Why Most People Will Never Become Wealthy with Their Investments And There’s a Good Chance You are One of Them

diceSpecial Report by George Antone

 

The headline of this report is a very bold one. But sadly, it’s true.

 

I share with you in this report why it’s true for most people, and what you need to know be one of the few that build wealth.

 

I’ll start with my assumptions.

  • I’m talking about people that are trying to build wealth from their INVESTMENTS, and not considering wealth built from entrepreneurship or high salary.
  • I’m talking about people that invest the way many “experts” out there recommend, i.e. invest in stock market, bonds, load up their 401K, real estate without using leverage.
  • I’m talking about people that have been conditioned that any form of debt is bad.

 

Things to consider when investing:

CONSIDERATION 1: CASH

So let’s start our journey with a fixed sum of money, say $10,000 in CASH.

So the $10,000 won’t build wealth sitting there in cash under your mattress. We need to make it work for us.

So let’s consider investing it.

 

CONSIDERATION 2: COMPOUNDING ENVIRONMENT

Let’s start with a lesson we were taught many years ago in a class called mathematics. The teacher shared this wonderful strategy called COMPOUNDING.

 

She said if you place your money in a compounding account, it will grow to gazillion dollars after a gazillion years. We were so excited.

 

In fact, she said Albert Einstein once said that “‘compound interest is the most powerful force in the universe”! Now we knew how we would become rich!

 

She went on to ask us this question to drive the point:

“If I were to offer you one penny that I will double every day for thirty days or I will give you $100,000 today, which would you choose?”

 

We all guessed $100,000 just to find out we were wrong. She said a penny doubled every-day for thirty days would give us $5,368,709.12!

 

Wow! We were so astonished our eyes were bulging out!

 

But we weren’t told about taxes at the time. So let’s add taxes…

So taking the above scenario with the penny, let’s run it in 3 environments:

Taxed Compounding Growth 30% Tax Bracket
Day Growth
1 $ 0.01
2 $ 0.02
3 $ 0.03
4 $ 0.05
5 $ 0.08
28 $ 16,677.11
29 $ 28,351.09
30 $ 48,196.86

 

 

Here are the results:

  • Tax-Free Compounding Growth: penny turns into $5,368,709.12.
  • Tax-Deferred Compounding Growth: penny turns into $3,758,096.38 (assuming 30% bracket).
  • Taxable Compounding Growth: penny turns into $48,196.86 (assuming 30% bracket).

Whoa! Wait a minute! The $100,000 suddenly becomes more attractive for the last scenario!

 

This shows us how important the tax environment is.

 

So we decided to use a tax-advantaged environment (tax-free or tax-deferred).

 

We are excited about having the “greatest force” working for us in the right tax environment.

 

After few years, we review our growth, just to realize something is off. We are not where we need to be financially.

 

What is going on?

 

Upon further investigation, we realize that we are being charged “low” fees that are connected to our investment.

 

“But the fees are low,” I think to myself.

 

That’s when my friend Talonya emails me an interview with John Bogle on PBS, founder of Vanguard, one of the world’s largest mutual fund organizations. John Bogle is one of the most respected names on Wall Street.

 

The interview opened my eyes.

 

In the interview, he was asked “So if I do your average, what percentage of my net growth is going to fees in a 401(k) plan?”

 

Mr. Bogle replies:

“Well, it’s awesome. Let me give you a little longer-term example. The example I use in my book is an individual who is 20 years old today starting to accumulate for retirement. That person has about 45 years to go before retirement — 20 to 65 — and then, if you believe the actuarial tables, another 20 years to go before death mercifully brings his or her life to a close. So that’s 65 years of investing.

 

If you invest $1,000 at the beginning of that time and earn 8 percent, that $1,000 will grow in that 65-year period to around $140,000.

 

Now, the financial system — the mutual fund system in this case — will take about two and a half percentage points out of that return, so you will have a gross return of 8 percent, a net return of 5.5 percent, and your $1,000 will grow to approximately $30,000. One hundred ten thousand dollars goes to the financial system and $30,000 to you, the investor. Think about that. That means the financial system put up zero percent of the capital and took zero percent of the risk and got almost 80 percent of the return, and you, the investor in this long time period, an investment lifetime, put up 100 percent of the capital, took 100 percent of the risk, and got only a little bit over 20 percent of the return. That is a financial system that is failing investors because of those costs of financial advice and brokerage, some hidden, some out in plain sight that investors face today. So the system has to be fixed.”

 

“Why didn’t I know about this years ago?” I think to myself.

 

I had no idea the fees had that much impact on my investments.

 

So I reworked my investments to have minimal fees.

I was on my way! I thought.

But I was wrong. The GREATEST FORCES were still working against me…

Then comes inflation.

