Two_Levels_Of_Rich
00:00:00.000 | Hello, everybody. It's Sam from Financial Samurai. And in this episode, I want to talk about the two
00:00:05.280 | levels of rich, one level of which doesn't rely on index funds at all. So it's safe to assume the
00:00:12.720 | vast majority of you reading Financial Samurai want to be rich. I trust those of you who've
00:00:18.000 | been reading the site since 2009, and maybe since 2012, when I was writing heavily about investment
00:00:24.880 | strategies have indeed become much richer. The compounding forces since then have been enormous,
00:00:31.040 | right? We've been in a huge bull market since 2009. We're probably one of the richest communities on
00:00:37.200 | the internet today, based on all the surveys I've conducted since then. There's been over 100
00:00:42.800 | surveys. For example, 35% of you have a net worth of between $300,000 to $1 million, while 25% of
00:00:51.440 | you have a net worth of over $1 million. That's really, really solid compared to the median and
00:00:57.600 | average net worths in America today, which are all 50, 60, 70, 80% lower, depending on which metric
00:01:04.080 | you use. But here's the thing, despite our good fortune, it's worth discussing the two levels of
00:01:10.480 | rich. Because since I started this site, it's clear one level of rich has far surpassed the
00:01:17.040 | other level of rich. And that one level of rich didn't do so by investing in index funds over the
00:01:23.360 | past 10, 20, 30 years. I know we all love index funds. I love index funds. They're the personal
00:01:30.640 | finance communities number one recommendation for where to invest our money in stocks at least,
00:01:35.280 | right? VTSAX, VTI, SPY, index funds and ETFs are the way to go. It's very hard to outperform
00:01:42.640 | any index fund or ETF over a five to 10 year period. Retail investors have failed, most of
00:01:49.280 | us have failed. Professional money managers, most of them have failed something to the tune of 80%
00:01:54.960 | of underperformed over a 10 year period. And that cost that cost is a real drag that really adds up
00:02:01.280 | over time and also front loading commissions man paying a two to 5% front load fee. That's,
00:02:09.920 | that's crazy, folks. Don't do that because you're right, way behind it from the starting gate.
00:02:16.560 | Alright, so now that we've talked about some of the positives of index funds and ETFs,
00:02:21.200 | let's look at the other side of the coin. If you want to achieve financial independence
00:02:25.360 | well before the traditional age of 65 or 60, investing only in index funds is probably not
00:02:32.000 | going to cut it. The only way to get rich sooner off index funds is to consistently invest large
00:02:38.240 | sums of money. But that's kind of like saying to get richer, you got to start with a lot of money.
00:02:42.800 | So that kind of defeats the purpose. The reality is there's a whole other level of rich that has
00:02:49.120 | little to do with investing in index funds. As one centi millionaire once told me, quote,
00:02:56.320 | investing in index funds is what middle class people do who don't know what to do, end quote.
00:03:03.680 | Ouch, a dagger to my heart. But is there some truth to what he has said? I think there is.
00:03:10.480 | And part of the reason why there's so much discussion about index funds in the personal
00:03:14.720 | finance community is because a lot of people who talk and write about money and investing
00:03:20.880 | actually don't come from investing backgrounds. Just think about the people who you read and
00:03:25.680 | listen to. Did they work in finance or did they make money through investing or most of their
00:03:31.680 | wealth? Probably not. I mean, let's just be honest, probably not. And so the easiest default
00:03:37.840 | assumption is to say, let's just invest in index funds. Let's pay down debt. Let's save more money.
00:03:43.840 | So pretty much the basic common stuff, which is great and fine. And a lot of people don't do it.
