It’s safe to assume the vast majority of you reading Financial Samurai want to be rich. I trust those of you who’ve been reading this site between 2009 and 2012, when I was writing heavily about investment strategies, have indeed become much richer. The compounding forces since then have been enormous.
We are probably one of the richest communities on the internet today based on all the surveys I’ve conducted. For example, 35% of you have a net worth of between $300,000 – $1 million. While 25% of you have a net worth over $1 million. Not bad compared to the median net worth figures who have less than $100,000.
Despite our good fortune, it’s worth discussing the two levels of rich. Because since I started this site, it’s clear one level of rich has pulled far ahead. And that one level of rich didn’t do so by investing in index funds.
Index Funds And The Rich
I know we all love index funds. They are the personal finance community’s #1 recommendation for where to invest our money in stocks. However, it’s hard to get really rich off index funds alone.
In addition, if you want to achieve financial independence well before the traditional retirement age of 65, investing only in index funds is probably not going to cut it.
The only way to get rich sooner off index funds is to consistently invest large sums of money. But that’s kind of like saying to get richer, start with a lot of money.
The reality is, there’s a whole other level of rich that has little to do with investing in index funds. As one centi-millionaire once told me, “Investing in index funds is what middle-class people do who don’t know what to do.”
My View On Index Funds
I’m a fan of index funds. Over a 10-year period, the vast majority of active fund managers underperform their respective indices due to high fees and poor investing acumen. However, as I look back on what enabled me to leave my job in 2012 and stay unemployed, it wasn’t index funds.
I view investing in index funds as a low-cost, lower-risk way of investing in public equities. Investing in an S&P 500 index fund or ETF is my default setting when I’m buying the dip, but don’t have strong conviction.
I understand the downside of investing in an S&P 500 index fund or ETF. A typical bear market lasts about a year and has about a 35% drawdown. I’m good with that.
Investing in an S&P 500 index fund is like investing in a super-tanker. It doesn’t move very fast – at historically a 10% annual return – but it also doesn’t easily veer off course or sink to the bottom of the ocean either. Sooner or later, the super-tanker will get to its destination.
Index funds have acted like a pleasant tailwind pushing me more towards an ever-moving financial independence number. But they weren’t the difference maker.
The Two Levels Of Rich
1) First Level Rich: The Mass Affluent
The first level of rich is what I consider the mass affluent class. The mass affluent class is highly educated, motivated, and upwardly mobile. The mass affluent class is considered rich by general standards, but often doesn’t feel rich.
Today, the mass affluent class has investable assets of between $500K – $3 million. The mass affluent class also has a net worth of between $500K – $5 million. The range is largely dependent on age, location, and household (single versus couple). HENRYs are part of the mass affluent class.
The mass affluent class loves investing in stock index funds and real estate. They’ve got good jobs, often with six-figure household incomes. Usually less than 20% of their investable assets is invested in alternative investments, including cryptocurrencies.
For the most part, the mass affluent class is a great place to be. You’re comfortable and always have hope for a wealthier future.
2) Second Level Rich: The Truly Rich
The second level of rich is what most people think about when they hear the word rich. We’re talking vacation homes in the Hamptons, first-class flights, $100,000+ automobiles, and generous donations to charity where your name appears on a wall.
Let’s call the second level of rich the Truly Rich. The truly rich have investable assets of at least $5 – $10 million and a net worth of at least $10 – $25 million, depending on location, age, and household.
In a bull market, the truly rich crush it with multi-million dollar gains a year. Conversely, in a bear market, the truly rich get beat up the most. Back in 2009, we were all relatively much wealthier not because we made more money, but because people like Warren Buffet lost tens of billions of dollars in individual wealth.
The truly rich have a minority of their investable assets and net worth in index funds. Instead, the truly rich have the majority of their net worth in their business and other business ventures.
In terms of wealth creation, the top 0.1% and 0.01% have trounced those in the top 1%, never mind the 99%. For those folks with incomes and net worths between my two definitions, you are free to call yourself whatever you want.
Net Worth Breakdown By Levels Of Wealth
Here’s a good net worth breakdown visualization by net worth levels. The data is from the Federal Reserve Board Of Consumer Finances, which comes out every three years.
