Lies You’ve Been Told About Rate of Return – Episode 130

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, best-selling author, Kim D.H. Butler, and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we’ve got best-selling financial author Kim Butler with us today, and we’re going to continue our discussion on financial planning myths and lies. And today we’re going to start off by talking about the average rate of return versus an actual rate of return, which is really interesting because I can remember when I first got into the business, I was trained to sell annuities, and they were indexed annuities.

[00:54] And there was this pretend figure that the stock market averaged 12% a year or something like that. And over time it does, but some years there was a 40% loss, and you’re actually nobody ever got that indexed rate of return. And we still talk about, you know, either the Dow Jones or whatever, and we talk about these indexed rates of return that literally no one is ever receiving. So kind of long-winded there, but welcome, Kim. Well, thank you, Todd, yes. It’s sad that we talk about it, and it’s sad that we laugh about it, and I’m the one that laughed because it just, in hindsight, of course, is so ridiculous. You know, there’s a website out there known as DALBAR, D-A-L-B-A-R, and they do research

[01:46] on the difference between investments returns and investors returns. And it’s shocking, the difference, because the investments could be averaging, and we’ll talk about the difference between average and actual in a minute here. The investments could be averaging 9%, 10%, 11%, whatever percent, but the investors are only getting 2% and 3%. Now, DALBAR actually makes its money by selling this report, and so to get more detail, you’ve got to pay for it. But I think if you just, if you’re curious, if you just go to the site, DALBAR.com, they will give you the actual return that investors are currently earning. And I don’t know, you know, where they’re getting their statistics or any of the other background.

[02:38] I’ve read into it, but it’s not at the top of my head right now. But it is pretty amazing information. One of the biggest problems for whatever reason is that mutual funds are allowed to use their average rate of return, and it might be mathematically correct, but it has nothing to do with the actual rate of return that investors are earning. And yet that’s what you and I have always been taught to quote, right, is the average. Probably the number one is probably the S&P 500, I would guess. Absolutely. And we quote it all the time, and yet nobody ever does it. Yeah, that literally means that you’re invested in 500 companies every day of every year in order to get that rate of return. And I mean, there might be a couple people out there.

[03:32] I mean, maybe Warren Buffett could pull that off, but I don’t know too many people that can pull that off. You know, speaking of Buffett, I just saw something the other day. He is not a fan of diversification. As a matter of fact, the bulk of his wealth, apparently, especially in the original days, was from about 10 or 12 companies. That’s it. So he certainly wasn’t trying to go for quote, average. And you know, unfortunately, people have looked to the stock market as the place to not only build wealth, but also store wealth. I was so thrilled just the other day, our pool repairman showed up. And this guy is 81 years old. I wouldn’t have known it. He doesn’t look a day over 65. Here he is working, happy, moving around.

[04:25] It was dang hot outside. And he used to have a business that was a garage and gas station, you know, mechanics repair kind of place. And he sold that business. So he built all his wealth with this business, sold it and put the money in the stock market, lost half of it in 2008. And he was talking about, well, at least he’s back even again. Back even? It’s eight years later. It’s 2016 right now. 2008 to 2016 is eight more years or nine, depending on how you do your math. And it is amazing that we’re okay with that. He was okay with being, quote, back even, which basically means for the last eight or nine years, he earned nothing. So why is it, do you think, that the stock market, you know, one of the financial

[05:17] planning lies is the stock market’s the best investment long term. But you said it earlier, well, sometimes people think it’s the only investment. Why do you think that is? Well, I think the biggest thing is, is that most of us who invest in the stock market do it through some form of a retirement plan that requires monthly or annual contributions. And the fact that the account is worth more a year from now, technically, than it was today, makes us falsely think that, oh, it must be working when really and truthfully, it’s the money we’re adding, not the value of the account itself. Absolutely. And Todd Langford, when we do training for advisors at truthconcepts.com, talks about that all the time.

[06:07] Your qualified plan, your retirement plan went up because you put money in it every month. And so it should be going up. And yet we as a society have this hope that the stock market’s going to be it. One of the reasons I think it’s such a pull or a lure, if you will, is that people want something for nothing. I mean, I would love that too. I would love to have a small little account turn into a big account without me having to add to it all the time. It’s funny, right now, I just found out about an old IRA that I have that was in a defunct bridge loan that does happen sometimes, and it has the potential of actually paying off now. And the things like worth $1,000 or $1,500 and all of a sudden, you know, it might

[06:59] be $20,000 or $30,000. I couldn’t believe how happy I was when I got that $20,000 or $30,000. You know, when I got that information, here’s a classic example of something for nothing. Now, in actuality, I probably originally had that much money in it, I don’t even remember. This is just something that we get in our society that’s a sad statement on human beings, but I’m just as guilty. You know, I want to have a worked out body, but I went on vacation for two weeks and didn’t do any pushups. Well, guess what? When I went back to the gym, it was miserable doing pushups again, because somehow I thought I could keep that in shapeness. But that whole desire of something for nothing causes us in our financial world

[07:41] to think that we could put a little bit money in and that stocks are going or mutual funds, if you will, are going to somehow actually earn this, quote, average rate of return that is advertised. This is the thing that makes me so frustrated, is it’s completely legitimate and legal for a mutual fund to advertise its historical average rate of return. And it’s a mathematically correct number, but it has absolutely nothing to do with reality because people put money in and take it out at different times. And so we’ve been, again, lured, lured, I’m not sure, can’t get my pronunciation quite right on that, into thinking that this is where our dollars can actually grow. And it’s very, very misleading.

