The WORST Investment Lies Told by Finance Gurus

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience. Live it is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. You ever notice how investment gurus make building wealth sound like you're ordering takeout? Just click a button, sit back, and poof. Your net worth shows up hot and ready. Listen, if my portfolio worked like that, I'd have fewer gray hairs. I actually have more hairs and more beach days. So if it feels like everyone else has a secret recipe and you're stuck with the bill, well, you know what? You're not alone. Today I'm going to be busting some of the biggest investment lies, myths or half truths, if you will, that keep people and smart people at that, stuck and stressed. Real stories, real numbers, strategies that actually work. No fluff, no fairy dust, none of that. So let's go do this. Okay? Grab your drink, grab a calculator, and let's do this thing. See you in the episode.

You ever feel like some of the investment gurus out there, the TikTok financial folks out there, have make building wealth sound as easy as microwaving popcorn? Yeah. You just follow the secret formula, you set it, and poo, you're rich. If only my portfolio grew as fast as their stories. So here's the thing. Today we're going to break down the five worst investment half truths, lies, myths that I've heard over the 30 plus years in finance. And, you know, frankly, being totally transparent, I've talked about these myself too, so I'm not immune to them. And I'm gonna give you the real numbers, I'm gonna give you the real risks, I'm gonna give you a few stories, and I'm gonna let you know how to look at these in a way that now you're informed, you're empowered, you're educated, and now you can look at it with the right perspective. So let's jump in. Okay, the first half, truth or lie is the market always averages 10 to 12% per year, so you will too. Okay? Now look, I am, I am someone that says this because we have to look at markets and say what do markets typically do now? You'll hear every single advisor out there, they'll say, past performance does not equal future performance. Doesn't mean that it's future performance. But we can look at a historical, a historical pattern of what has happened in the markets. But, and, but this is a classic one. And they basically say, use it as a foundation to say, just put your money in and relax. And here's the catch. They're focusing on average, and I focus in on average because it's easy for people to understand we've been brought up on averages. But the challenge is that average doesn't tell necessarily the whole truth. It doesn't tell the complete picture. So I'll show you some numbers so you can start to see how this plays out. Because there are two ways to look at your returns. One is looking at average returns. The other is to look at compound annual growth. Okay? Now that is going to have more formulas to it, more calculations to it, but it actually gives you a better, truer picture of what the returns are in the marketplace or on your portfolio. So let's just look at it. I'm going to jump to my iPad so you can, you can see what we're, what we're dealing with here. And, and here's, here's what it is. We're going to assume that we have start with $100,000, okay? But now here's the thing. Just like the market, when we talk about averages, we, when we say, oh, it's an 8% or 10% or 11% average, we presume that that average is going every year. That's the, that's the mental state, is that we believe that it's going to happen every single year. But markets don't work that way. Markets go up and down, up and down, up and down. So we have a volatility of returns that affects the way that you actually get your money, the value and the actual returns. So in this example, I put in volatility. So up 22%, down 14%, 18%, then down 9%. So we, we created arbitrary. This is not based on anything. So if you look at the, the returns, they're all over the place, just like the market can be in any given year. Okay? And then we take that $100,000 investment and we multiply the returns to get what it would be at the end of the year. So it goes from 100,000, 22% up to 122. But then we have a 14% down. So that's at 104 and then from 104, it goes 18% up. So we're at 123. And we go on and on and on. And by the end of 10 years, and I just ran this out, 10 years, by the end of 10 years, we end up at this $170,000. Okay, so we made $70,000 over 10 years in this market, in this scenario. But if you look at it, here's how they. They'll calculate the average return. They're going to say, okay, the total return is 170,000, the total value minus our original investment of 100,000. So our total return is $70,000, and it's 70% up. So the total return over 10 years is 70% up. If we divide that by 10, that gives us the average of 7.1%. It's an easy number to understand, but it doesn't tell the whole story. Okay? What we want to really understand is what is the compounded growth from year to year to year, you're to year. When we look at that and start to understand that the compounded annual growth, annual return is only five and a half percent. So it's literally 5.5% versus 7.1%. So when we look at averages, we need to be aware of the fact that sometimes it doesn't give us the truest picture. That gap between. Between the average and the compounded annual growth rate is called the volatility drag, if you will. It's. It's this. It kind of can destroy averages if we have huge volatility and volatile swings. So what I try to get to do is we start to look at things from an average standpoint, but then it's important for us to then break that down and look at it on an annual growth standpoint, because some years we grow, some. Some years we shrink, and everything. What we don't want to be is in a place where we go, hey, I put my head in the freezer, my feet in the frying pan, on average, I'm warm. That's what we're doing when we do averages. We just need to be careful of it and not make it the holy gospel. Okay? Just know that averages have some challenges with it and that we want to look at the annual changes over a period of