Let’s assume the mass affluent represented in the chart below is at the $1 million net worth level. Roughly 25% of the mass affluent’s net worth is in their primary residence, 15% is in retirement accounts, 10% is in real estate investments, and 12% is in business interests.
In comparison, for the truly rich ($10M+), at least 30% of their net worth is in business interests. Intuitively, we know that entrepreneurs dominate the wealthiest people in the world. Therefore, if you want to be truly rich, take more entrepreneurial risks.
Index Funds Are Mostly For The Mass Affluent
I actually don’t know a single person who is worth over $10 million who has a majority of their investment assets, let alone net worth, in index funds. Conversely, I know plenty of people with net worths below $5 million who either only invest in index funds or only have a combination of index funds and real estate.
Here is the rough net worth breakdown of three truly rich people I know. Perhaps you can share your own insights too in the comments below.
Truly Rich Net Worth Composition #1: Net worth of about $30 million. 35% is his ownership stake in his online business. 30% is in investment real estate. 20% is in public equities (60% index funds, 40% individual names). 10% is in various private funds. 5% is in municipal bonds and other low-risk investments.
Truly Rich Net Worth Composition #2: Net worth of about $100 million. 40% is his ownership stake in his private equity firm as a partner. 10% is in various private companies. 15% is in public stocks (50% index funds). 30% is in real estate. 5% is in various risk-free investments.
Truly Rich Net Worth Composition #3: Net worth of about $250 million. 30% is invested in private funds spread across venture capital, venture debt, private equity, and private real estate. 40% is his ownership stake in his private money management firm. 20% in physical real estate, including two vacation properties. 10% is in municipal bonds and other stable investments.
Then I know one fella who was roughly worth “only” $100 million 10 years ago and now he’s worth over $5 billion through savvy investments. He’s an excellent tennis player too!
None of these examples involve investing in index funds to get rich. They all got truly rich by building a business while owning lots of equity.
Getting Rich Is About Time And Risk Tradeoff
If I could rewind time, I would have taken a lot more risk.
Blowing yourself up in your 20s and early 30s is not that big of a deal. You can always earn back your losses. But once you’re in your 40s or later, unless you’ve already amassed a decent fortune, it’s harder to take more risks to get rich. If you have children and parents to take care of, you will be forced to be more risk-averse.
When I was 23, I had a lucky win in 2000 when I invested $3,000 in VCSY, a Chinese internet company. It grew by 50X to $150,000. Oh man how I wish I had invested more. I look back now and can’t believe how little I had invested.
On the other hand, if I had invested $3,000 in an S&P 500 index fund back in early 2000, it would be worth about $9,200 today. Not bad, but not nearly the $150,000 that I would go on to reinvest in San Francisco property in 2003.
Although it felt risky buying property at age 26 with a $465,000 mortgage, I should have leveraged up even more! At the time, I was looking for a much nicer property that was 80% more expensive. But I was too scared to take on so much debt despite a growing career.
As you grow older and wealthier, you’ll probably wish you had taken more risks too.
Loading ...Index Funds Are Great For Those On The Traditional Path To Retirement
If you want to retire closer to the traditional retirement age of 60-65, then index funds are great. A 10% average annual return is what it is. It takes 7.2 years to double your money at that return percentage.
Being happy, plump, and free in your 60s is not bad! Although, future returns may be much lower, thereby delaying retirement.
If you want to achieve financial freedom sooner, then you’re going to have to take more risks beyond index funds. As you move out on the risk curve, you will gradually start to feel like investing in index funds is one of the lower-risk investments you can make.
In addition to investing in index funds, you may want to take more risk by:
- Starting your own business
- Investing in real estate beyond your primary residence
- Concentrating your positions
- Investing in other private businesses or angel funds
- Investing in more speculative assets like small caps and cryptocurrencies
- Sacrificing more family time so you can reach the top of the corporate ladder (tough one)
Satisfaction Will Prevent You From Getting Richer
In terms of trying to get rich, I have this “problem” I’ve faced all my life. I don’t have a top gear to grind for maximum wealth potential for a very long time. Instead, I’m more easily satisfied.