[08:38] And it’s something that we need to help our listeners and everybody that is starting to pay attention now, because people are starting to pay attention, I think, to their personal finances. We need to help them understand that average is not actual, number one, and that the stock market is not the only investment out there. And, you know, again, this goes back to the same idea is, you know, the idea that a higher rate of risk will produce a higher rate of return. If we believe that, then instead of investing, we should be going to Las Vegas. Absolutely. And that’s really where our importance of distinguishing between saving and investing comes to play, because what most people are doing when they think

[09:28] they’re investing is they’re truly gambling, and they maybe didn’t go to Las Vegas, but they’re gambling with their money. They’re truly throwing the dice and not in a literal form, but in a figurative form and hoping that something goes well, or they’re putting their money in every single month because that’s what their employer told them to do, and they’re hoping that it goes well or hoping that it goes up. And it’s just something that people need to become more fully aware of and understanding that that’s truly gambling. Well, I think, you know, I think one of the easiest ways to understand this is that, you know, look at the interest rate environment that we have right now. You can buy a house for three and a half percent.

[10:15] Businesses can borrow money for probably no more than five percent. Why would they pay you 25 percent? I mean, it makes no sense. That’s right. Yep. Yep. Very well said. So many of these things, if we just stand back and look at them and realize the importance of the language, you know, 401k in the original tax law that set it up was called a 401k savings plan. And yet what people are doing in their quote 401k savings plan, they think they’re investing, but they’re actually gambling. So I have to ask you if the stock market is not the best investment, which is the assertion that you’ve made, what else is there? Well, there’s a couple of things that we like to look at for investments. So again, defining that savings is liquid money, dollars that we

[11:16] should be able to get at. So I would not call a 401k a savings plan. I would call it an investing plan. Then we believe that your goals for investing should be somewhere in the double digit realm, so around 10 percent, and that it should only be what I’m going to call a medium term of time, let’s say five to 10 years. And clearly the 401k for anybody is locked up till 59 and a half. Now, if you’re 50 years old, then you’ve got your 10 years. But for everybody else, the 20s, 30s, and 40 year olds that are out there, that’s a very long time to lock money up. And I’m well aware that people think this is heavy discipline, so it’s helpful, but if you have investments that meet the five to 10 year

[12:07] guideline, which we have a couple of them, it’s a much more appropriate timeframe in today’s ever changing world. So the five year timeframe, or it could even be less than that, is usually best met with bridge loans that create monthly cashflow, and you can get involved with them in very little dollar figures, some of them as little as 25,000, many of them are 50 to 100,000, and you are able to earn somewhere between seven and 10 percent on that money, and sometimes a little bit more, and then the more five to 10 year timeframe is typically life settlements, where you can also potentially earn those low double digit rate of returns. And of course, you know, I always like to think that, you know,

[12:57] there’s a new listener out there who’s listening to our show for the first time, who’s probably saying, you know, this is some of the strangest stuff I’ve ever heard. And I know you’ve done a great job at providing some free resources to our listeners. And I wanted to make sure that you mentioned that. Absolutely. Thank you for reminding me. So the best way to get some additional information about these alternative investments that we like to work with, and the alternative to save cash, because everybody still needs an emergency opportunity fund, and that’s the savings part that’s so important, is a book called Financial Planning Has Failed. And there’s a history of the stock market in there that’s interesting.

[13:39] There’s a history of financial planning as an industry that’s interesting. There’s of course, our background and story, and it is available only in one spot, and that is at partners, number four, prosperity.com slash ebook. There’s an audio version as well, and it’s read by me. So it’s partners, number four, prosperity.com slash ebook. And it’s called Financial Planning Has Failed. I would encourage all of our listeners to take advantage of that because the one thing that Kim Butler has done that I think is so different for the industry is that she’s not out to provide answers, she’s here to teach you how to ask questions. And this is a great resource to get that. It is really interesting how many people are finally waking up to the

[14:27] fact that they’ve got to be their own steward for their wealth, their own responsibility, and you can’t abdicate it to an advisor. And we don’t want you to abdicate it to an advisor, whereas a lot of the typical financial planners want you to abdicate your wealth and the responsibility for it to them. And we just disagree with that. We think it should be in your hands. Super. Well, this is No BS Winnie Guy Todd Strobel. Once again, this is the Prosperity Podcast. I invite all of you to take advantage of the free resources. Look at partners, number four, prosperity.com for additional information. Special thanks to Kim Butler and we’ll see you all again soon. Thank you for listening to the Prosperity Podcast to take control of

[15:11] your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.