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From Mark Ford, founder, Palm Beach Research Group: I am not an investment professional. I have never made any money managing other people’s money. I went from rags to riches the old-fashioned way: by working hard and then investing my income as carefully as I could.
Because I’d done well on my own, I never considered seeking financial advice. Then a funny thing happened. I woke up one day with the thought that I should have a “professional” manage some of my money.
I interviewed two firms. One was a boutique business based in New York City that a friend recommended. The other was a private banking facility for one of the world’s largest brokerages.
The boutique firm was happy to take $100,000 of my money to get started. The other company wanted a minimum of $10 million. They both had fancy offices and pretty marketing brochures. But such frills scare me. They make me think, “Gee, these guys must be charging their customers a lot to afford all this stuff.”
Notwithstanding my trepidations, I worked with both of them for about six months. I answered their questions about my tolerance for risk (little to none). I listened to their presentations. And then I did something that I bet few of their clients ever do.
I started asking them questions. And I kept pushing them to explain why I should believe that they could help me become wealthier.
What I got instead was clever circumlocution. A financially sophisticated version of what you’d expect from your teenage son if you pestered him about why he didn’t come home until four in the morning.
Those discussions convinced me that these guys could not manage my money better than I had been managing it.
To be fair, they certainly knew more about investment products than I did. But they didn’t know more about how to become wealthy.
These guys were smart. They had graduate degrees from great schools. They spoke eloquently. They seemed so… so… inside the game. I wanted them to be better than me. I really did.
But they really didn’t seem to care whether their services would make me richer or poorer. The contracts they wanted me to sign were going to put money in their pockets regardless. That didn’t feel right.
In the end, I told both of my elite financial planners to take a hike. And I went back to managing my money myself.
Seeing Only 20% of the Big Picture
The investment advisory industry 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 investing in stocks and bonds.
It’s not a big black lie. But the unfortunate truth is the financial establishment rarely looks beyond stocks and bonds. And if you think about it, why would it want to? It makes its money by ushering you from one “hot” stock or “amazing” fund to the next.
Wall Street wants you to think the stock (and sometimes the bond) markets are the only places you can make money. And because they know that you have heard that “diversification of assets” is good, they give you the illusion of diversification by having your stock portfolio invested in businesses that are “diversified” into manufacturing, retail, global trade, natural resources, etc.
This is, as I said, an illusion. At the end of the day, it’s all invested in stocks or stock derivatives. The result? More risk and less potential wealth gain for you.
So 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 nine things:
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Giving top priority to increasing their net investible income, not maximizing returns.
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Spending less as a percentage of net income as it grows so they can save more.
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Understanding debt and using it occasionally and strategically to build wealth.
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Investing in stocks and bonds with discipline—i.e., without expecting to get returns that are much higher than market averages.
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Insuring themselves against “black swan” events but not investing with the hope of profiting from them.
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Owning tangible, portable, and non-reportable assets as a reserve that can be tapped into at opportune moments.
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Investing in safe real estate—i.e., income-producing properties.
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Investing directly in private enterprises and other “outside Wall Street” opportunities.
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Keeping a substantial store of cash to be used when “cash becomes king.”
As you can see, investing in stocks and bonds is only 1 of 9 strategies you must follow to become rich, but that was the only one the two money-management firms I tried cared about.
How to Ensure Financial Growth and Security
So if you can’t reasonably expect to get rich with just stocks and bonds, what can you do?
You can model your investing behavior on the behaviors that have been proven, time and time again, to actually work.
I’m talking about asset allocation.
Asset allocation is the process by which you spread your wealth across different sorts of investments.
You might think that something as dull as asset allocation could not possibly be that important in acquiring wealth, but numerous studies have shown that it may be the most important factor. (These studies can be found here.)
Because of an early financial disaster, I became an emotionally compulsive diversifier of practically every dollar I could save, putting some of it in bonds, some in stocks, some in cash, some in real estate, and so on.
Over the years, I have made hundreds of individual financial decisions—buy this, sell that. Some of them were quite good, a few of them were quite bad, and most of them were in between. And yet, overall, my net worth had increased considerably and consistently, without any down years, for more than 30 years.
I could see very clearly that this was not due to the particular buy/sell decisions that accounted for this good fortune. It was the general decisions about asset allocation that paid off.
Since I discovered this, I have been telling my readers about my own asset allocation decisions every year. Not because I think my portfolio is the best possible exemplum of diversification, but just to illustrate my belief that one needs to go well beyond some combination of stocks, bonds, and cash to win at the wealth-building game.
My yearly report is reasonably detailed, but the following will give you a bird’s-eye view of what I do:
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Stocks: I have several stock portfolios: one that you might call “legacy” stocks, one that I call “performance” stocks, and a third group that includes what would conventionally be called “growth” and “speculative” stocks. The lion’s share (maybe 80% to 90%) of my stock money is in the legacy stocks, a handful of big, dividend-paying companies that I’m happy to keep on a “forever” basis. A smaller percentage is in dividend-paying companies with growth potential. And a tiny percentage are speculations—stocks I’m quite sure I’ll lose all my money on, but I want to own them just for fun.
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Fixed Income: Historically, bonds make up this asset class. At one time, bonds (AAA municipal bonds) represented as much as 40% of my net investible worth. My strategy was always to hold until maturity and buy them in “ladders,” replacing them when they matured. But I haven’t bought them since the rates dropped below 4.5% and have sold some I didn’t like much. Today they represent about 5% of my net investible wealth. I also own an annuity and a life insurance product. These are not the typical insurance products. Most annuities and life insurance products are very expensive and very complicated. You have to be very careful with those.
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Rental Real Estate: Next to business ventures, income-producing property investments have been the largest contributor to my wealth-building success. I invest for the income and see appreciation as a bonus. As with insurance products, real estate investing can be tricky for the inexperienced investor. Most mainstream real estate advice is bad. But if you do it properly—focusing on income—this asset class will do huge work for your portfolio.
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Direct Investments in Entrepreneurial Businesses: This is, by far, the investment class that has given me the best results. If you do this right, you can expect terrific steady income and the potential for enormous growth. The trick here is to invest only in companies you understand and have some control over.
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Chaos Hedges: This asset class is not—for me—an investment. It is, as the name implies, protection from times of turbulence—a market crash, bankruptcy, lawsuits, etc. In this class, I include gold, silver, and platinum coins (bullion and one or two “rare” types). I bought all I needed when gold was trading at about $400 per ounce. It’s gone up and down since then, but at today’s prices, it looks good again.
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Collectibles: This is a category of investing that you will probably not be interested in, unless you want to enrich not just your net worth but your experience of living each and every day for the rest of your life. My preferred collectible is fine art and first-edition books, but you can invest in anything from baseball cards to vintage cars to surfboards.
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Options: Although my cardinal rule is not to invest in something I don’t understand, I found a way to trade options that I understand and also believe in. Like real estate and insurance products, most options strategies are speculations. I’d advise against them. But the way I do it, selling puts on “legacy”-type stocks has worked very well for me.
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Cash: I call this a “Cash Opportunity Fund.” You keep a store of money you add to every year. That way, when the crash comes, you can use this fund to swoop in and buy a bunch of great assets at bargain prices.
Reeves’ Note: Asset allocation is one pillar of Mark’s overall wealth-building strategy. The first is to find multiple income streams to increase your wealth every single day. Mark’s spent 30 years developing these income-producing “techniques” (he calls them “subversive income”)… and believes anyone who uses them can become a millionaire in seven years or less. You can start learning these techniques right here…
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