When I was in high school, I didn’t train harder in tennis because I was satisfied with just winning at the high school level. The thrill was good enough! Winning junior tournaments or playing college tennis didn’t interest me. Therefore, I never lived up to my potential until I started playing league tennis again in my 30s.
At work, I wanted to make Managing Director. But after just one year of not getting promoted to MD at age 33, I decided to move on by doing my own thing. Normal people would keep trying for three to five years to get promoted, since 33 was on the young side. But I didn’t care anymore. I just needed to try once to minimize regret.
I left banking along with millions of dollars in foregone compensation at age 34. Why? Because I was satisfied living on ~$80,000 a year in passive income in exchange for more freedom.
With Financial Samurai, I know I could grow this site larger by hiring a lot of freelance writers. I can add on lots of features, create expensive e-courses, and more to make lots more money. But what’s the point? To go back to feeling like I have a job? Forget it! All income generated online already feels like a bonus.
If I want to get richer, I’m not going to allocate most of my capital to index funds. Instead, I’m buying single stocks, investing in real estate with leverage, investing in private equity, or building my own business equity.
My main investment interest now is investing in Sunbelt real estate with Fundrise. I believe in the multi-decade trend of the fanning out across America. Work from home is here to stay. And millions of Americans will rationally try to move where they can get the most bang for their buck.
I’ve personally invested $810,000 in private real estate investments in the heartland since 2017.
If You Want To Get Really Rich
Here’s the lesson. If you want to get really rich, prevent yourself from becoming easily satisfied. Tell yourself what you have is not enough or is not good enough. Constantly compare yourself to others so you can get motivated to try harder!
By constantly seeking more, you will work harder and take more calculated risks. As a result, you should get richer in the process.
Conversely, if you want to stay mass affluent or middle-class, appreciate more of what you have. Compare down, not up. Better yet, try not to compare at all.
The Buddha taught us “desire is the cause of all suffering.” Therefore, try to minimize your desire for more. This includes homes, cars, vacations, promotions, titles, and even children. Trend towards being a nobody.
The Rich Threshold For Happiness
Just know that once you make over $200,000 – $250,000 as an individual or $300,000 – $350,000 as a couple, you won’t be happier. Also know that once you get past between $3-$5 million in net worth, you likely won’t be happier either.
Therefore, once you get to these financial levels, I highly recommend you pursue something you really enjoy doing regardless of the money. If you can then grow your income and wealth while doing what you love, you will have hit the richest jackpot of all!
And if you really don’t care about achieving these financial thresholds, you can always feel rich without having a lot of money. Find richness in time, relationships, and health.
Related posts:
The First Million Might Be The Easiest
How To Feel Rich Even If You Can’t Get Rich
A Book On Getting Rich And Happy
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As a counterpoint, being in the top 1% of performers at a top tier tech company such as Google can earn you seven figures annually. And investing a good chunk of that into index funds over many years can definitely put you above $5-10M net worth.
Of course, I agree that starting your own business is still a very worthy pursuit.
Sure. However, it would be the 7-figure income every year that made them rich, not the index funds.
… good point. lol.
Great post. I think an underlying theme and difference between the two classes is the amount generated from assets and how these translate to funding lifestyles.
I.e. HENRY/Mass affluent can generally afford to go on expensive vacations but the consequence of doing so would be spending a good amount of a month’s income, versus the truly rich who basically return from their very expensive vacation richer than they set off just because their income producing assets did not stop generating income.
That being said, and always being context specific here (I live in Southeastern Europe, not exactly first world), it always comes down to living expenses, meaning that if your expensive holiday and expensive lifestyle translates to 10,000 euro/month, having 12,000€ from income producing assets would mean you are truly rich in my view..
As Buffet said (I believe*) the ultimate flex is earning money while sleeping.
Good article! I think a key takeaway is that if you want to become truly wealthy, the stock market by itself probably is not going to do it. You can become “mass affluent” and comfortable, yes, but the wealthiest people made it with their own businesses. You don’t need to be the owner of the next hot tech startup, either. Plenty of people have done very well with “boring” businesses like plumbing, HVAC, car repair, etc.
Index funds is for the mass affluent is a good line. One needs to start a business to become truly rich. Few people do it through index investing, although it can provide a good retirement.
Hi Financial Samurai
What is the easiest way to find out when the S&P 500 dips and to buy.
