The Myth of “Average Rate of Return”

We are told that stocks are the way to wealth and that the market has averaged (pick a figure) over the last (pick a time frame) and so it will continue to do the same. It is important for you to understand that “average rates of return” can be easily manipulated and that whatever figure you get from Wall Street does not mean that your money will average that growth rate. (Dow Jones Industrial Average Stock Market Historical Graph)

Remember this example well: over 4 years, how is it possible to invest $100,000 on year one and average a 25% rate of return for four years and have less than $100,000 after year four and have never taken a dime out of the account during that time? The answer is so easy once you understand how this works. Invest $100,000 into the account and it grows at 100% (doubles) in year one so now it is worth $200,000. Year two, the account falls by 50% (half) putting the value back down at $100,000. Year three, the account grows by another 100% and the money is back up to $200,000. Year four, the account dips back down another 50% and our money is now back to $100,000. Now you take out taxes you made on the good years (the way mutual fund taxes work is you can owe tax even though you have not sold the asset) and fees, and time value of money and your account is worth quite a bit less than the $100,000 you started your investment plan out with four years before.

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Now take a look at your “average rate of return” and you will notice that if you add up 100% return years twice and subtract out your 50% years twice, that leaves you with 100%. You must divide that by the 4-year cycle and what do you get? Of course, I am a high school failure and college dropout but it looks like a 25% “average rate of return.” Did your money grow by 25% a year? Not hardly! If your money would have grown at 25% a year compounded annually your $100,000 would now be over $269,000. This is a far cry from the $80,000 your probably have left in your account when you “averaged” 25% per year for four years. Most of your 401k’s are earning an average rate of return.

Be very careful to focus on growth, not rates of return. If I am selling some kind of financial product and don’t like the last 4 year average I might try to show you the 8 year average. If that still stinks maybe the 15 year average will work? I have seen people in this day and age pull out 100 year averages to attempt to prove their point. The only problem is the economy of today doesn’t even vaguely resemble the economy of last century. This means that a 100 year average is probably a lousy way to try and predict the growth for the next 10 or 20 years of any particular product.

Instead of average rate of return focus on cash flow in and cash flow out of your accounts. Don’t get sucked into the age-old trap of just thinking about rates of return. Many times they are put in place so you will take your eye off the ball of what’s really happening. What’s really happening is that while we are all focusing on rates of return and the rise and fall of the stock market, we are happily pouring our wealth out month after month to the banks and other places with no real plan to stop the insanity. Wealth without Stocks will give you that plan.

Visit us at Perpetual Wealth Systems to learn more.

Why Only Investing Is A Suckers Bet

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Last week, I introduced my concept of the six circles of wealth, and discussed the first circle, cash flow. The second circle is investing. Simply defined, an investment is an asset whose value can grow or shrink. Some of the most common investments are:

  • Stocks and bonds.
  • Mutual funds from many different asset classes, including stocks and bonds.
  • Gold and other precious metals.
  • Real estate.
  • Commodities, such as oil, frozen orange juice and wheat.
  • Annuities.

Some are less commonly used:

  • Businesses.
  • Private placements (money is pooled and invested in properties, venture capital, inventions or other assets).
  • Limited partnerships (money is pooled to invest in something a general partner usually has expertise in).
  • Notes and income streams (this includes payments on a note, private contract or annuity).
  • Tax deeds and tax liens (a form of real estate with different rules).

Passive Investments

In passive investments, you have no say in what is done with your money once you invest it. You are relying on other people’s expertise. Examples from above would be:

  • Stocks held for long term (stock trading is more of a business venture).
  • Mutual funds.
  • Gold
  • Annuities.
  • Private placements (assuming you are just a cash investor and not the principle).
  • Limited partnerships

Active Investments

Active investments require more of your time and expertise to make them successful. As a rule, the more effort and specialized knowledge required to make an investment successful, the bigger its potential returns. Examples from the above:

  • Real estate will require you to study values, rents, acquisition techniques, liquidation strategies and other factors. To be a successful real estate investor, you must think build a team of professionals.
  • Business investing will require you to understand the business and the industry and to have a team of professionals and maybe even joint venture partners. There is potential for huge returns and a loss of your entire investment.
  • As the general partner in a limited partnership investment, you are the one with the expertise and time. Many times you will not invest money (although every arrangement is different). You will need a power team and the ability to raise private capital.
  • Discounted notes and income streams will require knowledge of collateral, cash flow, figuring rates of return on discounts and the ability to find private notes for sale.
  • Tax deeds and liens cover parcels (mostly unimproved land) that are auctioned off for back taxes. Great deals are possible, but you need to know the rules (every state and most counties in the state are different), the values, possibilities for land and guarantees offered by the local government.

Maybe splitting your investments between hands-off and hands-on programs makes the most sense. You might need to spend some time educating yourself to make hands-on investments succeed. Simply book time in your schedule to read, listen to CD’s, and attend workshops that will help your eventual goal of solid hands on investing returns.

