1,821,745 Households in the United States Have Investment Portfolios Worth $3,000,000 or More

One consequence of this big mass of wealthy is that there is a large group of people who should oppose asset confiscation and taxation in the democratic political process. Of course, it's not such a large group of people compared to the whole population.

In it's own ironic way, it's good to know that this "minority" has very much input as to how the laws are crafted.

Nice article. Minor correction: I think you meant, "This means 1 out of every 63.46 households."

I would quibble a bit about wealth being "self-made:" there are a number of studies that report that there is a strong bias for high-income families to have high-income children, low-income families to have low-income children, and the same is true for wealth. See for example:

[1]. http://economix.blogs.nytimes.com/2012/07/11/only-half-of-americans-exceed-parents-wealth/?_r=0
[2]. http://faculty.chicagobooth.edu/erik.hurst/research/final_resub_jpe_dec2002.pdf

I think it may be convenient for hard-working successful people to believe success is self-made, since it causes one to continue to work hard and be successful, even if the reality is some combination of self, environment, parents, and education. (Even though, logically, it should nevertheless be possible to be successful through only one's self study and drive).

It's a little surprising to me that 1 in 5 households make $100k *or more*, yet only 1 in 63 has a $3 million portfolio. I guess people (and governments) are spending a very high percent of that high gross income. The reason I find it surprising is $100k of family income in worldwide or historical terms (even inflation and PPP adjusted) is pretty fantastic, and prudence and the principle of mean reversion might suggest saving for a rainy day.

My biggest concern (yes, I lose much sleep over this) for the trust fund that I hope to leave my daughter is not so much accumulating the assets before my death, but who will oversee these assets, so as not to make her end up one of those 7 out of 10.

(side thought:my personal opinion on cash reserves, under normal circumstances, is that the 14 percent group is most prudent)

(obviously I mean the low end of that range, while always searching for value)

Joshua, could you elaborate on your thoughts regarding reasonable cash reserves? I realize it is very household dependent, but I would love to hear where you stand on the subject.

That breakdown is fascinating, I tend to be a fan of cash for the unexpected(and expected), but having 50% cash(particullary when you have millions of dollars) seems daunting with historical inflation rates unless it was for a particular short term purpose like buying/selling a house or business. At the same time less than 10%, particularly when many likely were at the lower end of the scale seems insane. The linked pdf on hand to mouth was also fascinating, I need to re-read it to fully grasp all the details, but it was a interesting analysis of the mindset and behaviors.

My wife and I currently use a spreadsheet we call savings tracker to track our cash funding progress for all of our goals(repairs, replacement, vacation, emergency fund, etc). We strive for 10% cash or savings tracker requirements plus 4%, essentially whichever is larger as our cash allocation.

What is old money , new money that has learned to survive. As you kids get older you need to teach them how you got your money to grow , teach them about stock market . Tell them if you don't learn how to handle your investments that someday or somebody may loose it loose it for you. Stocks will always go up over time it is human nature to consume stuff, things, and food. It is that simple and the trick is to control your consumption. There is 3 levels every body should be in at least on of them. 1. Business owner 2. individual Stock holder 3.Mutual fund {stock} holder.
I teach my teenage kids about stock investing and them self's now hold stocks and they are not rich there stock portfolios are worth 565 and 745 dollars. Think Ronald Read!

""The way to get rich is to keep $10 million in your checking account in case a good deal comes along."- Charlie Munger

Thanks for catching the typo, I appreciate that! I fixed it and am flushing the cache now so it should replicate.

The self-made question is interesting because it depends on how you define it. Some hear the descriptor and picture a character straight out of Dickens; a protagonist going from sleeping on wooden planks of an orphanage in the cold winters to an estate with servants; from gruel to pheasant; tattered rags to tailored shirts. To put it in terms of the the Pew Data, which is the basis for the NYT link you provided, the only person who "counts" for someone with this mental association is someone born into the bottom quintile making it to the top quintile.

Others look at massive leaps in net worth, where the child ends up the first in the family to possess obscene amounts of wealth far in excess of the parents. Take the kid of a dentist - by definition, a family in the top 5% or 10% of household income - who is given financial assistance with college, a car at graduation, and help with a down payment on a house. If that kid goes on to start a technology business that is worth $100 million, leaving his parents in the dust, he counts as self-made because a vast, vast, vast majority of everyone else with those exact same advantages didn't come anywhere close to that achievement.

Bill Gates is a good example. His parents were affluent, yes, and certainly respected in their community. He had access to computers at a time when almost no kids in America did, allowing him and Paul Allen to develop their interest and skill set. I don't know how anyone could consider him anything other than self-made, though, given had he not gifted so much to charity, he'd easily be worth somewhere north $200 billion after accounting for the time value of money (early donation proceeds and subsequent dividends reinvested). He ranks among the top 10 richest men in the history of human civilization. Would he have been able to do it were he born in the inner city? Statistically, almost definitely not. Does that make him any less self-made in terms of exponentially outperforming everyone around him based on his intellect, abilities, and behavioral patterns? No.