Thanks
Really great read as always. I recently referenced this post on my site because I think it is quite relevant. In my profession, we make a great income, but gone are the days where a physician can be ‘just’ a physician and ‘have it all.’ What separates mass affluent wealth from the 0.01 percent is the ability to generate multiple streams of revenue. One of those revenue streams should be business ownership. Even as busy doctors, the individuals who reach financial independence (regardless of early retirement) are generally the ones who have either built real estate side hustles, created an electronic product, built a blog, or founded a business (or all of the above). Your graphics tell a very important picture. Thanks for this post.
Hi Sam,
Great Article as always. I have decided to take my real estate investment gains over the last 4-5 years and pay the cap gain taxes. My cash flow on the rentals is negligible & I am sitting on a ton of equity. My question to yo is I want to build a $500k taxable index fund account. Who should I use as a brokerage, I would like to have an IRLOC or a form of margin in case I see an opportunity to buy more real estate. I love real estate but I think having a $500k stock account will make me sleep better at night. I’m only 28 I can rebuild the real estate portfolio in a couple years time.
I’m going to provide an N=1 experience here, but my parents are well above the mass affluent level due to business ownership, and they steered us away from Entrepreneurship and towards steady professional careers. I have a pretty strong sense that money is an area for “satisficing” instead of optimizing. Though this may be the perspective of someone born between third base and home plate already. From what I can tell, my parents basically went from barely positive net worth for decades, to very comfortable over a 5ish year period, to a “what do I need all this money for?”
FWIW- they have been generous givers all throughout the years, and they do get the opportunity to turn that up since they’ve made it clear that my siblings and I have all gotten a hand up in life, and we don’t need any more of their money.
Personally, I feel pretty happy to not deal with the stress of running a business and having dozens or hundreds of people depending on you for their paycheck. And if you’re successful, all you have is money. Lots of it certainly, but way more than you could ever really spend.
I suspect My siblings and I will mostly end life in the mass affluent class, except for perhaps one sister who has started her own business. Or if we are decamillionaires it will be the result of luck instead of investment savvy.
Thanks for sharing your thoughts. Did you feel you could relax more and not work as hard growing up wealthy? One of the fears is wealth spoiling children and adult children.
I have an upcoming post on this topic.
Interesting question. I don’t think I am spoiled, as I work hard in my professional career and steward money well. I also understand that I have had advantages that others haven’t had. My current wealth isn’t the result of inheritance, but I can’t say it’s of my own merit either.
I’m not trying to build an 8-9 figure business, but I am also working to contribute to society (my community, my own children, etc) in other ways and through other efforts.
If I thought that I could realistically build a high quality business that provided excellent work for many people, I may feel some obligation to start that because of that business. However, I don’t think I have that skill set right now. Maybe in another decade or so it will be a different story.
I look forward to reading your article on the topic!
Thanks for your thoughts Hannah! The post will probably come out next so stay tuned. You can subscribe to my posts by email to not miss a thing.
Reasonable thoughts but that mindset is also the reason for the saying a fortune doesn’t last more than 3 generations (which is probably good overall for society)
Index funds are safer to bet on. So for a busy person who cannot actually afford to invest in financial planning, it makes sense. Nevertheless a very articulate post here Sam. Really loved the content.
Keep up the good work!
Thanks, Sam. Sober, thought provoking, emotional and demoralizing post. I am a HENRY and only in the last 2 years or so really got serious about money and investing. My firm offers a .50 to .75 c (depending on our year) on every dollar up to the max (20,500 this year), so I can’t not do that even though I don’t like 401(k)s. The comment about “middle class people” and “index funds” really hit home. I have a ROTH (that I backdoor), some BTC, and lots of cash in stable coins, but really just feel like I am starting to get ahead. Lots of mistakes in my 20s and 30s. Appreciate your insights and providing realistic goals to hit, like $300k in invested assets.
Thanks for reading Timothy. That’s a good 401(k) match. Gotta take full advantage! Folks like me no longer have that benefit and it really adds up over time.
Although you may have started later, the great thing is that you’re now focused. And hopefully, you enjoyed your 20s and 30s more than the average person too! I was thinking about writing a post on this topic, late starters. Maybe you can share some thoughts on what your financial mindset was in your 20s and 30s and what made you focus more on money in your 40s?