More Than Just Investing

Many people might think I have left out certificates of deposit, savings accounts and life policies as investments. These are important parts of your wealth plan, but since they are guaranteed, risk-free products — you can’t lose money in them — they fall into other circles.

I also don’t include options on stocks or commodities in the investing circle. Most of the time, options are very short-term cash-flow plays. They require the stock or commodity you’ve bought options on to move a certain way fast if they’re going to pay off (up for call options, and down for put plays). They’re more a quick cash-flow generator rather than a longer-term investment strategy.

Far too many people make the mistake of just focusing on their investment circle while letting other circles fall into disrepair. Picture the six circles of wealth operating in a balanced way. When one circle gets too heavy or out of control, all the other circles suffer. When you understand this (and so few people ever do) you can take steps to balance out the circles and create a financial fortress.

John Jamieson is the best-selling author of “The Perpetual Wealth System.” Follow him on Twitter and Facebook.

Wealth Without Stocks! Why haven’t I heard of this before?

The indoctrination of the stock market is most powerful

Turn on your television, your phone, your computer, and any other device you care to name and you will almost certainly be greeted by the day’s stock averages such as the Dow Jones, NASDAQ, and S&P 500, among others. You will be instantly updated as to the direction of the market. There are entire television channels that are on 24 hours a day and 7 days a week that do nothing but report on the stock market; such as CNBC. How boring to have to follow those for hours every day.

When that kind of media blitz has been happening now for generations it is small wonder why people are unaware that they can, in fact, create much wealth even without stocks or mutual funds. This philosophy is NOT about being anti-stock market; there is certainly a place in every wealth plan for stocks or funds somewhere along an individual’s stages of wealth. The problem is that the vast majority of people have no idea of the many other ways that are available to grow and protect wealth. When me or my teammates and staff work with our clients from all over the country they are always fascinated when we start to discuss many of the alternative options to grow and protect wealth.

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Most of the topics we will cover in future posts are not only virtually unknown to most of the world but when used properly they can be extremely powerful. I am so excited to put all these wealth vehicles in one place that I can’t wait to begin to put this powerful information in your hands. We are going to cover debt reduction strategies, creative real estate strategies, private pension and self-directed IRA strategies, just to name a few.

We talked earlier a little bit about why the stock market is such a major force in almost every investor’s life but there is also the fact that you don’t need any knowledge to put your money into the market. Most Americans simply select what kind of investor they are; which will include aggressive, moderate, and conservative (Translation is how much money you can afford to lose). Just like that, they are signed up for their employers 401k, which will be their main retirement savings and investing plan for the rest of their lives. More than 80% admit to really having no clue what they signed up for to any great degree and certainly no knowledge of how their money was being invested. They just get their investing amount taken out of every check and let it ride!

The good news with that philosophy is that you don’t need any extra knowledge; the bad news is that you are making one of the biggest financial decisions in your life blind. You are investing (not saving, in most cases) money and just blowing all of your income. Although this is far from perfect, it is better than not doing anything at all. It’s fast, easy, and painless to get started funding your future. So you don’t have to be a financial expert to begin to accumulate wealth. That system is hands off from you and will allow you to focus on other things that are important in your life. The money is given to Wall Street (most of the time) and invested through mutual funds into many different kinds of stocks. However, that system also comes with enormous costs in the form of market losses and huge opportunity costs that we will talk about more in an upcoming articles.

The wealth without stocks philosophy is not that simple (it is pretty easy but not that simple) and will require you to obtain some niche knowledge to take advantage of the markets that are available to you in your quest to build wealth. If you are reading this than I am going to assume that you are the kind of person who is willing to shut off the television to further their own education for even one hour per night. You are willing to sacrifice time on Facebook® and every other social media time suck that are available to us. If that is a true statement than you will have the opportunity to grow and protect wealth at an accelerated rate that should far outpace your colleagues who have bought into the old financial plan described earlier. I want to congratulate you for being one of the few that actually will take the time to design their finances and secure an abundant future.

You are about to be launched into a secretive world (in comparison to the stock market and mutual fund world) that will make simple sense to you. Think of these articles like your own personal wealth buffet and you are free to choose whatever is to your liking and leave the other strategies on the table untouched. However, what will happen for many of you is that you will implement one of two of the strategies and then come back to the well of knowledge to see what else might be a fit for your goals. Just because it is not a fit for you today doesn’t mean it won’t be a fit for you tomorrow.

Just be open-minded and ready to learn!

All the best to you,
John Jamieson

be fearful or be greedy?

Warren Buffet is credited with quote of “when others are being greedy be fearful, when others are fearful..be greedy” In other words, find out what everyone else is doing and do the opposite! Most people are broke and will always be broke so why do you want to have the same thought process that they have? You want to think like rich people. You want to make decisions quickly and make them often. Show me someone who can’t make a decision and I will show you someone who can’t grow wealth. Successful people make more decisions than poor people. They make decisions and plenty of times the decisions are wrong so they will change later and try something different but they make the initial decision quickly. Get in the habbit of just deciding quickly and moving forward hard and fast.