00:03:48.480 | But I think this is part of the reason why investing in index funds is so prevalent,
00:03:54.240 | because it's the easy thing to do and talk about. It's easy to understand. And when things are easy
00:03:59.120 | to understand, it's more easily spreadable. So listen, investing in an S&P 500 index fund or ETF
00:04:06.000 | is my default setting when I'm buying the dip, but don't have strong conviction on a particular stock
00:04:12.960 | or frankly, the market overall. I understand the downside of investing in an S&P 500 index fund or
00:04:19.200 | ETF. You should too. Basically, a bear market lasts about a year on average and has about a 35%
00:04:26.320 | drawdown. And I'm fine with that. And if you invest in an S&P 500 index fund, you should be
00:04:31.680 | fine with that and aware of that possibility as well. There are no risk-free investments when
00:04:36.640 | you're investing in stocks. And I also view investing in an index fund like investing in a
00:04:42.160 | super tanker. It doesn't move very fast at historically a 10% annual return, which probably
00:04:48.640 | is going to go down in the foreseeable future or at least over the next five to 10 years.
00:04:53.600 | But the super tanker doesn't easily veer off course or sink to the bottom of the ocean either.
00:04:58.960 | Sooner or later, the super tank will get to its destination. And that's really important for all
00:05:05.040 | of us. If the direction is correct, sooner or later, we'll get there. But if you are a proponent
00:05:10.560 | of fire, retiring earlier, or just hopping off the corporate train before the age of 60, 65,
00:05:18.640 | index funds is just like a tailwind. And they're going to provide you a tailwind to get to where
00:05:23.520 | you want to go. But it's hard to get there sooner. So let's just talk about the two levels of rich.
00:05:29.600 | The first level rich I'll call the mass affluent class. The mass affluent class is highly educated,
00:05:35.920 | motivated, and upwardly mobile. Upwardly mobile is really important because if you believe you
00:05:41.280 | can make progress, that gives you hope. And when you have hope, you have action and you can take
00:05:47.760 | action to improve your situation. The mass affluent class is considered rich by general standards,
00:05:54.000 | but often doesn't feel rich. I think today the mass affluent class has investable assets of between
00:06:01.040 | $500,000 to $3 million. The mass affluent class also has a net worth of between $500,000 to $5
00:06:07.280 | million. And it largely depends on age, location, and household. Obviously, if you're younger,
00:06:13.360 | and if you live in a lower cost area of the country, you know, the mass affluent class
00:06:17.360 | determined by these figures is probably on the lower end. And then as you get older,
00:06:21.280 | the net worth and income figures go higher. So the mass affluent class loves investing in stock
00:06:28.720 | index funds and in real estate. They've got good jobs, often with six-figure household incomes,
00:06:33.760 | usually less than 20% of their investable assets are in alternative investments,
00:06:38.000 | including cryptocurrencies. And for the most part, the mass affluent class is a great
00:06:42.880 | place to be great. You're comfortable and you always have hope for a wealthier future. And
00:06:49.760 | frankly, by the numbers, most financial samurai listeners and readers are part of the mass
00:06:55.920 | affluent class, or will be a part of the mass affluent class. Now let's talk about the second
00:07:01.920 | level of rich. I'll just call them the truly rich. The truly rich are what people think about when
00:07:09.040 | they hear the word rich. We're talking vacation homes in the Hamptons, in Napa Valley, first class
00:07:15.920 | flights, maybe private class on occasion, $100,000 plus automobiles, and generous donations to charity
00:07:23.760 | where your name actually appears on a wall. The truly rich have investable assets of at least
00:07:29.920 | five to 10 million. This is liquid assets and a net worth of at least 10 to 25 million,
00:07:37.200 | depending again on location, age, and household. These are the minimum levels here. And in a bull
00:07:42.400 | market, the truly rich crush it with multi-million dollar gains a year. As a result, they think to
00:07:48.800 | themselves, why bother working so hard when you're making so much more from your investments?
00:07:53.360 | Conversely, in a bear market, the truly rich get beat up the most, right? Back in 2009,
00:07:59.360 | we were all relatively much wealthier, not because we made more money, but because people
00:08:05.120 | like Warren Buffett lost tens of billions of dollars in individual wealth. And if you look
00:08:11.280 | at the net worth composition of the truly rich, index funds account for a minority, minority share.
