Introduction
If what you thought to be true turned out NOT to be true, when would you want to know?
Imagine you are on a gurney and they are wheeling you into surgery. You were out hiking in the woods, got caught in a freak snowstorm, and ended up with frostbite on your left big toe. In order to save your left foot, they have to amputate the left big toe.
Under the intense lights, as the anesthesiologist is about to knock you out, you happen to look over and see the instruction sheet to the surgeons for this operation. Much to your horror, someone has mistakenly written incorrect instructions. They read, “Amputate the RIGHT big toe.”
The doctors are just about to knock you out. Would you agree you are at a juncture in your life?
What do you do? Do you scream bloody murder or rationalize to yourself, No, these doctors are smart; they would never cut off the wrong toe. They know what they are doing. Do you go to sleep hoping for the best?
Hopefully, you choose the option to scream bloody murder. If you choose hope for the best and wake up after surgery with your right toe gone, it will only add insult to injury, since they still have to amputate the left big toe.
To relate to this story, think back to March of 2000. Most people’s stock market investments had gone up almost 20 percent per year for five years in a row, and they felt their financial advisors were geniuses. Then they noticed their statements in April 2000, and again in May and June. The money they had was disappearing. Instead of most people screaming bloody murder, they rationalized to themselves that their advisors were smart, that they knew what they were doing. Most people crossed their fingers, went to sleep, and hoped for the best.
To their shock, many people awoke in October of 2002 with their portfolios down 50–80 percent. Not only had the doctors amputated the right big toe, but they had taken the whole leg, both arms, and an ear.
Look what happened after the 2008 market crash. The previous five years of market gains were wiped out, and the markets collapsed to 1997 levels. Once again, we went to sleep and awoke to find numerous body parts amputated. At this pace, we might as well start looking into bionics.
Why is it when it comes to money we tend to throw common sense out the window with complex rationalizations? With simple axioms such as buy and hold, or dollar cost average, or don’t worry about the long-term, your portfolio will come back, we second-guess what should be done. These sound good, unless you’re already nearing retirement.
Here’s another story about wishful thinking and hoping for a different outcome.
One sunny day you are driving to the beach when all of a sudden your car makes a loud clunk. As you slow down to see what has happened, you notice your car shifting between gears erratically, and you suspect your clutch has bought the farm. Good thing for you it is a Tuesday and you are playing hooky from work. The bad thing is now it will be spent at the auto mechanic’s versus on a beautiful, warm beach.
After the mechanic gives you a quote for one thousand dollars to repair your clutch, with a long sigh and acceptance of your dilemma you decide to grab a sandwich and a movie as your car is being fixed. The day off from work isn’t completely wasted.
A few hours later you pick up your car and begrudgingly pay the thousand dollars. You jump in and start to drive off. Lo and behold, your car is still shifting erratically and making the same loud clunking sound!
What is the first thing you do? You turn around immediately, clunk your way back to the mechanic, and demand that he fix it or give you back your money.
After taking your car back, the mechanic looks at it again and then advises you to keep driving it for a while. It will fix itself over time. What is your reaction to this advice? “You’re nuts! My car can’t fix itself. If I keep driving around like this, the damage will get worse, and I’ll be out of pocket even more money.” At this point, you fire the mechanic and take your clunky car to another mechanic who can fix the clutch.
How many of us are driving broken portfolios, nest eggs that seem to be going nowhere? When you go to your financial advisor, what do they tell you? “Don’t worry; you are buy and hold. Keep driving that broken portfolio, and it will fix itself.”
How many broken cars fix themselves? The same goes for money. Wall Street wants you to believe that stocks always go up. They want you to stay in their fee generating investments for many more years, hoping for your portfolio to fix itself. Sometimes, your portfolio does seem like it is on the mend. The clunking sound goes away for a while. For instance, many people who lost big between 2000 and 2002 made back a lot of their losses from 2003 to 2007. But, like the broken clutch that really couldn’t fix itself, although the clunking sound might go away for a bit, a bigger problem was brewing under the hood; something much worse. . . .