Thanks for any color!
I am definitely in the mass affluent class I am a high income professional who owns a small business and invests the vast majority of my money and income into index funds and I’m perfectly content with this and have no desire to become into the truly rich class. My splurges include fine dining, flying business class and staying at swanky resorts in the Carribean which I can do 3 times a year. Long live the mass affluent class!
Agree!
My 2 cents: I think most people can’t accept the idea of having less wealth that once they had. Once they stop earning as much money as they used to, the idea of spending the wealth terrorizes people. Few can handle the idea of spending 5M$ of 10M$ they have by the time they die. No amount of money can overcome that fear. The way I look at it is: I will build as much as wealth I can, I will retire by mid 50s, live within my means, be with my family, and hope for the best. Life is not risk-free.
Yes, after a lifetime of wealth accumulation, going the other way naturally feels odd/bad/uncomfortable. But you got to do it lest you want to die with too much!
You have to figure out your goals. If you want to be “truly rich”, then you should take more chances and be more entrepreneurial.
Me, I’m much more laid back. My goal is to be happy. That doesn’t take $10+ million. I’m already happy at the “mass affluence” level. Why struggle so much to get rich? There are a lot of risks too. What about those entrepreneurs who failed? You don’t hear much about them.
True. I think for many, getting richer is almost like a game. We all have this desire to strive for more. But it’s be nice if we appreciate a certain limit and enjoy more of what we have.
You’ve always struck me as someone with pretty good balance, which is fantastic!
Sam, I’m on CrowdStreet now, with one deal done. What Investing Entities do you use? Individual (taxable), SD-IRA, LLC, etc? I think real estate is good to have in an non-taxable account, but the SD-IRA seems daunting. Not sure I should put in the energy to pursue that. I’m curious how you approach it. Thanks!
Both self-directed IRA and taxable accounts. Self-directed IRA obviously best and easiest. But more limited by amount I can invest.
How was the return on the deal?
Retiring with zoodles of cash is okay … but I kind of admire Elon Musk and Warren Buffet etc … who still get a thrill from doing a business that helps others … etc …. recently early retired and looking for my next thing …
Another great post, Sam. Love the breadth of your readership and comments from varying wealth/perspectives. Agree no one gets rich off Index investing.
One point –the classifications break down when you factor in HCOL vs LCOL, kids/no kids/lifestyle choices. 10M-15M NW- gets you at or just above 1% NW in US, but not in Coastal CA or NY.
To wit: comment from Dennis in CA with a 16M NW but still has to work at 59. Leaving aside the amount of NW tied up in non-income producing residences, the property taxes and cost of living create a high burn rate. Given these are appreciation markets, it’s possible one’s NW tied up in personal residences increased at a higher rate than your earnings and equities (which you HODL and may generate little dividends) . Either way, it seems in retirement, you’re forced to sell assets at one point — high growth real estate or high growth stocks.
We are 51, retired 20 months ago, and at +/- 10M or so NW with 24% in equity in personal residences but without 100% paid off mortgages, finding it hard to live off passive income alone. Assuming SWR of 3.2% on $7.6M, (and some has to be in cash and generating little return), that’s only $243K gross a year. That is barely enough to pay income taxes, property taxes, home maintenance, health insurance, home and car insurance, gas, etc for a couple, let alone a family. Our non-heated pool is a money pit. Shitty individual NY exchange health plan is $650 a month per person with $6K deductible and super limited in-network doctor/hospital coverage. God forbid you have a major CAPEX event, need to replace your car, or have a big medical expense. The math doesn’t work. We buy vintage/used/shop from estate sales to save money and eat mostly at home, but splurge on travel. Worried about inflation, like everyone else.
Hence, why one feels “upper middle class” or “mass affluent” and not at all close to “rich.” We felt richer when we were working with good salaries and accumulating….we thought nothing of going to St Barts every winter (9 years straight) — a luxury pipe dream at this point. Now contemplating some consulting to supplement income so we don’t feel strapped or pressured to sell assets.
Thank you for sharing.. great point!