00:08:19.680 | Instead, the truly rich have the majority of their net worth in their business and other business
00:08:25.440 | ventures. So equity in their own business or other business ventures. And in terms of wealth creation,
00:08:31.360 | the top 0.1% and top 0.01% have trounced those in the top 1%, nevermind the top 10%.
00:08:40.080 | So when you hear headlines like, you know, millionaires are annoyed with the billionaires
00:08:47.040 | that sent to millionaires, it's that kind of angst and common comparison. Everything's all
00:08:52.880 | relative in finance. So even if you're worth 10 million, you're going to feel a little disgruntled
00:08:57.520 | if somebody moves in next door who's worth 50 million and has a whole bunch of fun things
00:09:02.960 | outside on his or her driveway. So let's break down a little bit more in detail the net worth
00:09:08.320 | of the mass affluent and the truly rich. So roughly 25% of the mass affluence net worth is in their
00:09:15.440 | primary residence. 15% is in retirement accounts, 10% is in real estate investments, and 12%
00:09:22.640 | is in business interests. In comparison for the truly rich, at least 30% of their net worth is in
00:09:29.600 | business interests. Intuitively, we know that entrepreneurs dominate the wealthiest people in
00:09:34.880 | the world. Therefore, if you want to be truly rich, take more entrepreneurial risk. I'm looking at
00:09:41.200 | this chart, let's say for those with over 100 million in net worth, their business interests
00:09:48.160 | account for about 50% of their entire net worth. Real estate, it's about 15%. Fixed income,
00:09:55.760 | decent about 18%. Stocks about 18 to 20%. Mutual funds, about 20%. Over the past, let's say 10
00:10:09.040 | years, I have seen regular millionaires become extraordinarily wealthy. And it's really due to
00:10:16.960 | the businesses that they've built and the risks that they've taken. So maybe 10 years ago, it would
00:10:24.000 | seem uncommon to meet people worth 25 to $50 million or $100 million, or maybe ever bump into
00:10:31.680 | a billionaire at like a dinner or a restaurant or cocktail party or whatnot. But now, and I don't
00:10:37.520 | know if it's just because of function of me living in San Francisco, but I bump into these folks
00:10:43.200 | on a regular basis now, whether it's on the tennis courts or in a public park. And it's also because
00:10:47.920 | I'm older, right? I'm 45 now versus 34, 32, when I first started writing. And so the people that I
00:10:54.400 | know have gotten wealthier over time. And that's just the power of compound returns. I was playing
00:11:00.560 | tennis with an old friend on the public courts one day. And he said his cousin, he's 52 years old,
00:11:07.600 | he works at PG&E, which is a utility company. He probably makes, I don't know, around $160,000 a
00:11:14.240 | year, not huge, but he's staying on until he's 55 for a pension. But here's the one thing, he's worth
00:11:21.120 | about $40 million. And I asked my friend, why the hell is he still working when he's worth $40
00:11:28.400 | million at age 52? It's not like working at PG&E is really exciting. And he just says, you know,
00:11:34.640 | he just wants that pension. And I asked him how did he manage to earn $40 million or get a net
00:11:41.920 | worth of $40 million. And he said, through cryptocurrencies, he's been buying all different
00:11:46.480 | types of cryptocurrencies. His net worth probably went up to 60, 70 million. And now it's quote,
00:11:52.000 | only 40 million. But he doesn't have to work, but he still works anyways. So these are like
00:11:57.520 | the common middle class millionaires that I see more and more of. This is just an example.
00:12:03.600 | And given I'm in the personal finance world, you might be listening and reading to other
00:12:08.560 | personal finance sites and podcasts as well. And you might, you might think that this is the entire
00:12:15.520 | world. Okay, index funds and you know, retire with $3 million by 50, 60 years old, and then live
00:12:22.640 | happily ever after. And that's fine. That's totally fine. But I'm telling you that there's this whole
00:12:28.640 | world, different world out there of rich that have gone way beyond that. And so when you start
00:12:34.480 | believing and knowing what is possible, that will help you build more wealth if that's what you want.