Inflation? What does inflation have to do with this?

Besides, inflation is low. How does it affect me?

I am debt-free, own my assets free-and-clear, and my returns are good. I am being told I shouldn’t worry about it – by those experts on TV.

Think again.It turns out to be the biggest threat: the loss of purchasing power.

 

According to FOOL.COM, a well-respected website for stock news and analysis, “Put simply, inflation slowly but surely saps the value of your hard-earned money. Even at a relatively low 3% inflation rate, prices double roughly every 25 years. Moreover, depending on your individual needs, your personal inflation rate might be much higher than the official Consumer Price Index. For instance, many retirees have argued that the CPI doesn’t reflect their particular spending patterns, making it necessary to determine their own price-increase exposure and make arrangements accordingly.

 

The steady erosion of purchasing power is the biggest reason why investing too conservatively can be problematic. If you keep money in a savings account right now, you guarantee that your account balance will never go down. But earning just a fraction of a percent in interest, you’ll never keep up with even the low inflation rate that we’ve enjoyed lately.”

 

So what is inflation rate? You just might want to take a look at ShadowStats.com.

You might want to be seated when you do that.

According to ShadowStats.com, inflation is closer to 10% than the 3% that the government

states. That’s because the CPI (index that measures inflation) was updated in the Carter and Clinton years, and energy (gas) and food were removed from the CPI, which in turn lowered inflation rate. In plain English, they removed the food and gas we need to survive on from the calculation for inflation! Huh? Yep, it’s true.

 

However, ShadowStats.com keeps track of inflation with the old calculation.

So if inflation is indeed closer to 10%, and inflation compounds. What does that mean to me? Simple.

My investment of $10,000 has to return 10% after taxes and after fees, every single year, just to maintain purchasing power, and the investment has to be growing in a compounding manner!

Where can I find this?

Not sure.

Real estate?

No, I was told by the experts on TV that having a mortgage is bad.

The stock market?

According to the Dalbar Study, the average investor has a return of just over 3% in the last 25 years. Dalbar Inc. is the nation’s leading financial services market research firm and performs a variety of ratings and evaluations of practices and communications that are committed to raising the standards of excellence in the financial services and healthcare industries – so in other words, they are the ones to listen to.

Bonds?

Not even close.

Mutual funds?

What a joke!

So I spoke to another expert about this. What he said knocked me out of my seat.

CONSIDERATION 6: OPPORTUNITY COST

He said the largest cost for the average American in “opportunity cost.”

According to InvestorWords.com, opportunity cost is, “The cost of passing up the next best choice when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. Opportunity cost analysis is an important part of a company’s decision-making processes, but is not treated as an actual cost in any financial statement.”

When I “park” my money in an account that grows in a compounding manner, I am losing the opportunity to make more money on that money. In fact, it is the biggest cost than any other cost he stated.

Imagine putting $250 per month in an account “because the experts on TV said that.” That money could have made us a lot more money if we had used it right.

I was puzzled.

What else can I do with it?

Hold on to your socks.

CONSIDERATION 7: THE WEALTH FORMULA

Let’s approach this from a mathematical point of view. Building wealth starts with positioning yourself on the right side of the equation. A typical mathematical equation might look like this:

X + Y = Z

Assume these variables represent dollar amounts – money. That would mean the sum amount of X + Y dollars is the same as Z dollars. Or another way of looking at it – the money on the left side of the equation would be equal to the money on the right.

So if X is $5 and Y is $2, Z would be $7. And our equation would be:

X + Y = Z
$5 + $2 = $7

In the real world, most people are on the left side of that equation – what is considered to be on the “paying” side. The right side of the equation is considered the “receiving” end, and therefore must be equal to the left side. After all, the left side is “paying” the right.

The example below shows that James and Justin are on the paying side of the equation, each paying $2,000 and $3,000 respectively. Jennifer is on the receiving side, of that equation and so must be receiving the $5,000.

Description Paying Side Receiving Side
James & Justin $2,000 + $3,000
Jennifer $5,000

 

Now the formula looks like this:

$2,000 + $3,000 = $5,000
(James & Justin pay Jennifer)

Obviously, we all want to be Jennifer, but very few of us are.

In the real world, there are certain, major “forces” that we are on the paying side of (most people), as shown in the chart below.

Force Paying Side Receiving Side
Inflation X
Interest X
Taxes X
Opportunity Cost X

 

If, then, most people are on the paying side of those forces above, who is on the receiving end?

The financial institutions, the government and the very wealthy. The diagram below shows an approximation of that.

