Hello, everybody. It's Sam from Financial Samurai. And in this episode, I want to talk about the two levels of rich, one level of which doesn't rely on index funds at all. So it's safe to assume the vast majority of you reading Financial Samurai want to be rich. I trust those of you who've been reading the site since 2009, and maybe since 2012, when I was writing heavily about investment strategies have indeed become much richer.

The compounding forces since then have been enormous, right? We've been in a huge bull market since 2009. We're probably one of the richest communities on the internet today, based on all the surveys I've conducted since then. There's been over 100 surveys. For example, 35% of you have a net worth of between $300,000 to $1 million, while 25% of you have a net worth of over $1 million.

That's really, really solid compared to the median and average net worths in America today, which are all 50, 60, 70, 80% lower, depending on which metric you use. But here's the thing, despite our good fortune, it's worth discussing the two levels of rich. Because since I started this site, it's clear one level of rich has far surpassed the other level of rich.

And that one level of rich didn't do so by investing in index funds over the past 10, 20, 30 years. I know we all love index funds. I love index funds. They're the personal finance communities number one recommendation for where to invest our money in stocks at least, right?

VTSAX, VTI, SPY, index funds and ETFs are the way to go. It's very hard to outperform any index fund or ETF over a five to 10 year period. Retail investors have failed, most of us have failed. Professional money managers, most of them have failed something to the tune of 80% of underperformed over a 10 year period.

And that cost that cost is a real drag that really adds up over time and also front loading commissions man paying a two to 5% front load fee. That's, that's crazy, folks. Don't do that because you're right, way behind it from the starting gate. Alright, so now that we've talked about some of the positives of index funds and ETFs, let's look at the other side of the coin.

If you want to achieve financial independence well before the traditional age of 65 or 60, investing only in index funds is probably not going to cut it. The only way to get rich sooner off index funds is to consistently invest large sums of money. But that's kind of like saying to get richer, you got to start with a lot of money.

So that kind of defeats the purpose. The reality is there's a whole other level of rich that has little to do with investing in index funds. As one centi millionaire once told me, quote, investing in index funds is what middle class people do who don't know what to do, end quote.

Ouch, a dagger to my heart. But is there some truth to what he has said? I think there is. And part of the reason why there's so much discussion about index funds in the personal finance community is because a lot of people who talk and write about money and investing actually don't come from investing backgrounds.

Just think about the people who you read and listen to. Did they work in finance or did they make money through investing or most of their wealth? Probably not. I mean, let's just be honest, probably not. And so the easiest default assumption is to say, let's just invest in index funds.

Let's pay down debt. Let's save more money. So pretty much the basic common stuff, which is great and fine. And a lot of people don't do it. But I think this is part of the reason why investing in index funds is so prevalent, because it's the easy thing to do and talk about.

It's easy to understand. And when things are easy to understand, it's more easily spreadable. So listen, investing in an S&P 500 index fund or ETF is my default setting when I'm buying the dip, but don't have strong conviction on a particular stock or frankly, the market overall. I understand the downside of investing in an S&P 500 index fund or ETF.

You should too. Basically, a bear market lasts about a year on average and has about a 35% drawdown. And I'm fine with that. And if you invest in an S&P 500 index fund, you should be fine with that and aware of that possibility as well. There are no risk-free investments when you're investing in stocks.

And I also view investing in an index fund like investing in a super tanker. It doesn't move very fast at historically a 10% annual return, which probably is going to go down in the foreseeable future or at least over the next five to 10 years. But the super tanker doesn't easily veer off course or sink to the bottom of the ocean either.

Sooner or later, the super tank will get to its destination. And that's really important for all of us. If the direction is correct, sooner or later, we'll get there. But if you are a proponent of fire, retiring earlier, or just hopping off the corporate train before the age of 60, 65, index funds is just like a tailwind.

And they're going to provide you a tailwind to get to where you want to go. But it's hard to get there sooner. So let's just talk about the two levels of rich. The first level rich I'll call the mass affluent class. The mass affluent class is highly educated, motivated, and upwardly mobile.

