CHAPTER SIX

WEALTH IS EARNED, NOT ACQUIRED

“So, uh, Douglas, how’s that nine to five treating you?”

“Nine to five,” you say? That concept is funny for the young people I know in today’s workforce. Those of us pursuing corporate jobs work longer hours than that, and the true entrepreneurs in our group never really have an off switch. For better or worse, technology has made it so we never need to—or hardly ever can—disconnect. We are master multitaskers, always available for our friends, family, and jobs, often all at the same time.

Distractions are only such if they affect our productivity toward something else. And if we can do both at once, is it so bad?

Like generations before us, Millennials have an entrepreneurial spirit. What separates us is our ability to harness technology to be more productive; to achieve more in the same time given.

Some Millennials discovered their entrepreneurial identity when their advanced degrees didn’t align with the demands of the job market. Unemployed or underemployed, they didn’t have a choice but to set out on their own. Others found traditional corporate roles to be bureaucratic, archaic, and infuriating. Even more felt like they were doing just fine, but weren’t happy.

If Millennials in the workforce are guilty of one thing, it’s dreaming. It’s believing that we can create or offer something that could impact someone else. We don’t feel entitled to do something important. We just understand how much smaller technology has made our world. Making an impact is more possible than ever.

All this doesn’t mean you should be your own boss. Not yet, at least.

There are serious tradeoffs in becoming an entrepreneur. Although you hope to achieve limitless success, you are making a huge gamble. Foregoing your salary welcomes the peril of instability at any time—at terrible times. So much so that it’s deemed too impractical for most to consider ever doing. And not everyone is ready to go unmanaged. To flourish on your own, having patience and discipline is almost mandatory. You have no benchmarks for performance other than those you set for yourself.

Then how can a Millennial with an idea or passion make an impact if he or she has too much at stake, too much student loan debt to repay, or too many mouths to feed?

By doing it on the side and hustling inches closer every day.

HUSTLE AND GROW

I don’t have a better example to share other than my own. I am a financial advisor who worked for other people before launching my own wealth management firm. At first glance, this may not seem like your classic tale of entrepreneurship: the American Dream you see on Shark Tank. But the careful steps I took to establish my own brand, while earning a stable income elsewhere, are translatable to anyone’s career path. Here’s how it happened.

Before I even graduated college, expectations were set for me. My father opened a satellite office of his financial planning practice in Gainesville, where I worked during school and would continue providing service afterward. He wanted this to be his succession plan and the ticket to his retirement someday. I learned much of what I know from him, no doubt. But within that first year out of college, I knew our father-son team wasn’t working out. As generous as his time and energy were, we disagreed about almost everything.

The day-to-day was growing too hard for our relationship to bear, and that wasn’t even what kept me up at night. I was captivated by helping people with their finances, but I wanted more. I wasn’t going to be happy with a lifetime of servicing my father’s preexisting relationships. I wanted to help my own type of clients, on my own terms, and in my own firm. Oh, and I wanted to move to New York City to do it.

When I told him, honestly, I think he was heartbroken. But like the loving father that he is, he vowed he would not stand in the way of my dreams. He sent me up north with a hug and my two duffel bags, more uncertain than me about whether it would work out.

I was moving to one of the most expensive cities in the world. And no, my parents did not lend me a dime. I had a small cash reserve saved from living at home for a year (a decision I think there’s no shame in making). Heather told me what it would cost to find a roommate in a decent apartment on Craigslist, and I used my cash flow analysis to understand how much I would need to earn to get by. I mean really, just get by—I made meals for a whole week from two pounds of ground beef chuck (and was proud of myself already)! Without being a master of cash flow, I never would have had the confidence to go all in.

After some interviews, I secured a position as an associate advisor in a Park Avenue practice. I wrote financial plans and performed administrative work to help my boss’s business run smoothly. In addition to my base salary, I negotiated a subsidy for my continuing education—I wanted to become one of the youngest Certified Financial Planners in the country. This would help legitimize me in a field where most successful professionals were much older. I worked like a dog servicing clients, studying, and starting to figure out how I’d find clients of my own. The goal would be to phase out my base salary for client revenue. But it became clear very fast that this wasn’t going to be achieved through cold calling. I needed to be patient, keep my head down, and learn.