Force Paying Side Receiving Side
Inflation Most People Federal Institutions, Government and the Wealthy
Interest Most People Federal Institutions, Government and the Wealthy
Taxes Most People Federal Institutions, Government and the Wealthy
Opportunity Cost Most People Federal Institutions, Government and the Wealthy

 

So what does one have to do to be wealthy?

Simple!

Change which side of the equation you’re on.

You want to position yourself on the right side of the equation. Position yourself on the receiving end of those powerful forces. The diagram below illustrates the ideal goal.

Force Paying Side Receiving Side
Inflation You
Interest You
Taxes Minimize
Opportunity Cost You

 

Obviously, you can’t be on the receiving end of taxes, but you can minimize how much you pay.

By simply moving yourself to the other side of the equation, you realize that you will build wealth automatically – while being on the same side as the financial institutions, the government and the ultra-wealthy.

So how do you do that?

Well, let’s recap where we are first.

We had $10,000 cash, we used compounding on it, the “greatest force in the universe” on it, and that wasn’t enough. We placed it in the right tax environment. That wasn’t enough. We minimized fees. That wasn’t enough. We considered inflation, and realized there is very little to nothing that can beat all the above including inflation. But even if there is, it has to beat it every year consistently!

Here is the actual formula to calculate the break-even return we need:

R = Tax Rate

I = Inflation Rate

X = Return after taxes and after fees that you need to maintain purchasing power (“break even”)

X = I / (1 – R)

This calculation shows you what you need to make as a return to break even after taxes, after inflation and after fees. This assumes the investment offers compounding growth too!

Let’s plug in some numbers.

Let’s use 40% for tax rate, which includes state and federal taxes. Let’s use 10% for inflation (according to ShadowStats.com). If you don’t agree, then consider that all experts predict that inflation WILL be going up given all the money that is being printed right now.

X = I / (1 – R)                     X = 10% / (1 – 40%)                      X = 16.67%

That means you need to get a return of 16.67% to break even. That is after taxes, after inflation and after fees. More so, this assumes the investment offers compounding growth too. And worst yet, this has to be a consistent return every year.

All that just to break even! Not even to increase our wealth!

This is pretty bad.

How is anyone building wealth then?

 

Well, there is no way but to use LEVERAGE.

Without leverage, it is practically impossible to build wealth. And most “experts” on TV tell us not to use it, yet the affluent tell us they cannot do without it. They are right. The numbers prove it all – and their wealth proves it too.

Financial leverage can be good and bad. It can work for us or destroy us financially.

However, once you know how to use it and manage the risk, it can MOVE us to the right hand side of the Wealth Formula.

In fact, some of the affluent have said that it’s impossible to build wealth without leverage. Now you see why. The numbers prove it.

What does leverage do?

Again, used right, it moves us to the right side of the Wealth Formula. Leverage is to the wealthy as candy is to kids.

We position ourselves on the receiving end of inflation. That means as inflation rises, we benefit. Leverage positions us on the receiving end of interest and opportunity cost as well.

Here is another analogy for leverage.

Instead of having just one $10,000 growing in a compounding environment and in a tax-advantaged environment, we can first replicate the $10,000 four more times, and each of those placed in a compounding environment and in a tax-advantaged environment. Now we are working with $50,000 to start with, and more for the people that know how to use leverage effectively!

The key to financial leverage is to have the interest rate on the leverage to be FIXED for a long time, and less than inflation rate.

Interest Rate < Inflation Rate

So think of financial leverage, used right, is a REPLICATING process.

Let’s put everything together.

We started with $10,000 cash. Now we will replicate it several times (using leverage). So we expanded the $10,000 to $50,000 instantly in this example. No waiting for a gazillion years! We now place each of those sets into a compounding environment. We then make sure we place all that in a tax advantaged environment. We make sure we minimize or eliminate fees. And then because we are using leverage, inflation works to our advantage. Each set can return less than the 16.67% return we calculated above, but the sum across all sets should easily beat that, which allows us to know we are actually building wealth.

Here’s the big question: what are you supposed to do with this information?

The numbers sound great, but how can YOU put it to use to transform your financial future?

I’ll tell you how in a minute—but first, imagine with me what it’s like being a banker. Your job is to turn money into more money. People deposit money into your bank, you use financial leverage to double or triple the amount, then you lend it all to other people at high interest rates—and sit back and enjoy the cashflow.

Now imagine if you could do this as a home-based business. Imagine if you didn’t even need to have any money to start with. Sound good?

If there’s one thing I’d like you to get from this report, this is it: the centuries-old business model I just described is one of the easiest and safest ways to create cashflow. Since I started teaching this business model, it has transformed thousands of lives.

You can learn all about this business model in The Banker’s Code, an intense home study course and 3-day live immersive event.

Click this link to find out more:

www.mpactwealth.com/financialfreedom