mediocre, what’s with all the rhetoric? Why does everyone and their grandma tell me to shovel my money into a mutual fund?

Well to be frank, most people are incentivized to do so.

A lot of the rhetoric is coming from those that work in finance, and it’s in their best interest if you keep your money in the markets. It’s like asking a furniture salesman if you need a new couch. What can they really say?

They make fees from managing your accounts, their salaries are dependent upon you keeping your money with them. If everyone in America liquidated their brokerage accounts tomorrow, they would all be out of their jobs.

But what about the personal finance gurus who are not working in finance? Why do they all say the same thing? If you’ve read as many personal finance books as I have – you quickly begin to realize how much of the industry is just an echo chamber. Somebody says some random piece of advice and soon everyone starts screaming the same thing. It’s why so many of these get-rich books are similar. It’s why so many blogs are near identical.

Am I saying all the advice you’ve previously read or heard is garbage? No, definitely not. But what I am saying is we need to separate the meat from the fat here. We need to improve our games if we want to compete for a championship.

The Winning Mindset

My guess is that most of you reading this are somewhere in between.

Maybe you are a decent earner, but you tend to run up the bar tab on the weekends. Or maybe you are great at saving but feel stuck at your $30,000 a year desk job.

The good news is that you are not doomed. You truly are the master of your own destiny.

The first step to winning a championship, is realizing the rules of the game have changed and then creating a champion’s mindset within yourself. There’s a reason why every NBA front office is so big on “winning culture”.

It’s because the biggest limiting factor in success will always be yourself; your thoughts, your beliefs. I believe through knowledge, practice, and diligence – you can improve your financial standing, no matter where you’re at today.

We’re on this journey together. Let’s make it a good one.

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  1. Jane says:

    useful article

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