If you are fortunate enough to work in the industry you’d like to spin off in, that’s great. Even under the thumb of someone else, you are gaining on-the-job training that applies to your craft. You might be in for a long game, but again, you need to be patient. This is the most practical way to fulfill your financial obligations while getting closer to your goal. You can see what works and what doesn’t—and it’s not your butt on the line. Witnessing someone else’s business decisions (even when they’re wrong) can teach you valuable lessons you will have forever.

If your dreams are a complete pivot from your current career, consider this: time is your best friend. You want to be working a job that maximizes your work-life balance. Then you can invest your free time into that entrepreneurial venture. This doesn’t necessarily mean that you up and leave your full-time job to become an Uber driver. It doesn’t have to be that dramatic of a shift. There might be ways to stick it out in your current industry, but in a more limited capacity or role. You can reclaim time in your life with simple changes. You just need to look for them.

Anyway, you read earlier about what happened to Heather during the Recession, but you didn’t hear my side of the story. Within days of my arrival to the Big Apple, the bottom fell out. The last person you wanted to be was a financial professional, as I fielded no less than a dozen hysterical phone calls per week from my boss’s clients claiming the sky was falling. But dealing with them was the easier part of my day.

Through the following years, I watched Heather and our peers struggle, terrified that the decisions they made were the wrong ones, not knowing how they’d ever start their careers or have the chance to do what they knew they were capable of. Heather was (and is) an incredibly strong woman and she felt like a victim. That was what killed me. No one so strong should feel incapable of improving her situation, no matter how bleak.

I realized that my real goal wasn’t just to be my own boss, but to educate and empower Millennials. Older financial advisors were dismissing my generation as the entitled children of their clients. They had no idea how to assist with the new challenges we faced breaking into the workforce, or how to answer our unique financial questions regarding student loan debt repayment. More importantly, there were no wealth management firms run by Millennials for Millennials. With retirements of their own to worry about, older advisors weren’t willing to invest in people just starting their careers with challenges they couldn’t relate to. I could relate to them because I was living them. There was a crack in my industry and I hoped to be one of the first to fix it.

As the economy recovered, I switched firms and recouped some time to start brainstorming my plan of action. Although I had made some friends living in the city, I knew I would need a bigger network to grow a business, as mine wasn’t large enough to form a meaningful pipeline for new clients. Attending a renowned business school program would expand my network and enhance my credentials; two gains for the price of, uh, a vacation condominium?

Before deciding to enroll, I carefully considered what would need to occur to make a return on my investment. Indeed, the cost was exorbitant, and I just watched Heather learn the hard way about making uninformed financial decisions with her student loans. I decided that the only way it would make sense to pursue my MBA would be in a night program, so that I could borrow less money and continue to make money during the day.

But wait, you might ask, didn’t he warn us earlier about the perils of pursuing graduate degrees? Are they worth it if not “required” to enter a certain field? The takeaway here isn’t that attending business school will unlock the secrets for running a successful business. Many successful entrepreneurs would argue that no school can teach you entrepreneurship, and that real mastery comes more from doing more than anything else. In this limited context, business school happened to be my investment—an investment in my time and money to build the network and credentials I needed.

There will come a time when you need to make an initial investment in your business venture. It could be additional training, a piece of equipment, or straight up cash. From a numbers standpoint, give this investment as much attention as any other decision we analyze in this book. But be a little cavalier about the unknown. Every entrepreneur should possess a bit of bravery. It’s why we are drawn to set out this way in the first place.

In pursuing my MBA, I formed relationships and even learned a thing or two about business. My expanding network of young professionals translated to new clients and referrals, many of whom were also friends. It felt so wonderful to root for them as they did for me. My investment was starting to pay off.

Right before I walked across the graduation stage at Radio City Music Hall, I took the plunge: I eliminated my base salary and started relying on only my clients to generate income. Heather and I got married in the fall before then, and her job provided us with the financial security and health benefits we would need to leave my salaried days behind. Her stability made it possible for me to get closer to my goal. The ebb and flow of our relationship allowed this to be my time. We were both okay with that, and if you are in a committed relationship, your spouse needs to be, too. (You will learn more about this in Chapter 7.)