Housing tends to be the biggest component of costs everywhere. It’s amazing that you have paid off your mortgages (and congratulations!)
Back-of-envelope, tour SWR of $243K gross would translate into $158K net based on a a 35% all-in tax rate in a HCOL location, or a monthly budget of $13K/mth.
From your post, it sounds like you have no dependents, and no mortgage expenses (though there will be other housing costs).
What monthly budget would you feel you would be more comfortable living with? Trying to calculate the implied investable assets needed for “safer” retirement.
We have small-ish mortgage at 3.25% left — about $750K, which could be paid off but historically left invested. Mortgage payments still drain on our passive income. Fortunately much is from real estate and sheltered through depreciation, so we were in the 12% marginal bracket last year.
Correct, we have no dependents. Figure comfortably to hold everything we have without worry and splurges like home upgrades and slow travel, we’d need $275K+ net. Mortgage at $55K annual, Property taxes are $25K a year, Co-op maintenance $15K a year, Housing repairs/landscaping/pool another $20K, Health Insurance $18K a year. That’s already $133K a year.
Our “first world problems”:
1) the composition of assets (real estate heavy in appreciation markets with lower cap rates) don’t generate total cash flow needed. Since they are all in CA and NY, the longer we hold and wait to sell, the higher the appreciation and total return. That or sell long held equities. No particular interest to 1031 and chase higher cap rates/cash flow.
2) Either reduce mortgage expense (and therefore investible assets) or move away. Our Manhattan maintenance/property tax has gone up 60% in 10 years, which is line with the average. Our friends mostly live in HCOL/capital cities around the globe so unless go off the grid, we’re not likely to get much savings. We have UK/EU right of residency and considered divesting and moving to one of select countries that don’t tax worldwide income. We’d benefit from super cheap property taxes (in general EU govts don’t look to property taxes to raise bulk of revenue) and reasonable health care/insurance costs.
For sure, our “wealth” is having time and flexibility…a huge luxury. We might need to side hustle and get $50K extra a year to keep status quo.
Yeah, on the coasts, we’re talking more like $25 million minimum to be truly rich, hence the $10-$25 million range.
The good thing is, coastal city residents can easily move to save money.
I’m sure you can comfortably afford to go to St Bart’s again if you want!
Strangely, we don’t miss St. Barts. Too many other places to go in the world when you’re not tied to a corporate job that looks at you askance if you take more than a week off at a time. Personally I’ve gotten to a point where if the resort town has a Louis Vuitton or Dior, then it’s a turn off.
Agree. Gotta mix it up! Which is one of the negatives for owning a vacation property. It gets boring visiting the same spot after the 10th time. The country and world is big. Gotta go explore it!
Sam, this is a great post. I am well and truly in the Mass Affluent (and HENRY). I would love to be in the other category but am not.
I also have limited clue in how of how the markets work and think I’m better off just sticking to index funds. I have limited time due to my job and family to deal with other things, so I’m better of the way I am just sticking index funds.
The reality is that I’ve only known about index funds for the past few years. Before then I had no idea and the money just went into my bank account
Nice to hear from you. One of the points I’m trying to make in the post is that being “truly rich” doesn’t change your happiness level at all if you are already mass affluent rich.
Therefore, you’re not missing much!
Wow seeing all the comments with net worth $5mill+ but still don’t feel rich or wealthy is amazing. as someone in the net worth range of $1 mill at 40 years old I feel I would be happy with more but I seems like Sam is right that won’t make me happier.
I took early retirement at 53 from my job as a fish biologist, which I loved doing. I maxed my TSP (mostly indexed funds). I now have a NW of 2.6 million about 1.1m in 60/40 indexed funds and 1.5 in real estate. 1m of the real estate I recently inherited. I would have been fine without the inheritance. I have a small pension and health insurance. My significant other has about the same.
Now I play guitar in a bar band, windsurf, ski, mountain bike, make wine and do carpentry part time only because I love it. My SO plays a lot of tennis (4.0) and we travel when we can. I’m happy being the mass affluent.
I think the truly rich must have had a lot of guidance from their parents. How else would one know anything about venture capital or even have any capital to invest, or have the security in their early 20s to take risks? Good for them for not squandering their guidance.