time. All right? That leads me to lie number two, and that is just buy the S&P 500 and you're set. Okay? And I get it. Listen, I am someone who had a very, very complex portfolio for a while, extremely complex. It was like I was an institutional investor and we had a lot of different investments. And when I, when I moved wealth teams, they looked at it and said, how do you keep this straight? Well, why do you think I got gray hair? You know? But we simplified. And what I've realized is this, Simplicity is great, okay? But oversimplification is not. And so we want simplicity because complexity will find you as your wealth grows. And complexity comes with friction, complexity comes with risk. Complexity comes with nuances and lack of understanding. So I want to keep complexity away as much as possible. So I'm all for simplicity, but oversimplification, saying, I'm just going to buy the S&P 500 and that's it. Here's the thing. When you look at things over the long term, again, looking at averages, we know what the S&P 500 has done, average basis and on a compounded annual growth basis. But when we look at each year, The S&P 500 sometimes is at the bottom of all the returns of the performers of the marketplace. If we look at asset classes and, and, and markets like that. So I, I, I have a diagram. This was, this is something that they broke down. And you can see it here. But this diagram goes back, you know, 15 years. And if you look at, let's just look at the top performers. That's this, that is this row here. Okay, the top row from 2020 to 2010 to 2024. You know, the REITs have been up there a lot, but you can see that, that in any given year, okay, large cap in 2024, large cap in 2023, cash in 2022. Cash is at the top of the list. Inevitably, if we look at just finance theory, the more risk you take on, the higher returns you typically get. But in a short time frame, there's a tremendous amount of volatility. So if you look at, we don't have consistent colors all along. They change every single year. And so this makeup is very, very different, and the variability in it is different. And if all I did was grab the large cap and call that S&P 500, then in 15 years, the large cap was only at the top three of those years. Okay, so, so just parking it in S&P 500 doesn't necessarily get you the best performance, but this is just like putting eggs in, in a single basket. And now you become at the mercy of the market's mood swings, the S and P smooshings. Now, now I get it. And there's people that say, oh, diversification. Diversification. Yeah, I don't like it? Well, I love it. It's not flashy, but it is how you protect yourself when a portion of the portfolio might not be performing and another portion is performing. For instance, if you happen to have money in a small cap here, in a year when the large cap was down at number three, you would still participate in the large cap growth and the performance. But now you also have exposure in small cap. So this is why when we create portfolios, we want to create portfolios that have exposure to different elements based on age, stage and circumstances. So, and we don't want to get it complicated. We don't need to. We can do it in a, in a two, three, four, maybe five fund portfolio at least till you have critical mass to your, to your wealth to do that. But the point here is this. To park it in one asset class, to park it in one type of investment and just let it go is probably not going to give you the optimal returns on your investments, your portfolio and building your wealth. All right, that leads me to lie number three, and that is this. Just dollar cost average. You can't lose. You can't lose. Well, I do dollar cost averaging, full transparency. We are always buying every single month we are buying. Now what is dollar cost averaging? That is investing the same amount at the same time over time. It is great for wealth building and it's something that a lot of people will do when they have a lump sum, say they inherit $100,000 and they're afraid to put it in the market all at once. And so what do they do? They will take it and say, I'm going to put a $10,000 in a month, every month for the next 10 months and get it in there. Now that means that they're going to buy a portion of their investments at a higher price and they're going to buy a portion at lower prices. And over time you get an average cost of those investments. Now, if you knew that the market was going to go up, then putting it all in at once would be beneficial because you're buying it all at the lowest. But since the market goes up and down, we don't know. And sometimes we, we do that so we don't experience that inevitable. I just invested in the market, dropped the day after. Okay, Murphy's law. That's kind of the way it works. And so, so this is the thing that, that starts to come into play. Now here's the. It is a powerful tool. The challenge is this, is that when you start to draw out of your portfolio, there is Something called the sequence of return risks. And this is when you start to get in trouble. I'm going to show you another example, show you some numbers. So it brings this one home, okay? Because let's assume you have two people with a million dollar portfolio. They start out with a million dollar portfolio. They each are going to draw down $40,000 a year, a 4% drawdown withdrawal rate. So they're going to draw $40,000 a year from their portfolio and they're just going to keep it consistent. If the portfolio goes down, they're still drawing the 40,000. Okay, we didn't dynamically adjust the withdrawals for this exercise or illustration. Now again, just like the prior example, market goes up in some years, it goes down in some years. And what we did in this example is I put, I put one example where in the first couple years of drawing money out, they had really good returns and the last couple of years they had bad returns. And then in the second example, I flipped it. So in the beginning years they had the bad returns and in the later years they had the good returns. On average, they had the exact same return over the same time frame. But watch what happens. Okay, so