00:12:41.120 | One of the reasons why I wrote my upcoming book, Buy This, Not That, How to Spend Your Way to
00:12:45.920 | Wealth and Freedom is due to the urgent need for better financial education for the general public.
00:12:52.000 | I spent 13 years working in finance, I got my MBA, and I'm a practitioner of investing, saving,
00:12:59.600 | retiring early and going through everything so I can tell you what it's like. Those who are
00:13:05.200 | financially savvy have crushed it over the past decade. And because of the stealth wealth mantra,
00:13:11.280 | a lot of folks don't really understand how much these folks have crushed it. Meanwhile,
00:13:16.240 | those who are disinterested in personal finances and investing and who haven't spent much time
00:13:21.920 | at all learning about investing have fallen farther and farther behind. And as a financial
00:13:28.080 | writer, it feels bad the wealth gap has widened so significantly, because it feels like I'm
00:13:34.480 | failing a large part of the population. I know I can't save anyone and there's no savior complex.
00:13:39.760 | But this is what I do. This is what I've been doing for so long since 2009. And I want people
00:13:46.240 | to achieve financial freedom sooner so they can do more of what they want. In conclusion,
00:13:51.680 | I say index funds are great for the majority of your public stock portfolio. I recommend 70% 80%
00:13:59.760 | plus of your public stock equity portfolio be an index funds and the rest 20 to 30% you can buy
00:14:06.080 | individual stocks, companies that you like the products that you use. I've been doing this for
00:14:12.160 | 20 plus years. And I've accumulated names such as Apple have an iPhone, I have a MacBook,
00:14:18.400 | Nike stock, because I'm infatuated with old Air Jordans and Andre Agassiz. Those shoes I was
00:14:25.200 | growing up with as a kid that I couldn't afford a single pair. And then what Google I use Google
00:14:30.720 | all the time. Yeah, Google, you know, these names, they're probably going to do okay, but there are
00:14:35.600 | no guarantees. And I'm under no delusion that I will be able to outperform the broader index.
00:14:41.760 | But this is my strategy. It's the stock plus strategy. And then I've taken concentrated bets
00:14:48.000 | in real estate, specifically San Francisco real estate since 2003. And Heartland and Sunbelt real
00:14:54.240 | estate since 2016. It's about 50% of my net worth, because I like real estate, it's tangible,
00:15:01.680 | it produces income, it provides shelter. And it's not just going to go poof overnight,
00:15:06.480 | like some growth stocks have done over the past 12 months. Real estate really is the asset class
00:15:12.720 | that I like the most because it tends to generate the most amount of tax efficient income. So you
00:15:17.920 | if you're planning on jumping off the corporate bandwagon, it's really the real estate income that
00:15:22.640 | has provided me the most amount of income to live our lives. In comparison, index funds, yeah,
00:15:28.640 | they generate about 1.5 to 1.8% in dividends. And if you buy dividend stocks, it'll generate
00:15:36.480 | probably they'll probably generate more. However, I'm mostly investing in growth stocks, and then I
00:15:41.280 | have index funds. So it's not a huge portion of my passive investment income. And finally,
00:15:47.680 | business interests. Since 2009, I've been spending time creating Financial Samurai,
00:15:53.040 | which does have value and it generates online income. So one of the big differences between
00:15:58.800 | a day job and having your own business is that you have the double banger of owning the equity
00:16:04.160 | and owning the income. So if you work at a company, you'll probably get mostly compensation
00:16:10.400 | in terms of your salary, and then maybe some equity compensation, obviously more if you join
00:16:15.120 | a startup or a tech company, and less if you join other types of industries. I hope you all enjoyed
00:16:21.200 | this episode. It really is important to open people's eyes to what's possible. And I do believe
00:16:27.200 | you're going to really enjoy by this not that how to spend your way to wealth and freedom. You can
00:16:31.680 | check out the landing page at financialsamurai.com/btnt. And I'd love for you to pre order a
00:16:38.880 | hard copy today. And also after it comes out. Thanks so much everyone for listening. I will
00:16:44.080 | see you around. Transcribed by https://otter.ai