Upwardly mobile is really important because if you believe you can make progress, that gives you hope. And when you have hope, you have action and you can take action to improve your situation. The mass affluent class is considered rich by general standards, but often doesn't feel rich. I think today the mass affluent class has investable assets of between $500,000 to $3 million.

The mass affluent class also has a net worth of between $500,000 to $5 million. And it largely depends on age, location, and household. Obviously, if you're younger, and if you live in a lower cost area of the country, you know, the mass affluent class determined by these figures is probably on the lower end.

And then as you get older, the net worth and income figures go higher. So the mass affluent class loves investing in stock index funds and in real estate. They've got good jobs, often with six-figure household incomes, usually less than 20% of their investable assets are in alternative investments, including cryptocurrencies.

And for the most part, the mass affluent class is a great place to be great. You're comfortable and you always have hope for a wealthier future. And frankly, by the numbers, most financial samurai listeners and readers are part of the mass affluent class, or will be a part of the mass affluent class.

Now let's talk about the second level of rich. I'll just call them the truly rich. The truly rich are what people think about when they hear the word rich. We're talking vacation homes in the Hamptons, in Napa Valley, first class flights, maybe private class on occasion, $100,000 plus automobiles, and generous donations to charity where your name actually appears on a wall.

The truly rich have investable assets of at least five to 10 million. This is liquid assets and a net worth of at least 10 to 25 million, depending again on location, age, and household. These are the minimum levels here. And in a bull market, the truly rich crush it with multi-million dollar gains a year.

As a result, they think to themselves, why bother working so hard when you're making so much more from your investments? Conversely, in a bear market, the truly rich get beat up the most, right? Back in 2009, we were all relatively much wealthier, not because we made more money, but because people like Warren Buffett lost tens of billions of dollars in individual wealth.

And if you look at the net worth composition of the truly rich, index funds account for a minority, minority share. Instead, the truly rich have the majority of their net worth in their business and other business ventures. So equity in their own business or other business ventures. And in terms of wealth creation, the top 0.1% and top 0.01% have trounced those in the top 1%, nevermind the top 10%.

So when you hear headlines like, you know, millionaires are annoyed with the billionaires that sent to millionaires, it's that kind of angst and common comparison. Everything's all relative in finance. So even if you're worth 10 million, you're going to feel a little disgruntled if somebody moves in next door who's worth 50 million and has a whole bunch of fun things outside on his or her driveway.

So let's break down a little bit more in detail the net worth of the mass affluent and the truly rich. So roughly 25% of the mass affluence net worth is in their primary residence. 15% is in retirement accounts, 10% is in real estate investments, and 12% is in business interests.

In comparison for the truly rich, at least 30% of their net worth is in business interests. Intuitively, we know that entrepreneurs dominate the wealthiest people in the world. Therefore, if you want to be truly rich, take more entrepreneurial risk. I'm looking at this chart, let's say for those with over 100 million in net worth, their business interests account for about 50% of their entire net worth.

Real estate, it's about 15%. Fixed income, decent about 18%. Stocks about 18 to 20%. Mutual funds, about 20%. Over the past, let's say 10 years, I have seen regular millionaires become extraordinarily wealthy. And it's really due to the businesses that they've built and the risks that they've taken. So maybe 10 years ago, it would seem uncommon to meet people worth 25 to $50 million or $100 million, or maybe ever bump into a billionaire at like a dinner or a restaurant or cocktail party or whatnot.

But now, and I don't know if it's just because of function of me living in San Francisco, but I bump into these folks on a regular basis now, whether it's on the tennis courts or in a public park. And it's also because I'm older, right? I'm 45 now versus 34, 32, when I first started writing.

And so the people that I know have gotten wealthier over time. And that's just the power of compound returns. I was playing tennis with an old friend on the public courts one day. And he said his cousin, he's 52 years old, he works at PG&E, which is a utility company.

He probably makes, I don't know, around $160,000 a year, not huge, but he's staying on until he's 55 for a pension. But here's the one thing, he's worth about $40 million. And I asked my friend, why the hell is he still working when he's worth $40 million at age 52?