this is if we hit the good years first. Okay? So we have, we have two gain years, a loss year, and then two gain years here, average returns here. If we look at the withdrawals that withdraw in the 40, 40, 40 out, and this is year six. Okay? If we do this in the good years first, by the time they get to the year six, they've got 956k still. Now we just reverse these. I just reversed these in, in the, the next example. Okay? And what we did is instead of ending with 6 minus 6%, we started with it. We start with, then we do 4%, 10%, 15%, and we have our big gains at the end. Exact same scenario. Just reverse the returns, look what happens to the portfolio. The portfolio is only at 877,000. It's literally almost $80,000 less, almost two years worth of withdrawals gone. The only reason is the sequence in which the returns came in. And so this idea of dollar cost averaging and all that stuff, it's really powerful. But we have to also be mindful of what we're going to do when we start to withdraw our funds. And this is one of the reasons, if you're going to follow the 4% rule, that you can't presume that in every year you're going to get the exact 4% or the exact same dollar amount, you can take 4%, but if the portfolio was down, you might take less. This is why we do dynamic planning and, and everything for clients. So we make sure that they adjust accordingly and you have a margin for error. Okay, totally upfront, I'm 63, going to be 64. I have no intention of retiring. Okay? I'm going to keep doing what I'm doing. But I am very vigilant and very focused on this idea of sequence of return risk. If I choose to slow down on my income, my work, and doing those kinds of things at some point, I don't want it to be at a time time when we hit a couple of, of bad years in a row because that can have a material impact on the portfolio, the drawdown strategy and how the money machine works. And this is one of the reasons when we build a money machine, we want a margin for volatility in there. All right, that leads me to number four. Number four is this passive investing means you never touch your portfolio. Oh, gosh. All right, so first things first. I have a gripe about the term passive. Okay? I don't like to use it. You'll see that I, I don't use. In fact, I explained it in my, in my book building your money machine, because passive insinuates exactly what they're saying here. Just automate and ignore your investments forever. You have a relationship with your money, you have a relationship with your wealth. If you choose, just like any other relationship to be passive about it, it's going to wither and die.

The difference is I use the term leverage. In other words, how much effort and time does it take for me to generate the income that's coming from it? I want the whole premise of building your money machine is this understanding that I need to separate my earnings from the efforts to earn it. Otherwise I am beholden and imprisoned by the earnings treadmill and that I will always have to be running to generate income. But when I build the money machine and it is generating income on itself, your money working harder for you than you did for it, now all of a sudden, the level of work and effort on my part is much, much smaller. I'm always tracking my portfolio, always actively involved with it, but it isn't at the same level of effort, one to one for generating the income. And so the other side of this, where people get in trouble when they say, I'm just going to put it in, I'm going to leave it alone, is that as much as hands off is important in your long term wealth building because you can't time the market. It's time in the market that matters. What happens is you get hit with something called portfolio drift. So the market's going to go, it's going to perform for the next five, 10 years, whatever your investment horizon is. 20 years. But let's say you have three or four years in a row of really strong markets. Okay? And when you started out, let's say you had a traditional portfolio of 60% stocks and 40% bonds. Well now after three years of a strong market, the portfolio might be 80% stocks. Cause the value of the stocks went way up 80 and 20% bonds. Now the reason you structure a portfolio is to build it in based on your age, stage and circumstances, based on your risk profile triad. What's that risk profile you have? Well, if I went from a 6040 portfolio based on my risk profile and my circumstances, and now it's an 8020 portfolio, guess what? I now have a portfolio that is more risky than my profile suggests I should be. Now what that means is, is that it's not telling you that you got to sit there and babysit your investments all the time, but you have to check it at least annually. And so one of the things that we do every single year is we do a rebalancing of our portfolio. We look at it and say, does this still fit the parameters that we set in place our, our premise for our wealth theory and how we're doing this? And if not, we make some adjustments to get us back in line with the risk profile and our, our age, stage and circumstances. And we need to do the same thing. We cannot sleep at the wheel and just think it's going to take care of itself. Now if you are in a situation, I don't want to deal with the rebalancing, I don't want to do that, and you don't have an advisor, then maybe the best thing for you, at least at the beginning, is to get a target date index fund that will do the rebalancing and the adjusting as you get older until you can be more involved or have someone else to help you with it. But just understand that it's not a set and forget it type of situation. Leads me to number five. If you're not beating the market, then you're failing. I hear this all the time. You got to get alpha, you got to beat the pros. You know, if you're not, you're losing. Listen, most of the pros don't even beat the market, okay? So they might do it for a year, they might even do it for two or three years. But historical data shows that by and large, they cannot beat the market long term. They have the best computers, they have the best algorithms, they've got the most well educated.