From then, I went all in, setting out to prove that financial advice for Millennials wasn’t a “niche”—it was the future. I sought the attention of national news organizations to become an authority on the subject and build a constant stream of press. Social media and technology helped me distribute educational content to the right people. I established relationships with nonprofit organizations and took leadership positions to affect the industry. Most importantly, I committed myself to providing outstanding service to my clients of all ages.

By December 2016, I was ready to go all in for real. I left my former organization to build my own firm, Bone Fide Wealth.

It took eight years from the day I hugged my dad goodbye in South Florida to make it happen. Eight years of training, education, patience, hustle, negotiation, compromise, success, and failure. And this is only the beginning. I’ll say it again: nothing worth doing is easy. I keep this in mind with every challenge I face.

Millennials are doers, and we are doing more than ever. Our hunger to have an impact, create, innovate, and disrupt the status quo makes us natural entrepreneurs. Pair this spirit with a solid foundation in personal finance, and you can achieve this Great Thing in Life. You can be unstoppable.

EARNING THE RIGHT TO INVEST

People think investments make them rich. That’s why they love them; why Jim Cramer can scream at millions of viewers on television almost every day; why moviegoers clamor over The Wolf of Wall Street and The Big Short, despite their portrayal of how awful investments can be when manipulated for greed; and why Amazon once had 123,984 search results in its books department for that one single word: investments. It’s about the glamour, the risk, and the sizzle when you get them right—and the things you can buy when you do.

Okay, okay, that’s enough. Time to cool off.

I may sound like a grandpa to my young clients, calling in with their first load of cash looking to triple their earnings. But I don’t care. Investments make up just one area of personal finance. And like we discussed earlier, you need to earn the right to invest by first prioritizing your goals, mastering your cash flow, and establishing the safety net of a cash reserve that’s appropriate in size to where you are in life. If you’ve followed along and met those benchmarks, then we can talk about investments.

Investing tests the relationship between risk and reward. People invest to grow their money at a faster rate than placing it in the bank. Some consider it “putting your money to work.”

This means that if you are willing to risk losing money by committing it to something that could generate income or profit, you might be rewarded for that risk in the form of greater income or profit.

But again, stay cool here. I know the concept seems sexy, but my goal for this chapter is to keep things simple and vanilla. We’re going to stick to learning about stocks and bonds and discuss two very popular ways of investing in them. My colleagues might think I’ve lost my mind by simplifying things this much, but I can assure you this is what you need right now. No more than this.

STOCKS, BONDS, AND EVERYTHING IN BETWEEN

This type of investing involves the capital markets. Capital markets are financial markets, such as the stock market. This is where you buy and sell securities, which are financial instruments that represent ownership in companies, called stock, or the debt of companies, called bonds. While you’re learning terminology, another word for stock is equity and another word for debt is fixed-income, but I will stick to using stocks and bonds from here on out.

There are other capital markets beyond ones for buying and selling stocks and bonds. You can practically find a market to invest in just about anything. There are markets that let you invest in commodities, such as oil and corn, or markets that let you invest in how other markets will do in the future.

Clearly, there’s no shortage of investment products, and new ones are being manufactured every day. They range from simple and straightforward to terribly confusing. With so many options to choose, how does one even begin? Again, let’s keep it simple. There are stocks, there are bonds, and then there’s everything in between.

Owning stock of a company means you own a part of that company. You buy stock in units called shares, which are traded on exchanges, such as the New York Stock Exchange. Therefore, owning shares of stock entitle you to a portion of that company’s value and profits. If a company does well, the value of its shares (or the income you receive from those shares) should increase. However, if a company does poorly, the opposite holds true. Stocks are viewed as risky investments because no company is immune to the chance of going out of business. Blockbuster Video, for example, didn’t see the streaming video services industry coming nearly as fast as it did. Thus, it went the way of the Dodo. But just how risky a company is comes down to a number of factors, including strategic risk, compliance risk, financial risk, operational risk, and reputational risk, positioned around its ability to turn a profit and grow that profit today and in the future.

Let’s view the relative risk of stocks by examining two companies: Tesla Inc. and The Coca-Cola Company. Automobiles that use alternative energy are harder to sell than soda. Therefore, investing in Coca-Cola is less risky than investing in Tesla. This is oversimplified, but a fact. We can all agree that Coca-Cola isn’t going anywhere anytime soon, whereas it’s uncertain if Tesla will survive the next decade. As of 2016, the company had just turned its first profit. Sure, there’s no guarantee that Coca-Cola is going to be around forever either, but since 1886, it has survived and grown steadily. However, because of the perceived difference in risk, Tesla might offer a greater reward than Coca-Cola, should Elon Musk’s vision break through to the mainstream car and energy industries.