As you were driving down the financial freeway in 2008 not only did your clutch freeze up again, but now the whole transmission fell out and snapped the rear axle to boot. That thousand-dollar clutch seems cheap now.
Continue this pattern of forgetfulness. Others who got clobbered in 2008 had their painful memories wiped away by the Federal Reserve’s printing press rally between 2009 and so far through 2012. Like 2007, the current situation today feels like something much worse is brewing under the hood, yet many have forgotten the pain they felt in 2008. All is right with the stock market in their opinion, even though as of mid-2012 the S&P 500 is still 15 percent below its 2007 as well as 2000 peaks.
Money is an odd creature. Some people can spend all day preoccupied with it, others spend their days avoiding the very thought of it, and most of us are somewhere in between. It ruins relationships, creates green-eyed monsters, and generally frustrates most everyone who tries to deal with it. Strangely, some of the brightest and best educated can become completely inept when it comes to protecting and growing their wealth.
The eternal question is, “What is the best way to grow my wealth?” The answers you receive tend to reflect the viewpoint of the person giving the advice: a Wall Street hot shot, a real estate guru, a gold bug, a lotto winner, or an entrepreneur.
As with anything that is important to us, we try to hire people who are better at a specific job than we are. When I get sick, I see a doctor. When I want to redo my front yard, I hire a landscape architect. And, of course, when I want to grow my wealth, I hire a qualified financial advisor.
The problem with wealth of course is that there is no Holy Grail for protecting and growing it. If you ask 10 financial advisors how to protect and grow your nest egg, you will probably get 10 different answers. Although the answers will be different, there generally is a common thread. It usually revolves around using Wall Street as the key to increasing and protecting your wealth.
In writing this book, I hope to show that Wall Street isn’t the only key player in a financial portfolio. Rather a single all-star player placed on a team of all stars from other teams, and when working together as an all-star team, these players have a much better chance of winning the trophy. In our case as investors, this all-star team of many different asset classes gives us a better shot at potentially reaching our financial goals.
Contrary to popular belief, most people who invest only with Wall Street see their wealth decline far more often than increase. How often do you read about people who invested in the markets for 30 years, only to watch half of it disappear right before retirement due to declining stock markets? These stories are far too numerous to count.
Most who are reading this book are thinking, “Hog wash. The stock market is great for building long-term wealth.” Really? I challenge the reader to think about their money in the stock market. When carefully analyzed and totaled, did the majority of the investment balance come from market gains alone, or did the act of saving and adding hard earned dollars each year cause the principal to increase? The answer to this question is very important.
I put one prospective client to this test. He went to his adviser of 14 years, from 1998 to the present, mid 2012. We requested his statements from day one. The easy part was that he did not have any contributions or withdrawals during that time period, which made it simple to analyze the results. He only reinvested his dividends during that entire time.
To his shock, his starting balance was $367,000 and his ending balance, after 14 years with this brokerage firm—a household name—managing his money, was $366,715. A total loss of $285. The real loss is significantly more when you factor in inflation and loss of purchasing power. Even using the government’s version of the consumer price index, which I explain in Chapter five as being artificially low, his money would have had to grow to $513,800 just to maintain the equivalent purchasing power it had in 1998.
To be able to buy the same groceries, gas, insurance, medical, education, and so forth as in 1998, he would have needed that extra $146,000 in his account. Needless to say, his adviser and the brokerage firm managing his money the entire time did far better for their pocketbook than for his.
Ask yourself this question. Is your financial portfolio better for your pocket or for your adviser’s? The honest answer to this is worth addressing.
A Key Wealth Code Concept is something I feel is vital for your understanding of our approach to building a strong financial portfolio. You will see these concepts highlighted in their own text boxes.
KEY WEALTH CODE CONCEPTThe title of this book, The Wealth Code 2.0: How the Rich Stay Rich in Good Times and Bad, is meant to elicit different questions, such as:
- What is conventional thinking in terms of finance and investing, and how is it working against my wealth building process?
- Are there other financial ideas and strategies of which I am not aware?
- Is there a code for wealth, a map that we can follow to provide a more secure road to or in retirement?
I believe these questions will be answered in the following chapters.