Analysts and people there. They've got, they've got all the tools that you and I don't have. And to think that, hey, they can't beat the market long term. How are we going to beat the market long term? So this is where this whole idea of, of, hey, get in the market, the time in the market. If you can't beat the market, let's use index funds, let's use ETFs, and let's just be the market. Here's the challenge. And there's a study called Dalbar that did this where they looked at the market returns versus investor returns. 20 year annualized returns on the S&P 500 was about 9 to 10%. Okay. However, average investor returns was around 5%. Half. Half. Why is that? Here's why. Because the gap and everything is not because the market failed. It's because we are human. We panic, sell, we buy fads, we chase last year's winners. We look at news, we allow things to get us emotionally to make decisions. Greed and fear are real when it comes to investing. And so what ends up happening is we jump in and out of the market when we shouldn't. And what happens is that in this case, we cut our returns in half. So this isn't about you being here. You don't need to be. You don't need to be here, but you do need to be consistent. You got to run your own race. You got to have a dynamic plan in place and operate from the plan. Is it in your plan, your financial plan? If it's not, then you don't do it unless there is a compelling reason to change the plan. So we have a financial plan. We know exactly what we're doing each year, each month, what we're trying to accomplish. And we follow the plan until something dictates that we change the plan. And when we change the plan, it is a conversation between me and the wealth team. It doesn't happen immediately because it's important that we run our own lease. And we're not driven by headlines, we're not driven by memes, we're not driven by panic. We're not driven by any of that. We're driven by a plan that's being well executed each step of the way. So here's the thing. These are some of the things that I think can cause you angst and problems as you move through this and you're listening to some of these financial gurus out there, hopefully it gives you a little additional perspective to understand it. Here's some other things that I'd love for you to think about, you know, some real talk. Like I said, I'm coming up on 64, and even though I'm not ready to retire, I've tested every scenario in my own plan. I've literally gone through it and said, what happens if the market drops 20%? What would my plan look like? What happens if I stop working two years earlier? What would happen? What would happen if, if inflation came back? What happens to, to the portfolio and the money machine? Okay, what happens if medical goes up, Social Security goes away? All the things I just tested, tested, tested and looked at the probability of success in the plan. We ran thousands of scenarios and looked at probability of success in the plan to make sure that was well into the 80% range. Meaning that no matter what the scenario was, over 80% of the time, we never ran out of money. Okay. Because that's where we go. Then I look at it and say, do I have three specific buckets, a one to three year bucket, which is really my living expenses in cash, bond ladders and things like that. I need that safe, I don't need that volatile. I need it somewhat liquid and accessible and that's built into the plan. Then my three to seven year bucket, which is moderate growth assets, and then the rest is long term. Okay, why? Because I want margin for error, I want margin for volatility. I want to be able to sustain myself and withstand downturns and things like that. So. So I want to make sure that no matter what happens, I can make a choice. I don't have to react. We've already thought about it and we've come to a place where we know we're good. You do a right plan, it should operate in good times, it should operate in sideway times, and it should operate in bad times just the same. So here's the truth. There's no shortcuts. There's no miracle averages, no one size fit all fits all formulas. But there is a path. Diversify, rebalance. Don't chase headlines. Build a plan for real life. Give yourself the margin to live by choice, not by chance. All right? I hope that this helps. I hope you found this valuable, and I hope that it sheds some light on some common things that some financial gurus might be throwing out there. So you can look at them with the proper perspective and context in mind. All right, if you want straight talk, then do me a favor. Make sure you're subscribed, Leave your questions below. Share this out and let me know what you're thinking, okay? Because I got so much more coming your way. I am on a crusade to light the path to financial freedom for a million families. I want one of them to be you. All right? I hope I get a chance to see you soaring on your road to your financial freedom. And until I do, as I always say, always, always strive to live a life that honors you. See you in the next one. Cheers. Thank you for listening to the Affluent Entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

And that's it for this episode of Building youg Money Machine, where we help you learn how to master your money, eliminate financial stress, and live a life of of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcasts, or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright, and I want to help each and every one of you claim it. Thanks so much.