Fish biologist! So neat. That is great you got to do what you love and now found things you love in retirement.
I like to paint, but mostly paint my walls and decks as I find it rewarding and meditative.
Net worth is approx $19 mil. Approx 50% equities (stocks and index funds), 45% real estate (investment and home equity), 5% bonds, -3% cash and 3% Alts (private equity, crypto, etc). I also don’t feel that wealthy as my 50% of my equity could get wiped out in a year (massive unrealized gains). Cash flow more than covers expenses. I still work a job that I don’t love with $100k income + health insurance. A lot of flexibility with the job. I have a similar background to Sam. Worked as a trader/derivs for a major bank for 12 years and aggressively saved. Negotiated severance and moved to lower cost area (that area is now more expensive than NYC) Also have 2 kids and wife.
Am I wasting my time working?
If you don’t like your job and it only earns around 100k ish and your NW is 19 mil I don’t understand why you are working. Find some work you enjoy, whatever it pays.
If you don’t enjoy your work, you are definitely wasting your time. Even a 2.7% return (3 year & 10 year treasury right now) is $513k/yr on your net worth – And I hope your RE is generating at least 5% cash on equity. Stock dividends are paying around 1.5% yield with a blended portfolio or could easily get 2.5-3%+ with a more dividend focused portfolio. Who cares about the principal that much if the underlying instruments are safely delivering the income you need and then some? Principal dropping a lot would just be a good opportunity to buy at 50-100% higher yield!
If I had your net worth, I would put $10 million into a diversified sunbelt portfolio yielding 5-7% cash on cash and the rest into index funds and just coast as that would generate around $700k/yr in income without ever touching principal. Maybe use $1-2 million for higher risk, higher return bets if you want.
Most of the very rich folks either started a very successful company, got really lucky (concentrated bets will on average lose to the market but there are always winners) or used significant leverage to get there or inherited a ton to start.
Had a few concentrated bets work out. Financial crisis came at a time in my career where I had solid income and little expense. I heavily invested in spy, qqq, aapl and MSFT. 1000%+ returns over ~15 years on some of those positions. Life changing but pure luck. Past 6 years invested in a lot of self storage/multifamily deals across the US. Those also worked out.
Like others have said, probably a waste of time not doing what you enjoy.
You might as well find a job you love love love making that amount or less to keep you fulfilled.
And if you’re worried about a collapse, then sell some of your gains. It will take you decades to make up for a bear market loss with your income.
See: How To Quantify Your Risk Tolerance And Figure Out How Much Equity Exposure You Should Have
GL!
I just wanted to congratulate you on such a thought provoking post. I know a lot of the comments strayed from “index funds don’t equal super rich” main topic but it’s because there’s so much else interesting that you presented.
One thing that shocked me was how low the top 1% in other countries is. Makes me think as a single man in his late 30’s in between mass affluent and truly rich, I should move to one of those countries and live like a king. Or maybe even a family of 4 that are FI/work from home as a financial blogger should consider it :)
Sure, the super rich have the bulk of their NW tied up in business investments. To get there, though, you have to take risks. And risks are by defnition not going to pan out for everyone. So when you see the super rich, you see people who have taken big risks that paid off. What you don’t see or hear about so much are the ones that tried and didn’t quite make it.
Know anyone who plays guitar in a bar band? Know anyone who plays guitar in a headline act at a stadium concert? There are thousands of the former, and only a handful of the latter. Same thing with entrepreneurs. I could wallpaper my office with the equity stakes I have in various startups I’ve advised. When it comes to getting a windfall from one of them that turns into a unicorn, I’m not holding my breath.
Conclusion? For most people, the ETF oil tanker approach is the smart move.
I totally agree. It IS good to talk about the super rich, but we also have to be realistic about the chances of becoming super rich. You know why they call them the 1%? Because only 1% of the population is going to get there.
Agreed – the super rich are 2 deviation right tail winners on big, usually concentrated, bets (or inherited wealth) and actually prove the passive index approach for the overwhelming majority of folks. The investments that don’t pan out well (majority) or even lose all your money are far greater than the ones that average a 20-100% CAGR. If it was that easy, private equity would be able to vastly outperform the stock market without massive leverage – instead most barely beat the market even with massive leverage (higher risk).