Bonds are less risky than stocks. They are the equivalent of giving a personal loan to a company. The company you give your money to is then responsible for paying you interest on that loan, called a coupon, and returning your money, called your principal, when the loan is due. Bonds are considered less risky than stocks because the income is more predictable. Also, if a company goes bankrupt, bondholders are the first investors to be paid out from what’s left, giving them priority over other investors like stockholders. However, like stocks, bonds come in many varieties, each offering different levels of risk and reward.

Let’s view the bonds of two companies: General Electric (GE) and Netflix. Owning a General Electric bond is less risky than owning a Netflix bond. GE is one of the largest companies in the world, and its presence is pervasive throughout our economic system. It’s literally one of the companies that are too big to fail. The likelihood of GE being unable to make its bond payments is extremely low, given a myriad of factors such as its rating, size, and overall financial health. Netflix has boldly changed the way we watch television and entertainment. Though it appears it’s here to stay, it’s not too big to fail. Therefore, assuming you are investing in bonds of similar quality respectively, it should be the riskier of the two. And you should not be too surprised to find out that the Netflix bond pays a higher coupon. There’s that risk for reward relationship once more.

So, if you are going to invest, how do you know which stocks and which bonds to invest in? Well, if I knew which ones were going to be the big winners, would I tell you? Probably not! I’d keep those secrets to myself and make tons of money in the process. I also wouldn’t be writing this book, but alas, here we are.

The bottom line is that it’s impossible to pick the right investments on a consistent basis. People and professionals might tell you they can, but they are full of it. History proves that even Wall Street’s best investment managers do a bad job picking only winners on a consistent basis.

(They probably would prefer you didn’t know that.)

Because you can’t predict how any individual stock, bond, or investment will perform, you must be diversified. This means you shouldn’t invest all your money in one stock or bond. I am sure you’ve heard of the expression, “Don’t put all of your eggs in one basket!” You want to spread the risk you’re willing to take across a broad range of investments, so that if a few do poorly, you have others that might do better.

MUTUAL FUNDS AND EXCHANGE-TRADED FUNDS

Rather than having to choose among thousands of stocks or bonds on your own, the financial industry has done you a favor. They created investment products that do this for you called funds. Funds are the most popular way for people to invest.

The two most popular types of funds are mutual funds and exchange-traded funds (ETFs). These products are created by financial institutions and can be considered “baskets” of individual stocks, bonds, or a combination of both. Funds can invest in hundreds to thousands of individual stocks and bonds, therefore making them an easy way to achieve diversification without having to pick and choose individual investments on your own. They also allow greater access to investing for people who don’t necessarily have a lot of money to invest.

There are thousands upon thousands of mutual funds and ETFs to choose from, each with its own investment objective. For example, if you wanted to invest in only domestic companies of a certain size (such as large companies worth more than $100 billion), there’s a fund for that. You could also just as easily buy a fund that invests in only small European companies, and so on and so on.

Mutual funds have been around for a long time—since 1924 to be exact. They remain the most popular way to invest, second to none. Mutual funds essentially work like this: you, the investor, buy shares of a mutual fund with a certain investment objective. That money is then pooled with other investors just like you.

Then, the pooled money is invested in one of two ways. The first way is by a fund manager, who is going to actively buy and sell investments that fall into the scope of the fund’s objective with the goal of earning a return for the fund’s investors. This is called active management. Remember that. The second way is called passive management. Instead of being actively managed, passive mutual funds will invest according to a predefined list of investments, called an index. Indices are predefined and meant to be representations of specific markets, such as the U.S. stock or U.S. bond market.

The S&P 500, for example, is one of the most popular indices, representing the 500 largest domestic companies. Although it does not represent all U.S. companies, it serves as a pretty good representation of the U.S. stock market and is commonly used as such.

I bet you’re wondering which management technique is better. Active and passive mutual funds have their advantages and disadvantages, and it’s a question that’s debated frequently today. However, I can share with you that, lately, more money on average has been going into passively managed investments because of their lower cost, and active managers often struggle to do better than their benchmarks through long periods of time. According to U.S. market data released from Morningstar, Inc., in June of 2016, $21.7 billion dollars flowed out of actively managed U.S. stock funds alone!