It's not like working at PG&E is really exciting. And he just says, you know, he just wants that pension. And I asked him how did he manage to earn $40 million or get a net worth of $40 million. And he said, through cryptocurrencies, he's been buying all different types of cryptocurrencies.

His net worth probably went up to 60, 70 million. And now it's quote, only 40 million. But he doesn't have to work, but he still works anyways. So these are like the common middle class millionaires that I see more and more of. This is just an example. And given I'm in the personal finance world, you might be listening and reading to other personal finance sites and podcasts as well.

And you might, you might think that this is the entire world. Okay, index funds and you know, retire with $3 million by 50, 60 years old, and then live happily ever after. And that's fine. That's totally fine. But I'm telling you that there's this whole world, different world out there of rich that have gone way beyond that.

And so when you start believing and knowing what is possible, that will help you build more wealth if that's what you want. One of the reasons why I wrote my upcoming book, Buy This, Not That, How to Spend Your Way to Wealth and Freedom is due to the urgent need for better financial education for the general public.

I spent 13 years working in finance, I got my MBA, and I'm a practitioner of investing, saving, retiring early and going through everything so I can tell you what it's like. Those who are financially savvy have crushed it over the past decade. And because of the stealth wealth mantra, a lot of folks don't really understand how much these folks have crushed it.

Meanwhile, those who are disinterested in personal finances and investing and who haven't spent much time at all learning about investing have fallen farther and farther behind. And as a financial writer, it feels bad the wealth gap has widened so significantly, because it feels like I'm failing a large part of the population.

I know I can't save anyone and there's no savior complex. But this is what I do. This is what I've been doing for so long since 2009. And I want people to achieve financial freedom sooner so they can do more of what they want. In conclusion, I say index funds are great for the majority of your public stock portfolio.

I recommend 70% 80% plus of your public stock equity portfolio be an index funds and the rest 20 to 30% you can buy individual stocks, companies that you like the products that you use. I've been doing this for 20 plus years. And I've accumulated names such as Apple have an iPhone, I have a MacBook, Nike stock, because I'm infatuated with old Air Jordans and Andre Agassiz.

Those shoes I was growing up with as a kid that I couldn't afford a single pair. And then what Google I use Google all the time. Yeah, Google, you know, these names, they're probably going to do okay, but there are no guarantees. And I'm under no delusion that I will be able to outperform the broader index.

But this is my strategy. It's the stock plus strategy. And then I've taken concentrated bets in real estate, specifically San Francisco real estate since 2003. And Heartland and Sunbelt real estate since 2016. It's about 50% of my net worth, because I like real estate, it's tangible, it produces income, it provides shelter.

And it's not just going to go poof overnight, like some growth stocks have done over the past 12 months. Real estate really is the asset class that I like the most because it tends to generate the most amount of tax efficient income. So you if you're planning on jumping off the corporate bandwagon, it's really the real estate income that has provided me the most amount of income to live our lives.

In comparison, index funds, yeah, they generate about 1.5 to 1.8% in dividends. And if you buy dividend stocks, it'll generate probably they'll probably generate more. However, I'm mostly investing in growth stocks, and then I have index funds. So it's not a huge portion of my passive investment income. And finally, business interests.

Since 2009, I've been spending time creating Financial Samurai, which does have value and it generates online income. So one of the big differences between a day job and having your own business is that you have the double banger of owning the equity and owning the income. So if you work at a company, you'll probably get mostly compensation in terms of your salary, and then maybe some equity compensation, obviously more if you join a startup or a tech company, and less if you join other types of industries.

I hope you all enjoyed this episode. It really is important to open people's eyes to what's possible. And I do believe you're going to really enjoy by this not that how to spend your way to wealth and freedom. You can check out the landing page at financialsamurai.com/btnt. And I'd love for you to pre order a hard copy today.

And also after it comes out. Thanks so much everyone for listening. I will see you around. Transcribed by https://otter.ai