This is why a relatively new type of fund, the exchange-traded fund (ETF), was created in the 90s. In a nutshell, an ETF is meant to replicate or track a particular index and provide you with a benchmark-like return at minimal cost. It’s essentially the equivalent of a passively managed mutual fund, but with one main difference. Unlike mutual funds, ETFs are bought and sold just like stocks, which trade throughout the day on exchanges. Mutual funds, meanwhile, trade at the end of the day. This means that when you buy an ETF, you can get in and get out the investment more quickly than you could with a mutual fund, which is an advantage for many investors.

ETFs have some additional advantages, like lower minimum investment requirements and tax efficiencies. But typically, lower costs and the ability to get in and out are the features investors value the most. So, ETFs over index funds, right? Not necessarily. The answer requires a greater understanding of how you invest.

HOW DO I INVEST?

As I explained earlier, you must first earn the right to invest. If you have not yet identified and prioritized your goals, mastered cash flow, and started working on a cash reserve, you simply aren’t ready. But let’s assume you are.

When you invest, you invest toward your goals. Lucky for you, you’ve already identified them. By having also quantified your goals, you know how much time you have on your hands to achieve them, which is critical when it comes to investing your money.

The rule of thumb here is that the longer time-frame that you have to achieve a particular goal, the more risk you can tolerate to get there. Why? Having more time allows you to make up for losses along the way. If you adopt this disciplined investing principle, then you might feel just as comfortable in the years that you lose money as you do in the years that you earn a return.

Let’s look at an extreme example. It’s early 2008, and you invested 100 percent of your retirement money in the S&P 500—all stocks. By March of 2009, you would have lost something like half of your investment. Losing this much of your investment is devastating (after all, the Recession was devastating). But, if you kept your investment where it was and made no changes to it, you would be pretty close to where you started in early 2008 by early 2010. Because retirement is a long-term goal, maybe more than 30 years away, you have the time to recover losses, even when they are catastrophic. However, I must note that as you become closer to achieving your goal, you should not be willing to take on as much risk.

Therefore, the second key point to investing is understanding your tolerance for risk. It’s a subjective and emotional thing. You must reconcile your feelings about the crucial relationship between risk and reward—just like with selecting a college or grad school earlier. In the context of investing, though, it means that if you aren’t willing to risk anything, you might not get the reward—or return—to achieve your goal in the time you wish. But that might be okay with you, too.

For example, let’s assume that losing half of your money is enough to make you curl up naked in the fetal position on the floor. What does this say about your tolerance for risk? Well, it gives me a better understanding of how you feel in extreme situations like the Great Recession, from which I could infer how you would handle fluctuations large and small. In other words, how would you feel about losing 5 percent of your money in the “stock market”? How about 10 or 20 percent? This exercise, though very general, can help you understand your own tolerance for risk and then apply that tolerance to a particular goal’s time horizon.

Once you know your investment time horizon and your tolerance for risk, you can start to think about how to allocate your money. This process is called asset allocation, which helps an investor understand how much of an investment should be placed in stocks and how much should be placed in bonds.

The process goes even further by demonstrating the specific types of stocks and bonds to invest in, called asset classes. Stocks are considered an asset class by itself, but it can be broken down even more. For example, within stocks, you can invest in U.S. companies of varying sizes such as small, mid-size, or large U.S. company stocks.

Asset allocation is interesting stuff because it examines how to maximize reward by using different types of assets and by also taking into account an investor’s particular tolerance for risk. Unfortunately, it gets very technical pretty fast, but there is a method to assist you.

The financial services industry did a good job categorizing general asset allocations by standardized tolerances for risk. These tolerances can be described as follows:

Aggressive

Moderately Aggressive

Moderate

Moderately Conservative

Conservative

Each of these categories has an approximate ratio of stocks to bonds. It can, very broadly, look something like this:

Aggressive	80–100% Stocks/0–20% Bonds
Moderately Aggressive	60–80% Stocks/20–40% Bonds
Moderate	40–60% Stocks/40–60% Bonds
Moderately Conservative	20–40% Stocks/60–80% Bonds
Conservative	0–20% Stocks/80–100% Bonds

Try not to be too bummed-out here, but I cannot lay out for you a detailed asset allocation, let alone tell you what funds to specifically invest in. First, my compliance office would murder me for making specific investment recommendations in a book. It’s basically a cardinal sin! And not for nothing; each of you are individuals. There is no standard approach to creating a detailed asset allocation model. Again, if there was a specific investment selection process to adhere to, we’d all be rich.

I can, however, tell you that once you have an idea of what your broad asset allocation is for a given investment goal, you can start to choose which specific funds fit the allocation and build an investment portfolio. You can start your search for individual investments by looking for funds that are literally named with the investment objective you might be looking for.

For example, if your investment time horizon is long-term, and you’ve chosen to invest aggressively, you might want to look for funds with names containing “aggressive growth,” “total market,” or “total equity.” But let me be very clear: I am not telling you to invest in something based on name alone. I am merely suggesting that you begin your search this way.

Once you’ve identified an investment that you think makes sense, you will need to do your homework; at the very least, locate and study that particular fund’s fact sheet. These are typically found on the Website of the company managing the fund. The fact sheet is a great way to learn about the most pertinent fund information, such as its objective, top investment holdings, risk profile and characteristics, past performance, purchase information, and associated costs.

One of the most important considerations when investing in a fund or any investment is that last one: costs. I personally believe that investments, especially investments in funds, have become increasingly commoditized during that last 10 to 20 years. This means that there’s not much difference between funds with similar objectives, and the main thing the fund companies are competing over are costs. I believe this will continue to happen more and more through the next decade as passive investment products (index funds and ETFs) become more popular than their actively managed counterparts.

Let’s review the various costs associated with investing in funds. The following represents the main categories of expenses you will encounter:

Investment Expense or Expense Ratio: The annual cost of owning a particular investment or fund. It can be as small as a few hundredths of a percent, called basis points, to as high as 2 to 3 percent of the value of the fund. The investment expense is accounted for in your return of the fund. So, when discussing the performance of a mutual fund or ETF, we are always talking about performance after, or “net” of, this expense.

Investment Management Fee: The annual cost of having your portfolio invested by an investment professional or program, such as a financial advisor, investment platform, or “robo-advisor.” The investment professional or program gets paid this recurring fee in exchange for constructing, monitoring, and maintaining your investment portfolio. This fee may or may not cover other investment-related expenses, such as trading costs and various account fees. Humans typically charge one percent of the portfolio’s value, and the robots charge 0.35 to 0.50 percent.

Commissions: The per-transaction cost of having your portfolio invested by a professional. Every time a professional sells or purchases an investment for you, you will pay a fee. Commissions vary greatly depending on the investment product being sold. It’s kind of antiquated to work with a professional in this regard. You might consider paying a blanket investment management fee instead.

Trading Fees: These fees come along with the actual purchase or sale of a particular investment or fund. They could exist when either investing on your own or with an investment professional. These fees are typically a fixed charge up to a certain purchase or sale amount, and they increase incrementally the more you buy or sell. These could be on top of any investment management fees or commissions.

No matter how you go about investing, it’s critical that you are aware of what you are paying for because costs have a direct impact on your returns. And they can be controlled, for the most part, if you understand them well. For example, you can minimize costs like investment expenses and trading fees by choosing passive investments over active investments or limiting the frequency in which you buy and sell. Other costs, like investment management fees, could be eliminated entirely if you invest on your own.

DIY? TMI.

Let’s last touch on the differences between investing on your own and investing with a professional. I make a living helping individuals invest toward their goals. Most of my clients trust my firm to manage their money in a way that puts their interests above everything else. But I’m not going to tell you that you can’t do this yourself. Of course you can. Many people do, and they are going to save money doing so. You can take the lessons in this chapter, along with an unlimited number of online resources (Investopedia.com is my favorite) and execute an investment strategy that works.

But in my experience, I can tell you that most of my clients are too busy working toward their goals to do as good of a job as my firm can do for them. Their time is too valuable and too precious to be spent perfecting an asset allocation model or mulling through the tens of thousands of funds that exist to create the optimal investment portfolio. They find value in working with a professional to help them make the best decisions, because they can reinvest that time into work or their personal lives. What it comes down to is, what is your time worth to you?