I would argue that society needs to do what it can to create ladders of upward mobility onto which those with great human capital potential in the bottom quintile can grab - we'd all benefit tremendously as the next Steve Jobs could very well be dodging gunshots on the South Side of Chicago as he tries to walk to middle school, one bullet forever changing the course of the world if it happens to hit him - but to say someone who amasses millions upon millions of dollars is not "self-made" because he or she was born into the top quintile - which is a police officer and a school teacher married to each other in many parts of the country - strikes me as intellectually absurd to some degree when almost no one else born under such circumstances will do what is necessary to achieve it. When you look at the data on millionaires from people like Dr. Thomas Stanley, you see that almost all of them came from stable, middle class backgrounds, which he discusses at length. That makes them no less self-made than Michael Phelps because the Olympic swimmer happened to be born with certain genetic advantages in body proportion and wasn't missing an arm or a leg when he emerged from the womb.

And why is it that only financial capital counts in determining if someone is self-made or not when a person's ultimate net worth depends on other forms of capital used to acquire it? Surely the genetic capital a person inherits - raw IQ - should count, too? By most definitions, I was one of those bottom-to-top jumpers out of a Horatio Alger story, and I certainly outworked everybody, but I was handed a lottery ticket of sort at birth due to the processor through which I experience the world; a machine that makes knowledge acquisition easy, retains it without meaningful effort, and that is constantly doping itself with pleasure by learning about more, curious all the time. Though I'm self-made by every definition of the word, am I really not because I wasn't born with Down's Syndrome and an IQ of 80? Why not beauty capital? Some of it is self-made, sure; absolutely. But some are born natural beauties, or taller than average, which directly correlates with income potential.

I'd argue the disutility others experience does not delegitimate the accomplishments of those who did not suffer that disutility, nor does it mean that it any less important to address the structural causes of disutility that make some start the race further behind than others.

On a related note, one of the things I think is most interesting is the fact you can basically reverse engineer your way out of poverty if you have a high enough intellect or somehow stumble across the formula. Case in point: That New York Times (I really enjoyed reading that, by the way; thanks for sharing it) uses Pew's data. If you dive into the source findings, you see things like 1.) college graduates are 5x more likely to leave the bottom-rung than non-college graduates and 2.) dual-earning families were over 3 times more likely to leave the bottom run than single-earner families. There's also a racial component (white poor were 2x more likely to leave the bottom rung than black poor, which is caused by a complex interplay of variables). Dual-earner families were 3.4 times more likely to escape. It goes back to that golden checklist we we discuss - that economists have clearly identified the single greatest predictor of whether a person will escape or avoid poverty is if they do the following in order: Graduate high school, graduate college, get married, have children.

The problem - and this is the reason I love behavioral economics so much - is that most people aren't wired to make rational decisions unless they are inculcated with the right software early in life, installed by osmosis (observing others) and direct instruction. As someone on this blog once put it in the comments, they don't even know what they don't know so they don't possess the necessary questions to look for an answer that will help them escape. If you took, again, Bill Gates at 18 years old and dropped him in poverty, on food stamps, living in government assisted housing, his probability of escaping, even if he had no access to family or friends, would be exponentially higher because of the things he picked up in those first 18 years of life. He's carrying around a skill set in his head that gives him incalculable opportunities others don't even see. (One commonality of those who did make it out on their own, largely without assistance or middle class parents, is an obsession with self-education; they're frequently voracious readers who, by sheer force of will, install the software themselves or seek out experts in the field that will mentor them, a la Dave Thomas going to work with Colonel Sanders before starting Wendy's.)

The interesting thing about the self-made designation: Where is the line? It's hard. No matter how much money he makes, I can't, quite, consider Mitt Romney self-made given the staggering political connections and wealth his father handed him at birth. But a kid born to parents pulling in $250,000 or $300,000 a year? Yeah. If someone like that went on to amass $250 million, I'd say it was clearly them (absent some sort of low-probability fortune event, like winning a lottery or taking Facebook stock as one of the first employees). To what degree are the political connections to power causing that fuzzy line for me?

Do we, as a society, consider Elizabeth Holmes self-made? The woman was definitely privileged - she was attending Stanford before she dropped out - but by 31 years old, the blood test she developed that has radically changed the world, saving countless lives, allowed her to amass $4.5 billion. She wanted to find a way to save others with early diagnosis so they didn't die like her uncle. Personally, I do (consider her self-made). I don't think of her accomplishments as being any less astounding because she didn't escape human trafficking or have a minimum-wage-earning single dad who beat her every night. Lots of people had her advantages, nobody did what she did with them. It was all her; that glorious brain of hers applied to a problem she wanted to see solved based on an experience she had.

I suspect part of the problem is people have this bizarre idea that if you work hard, it alone is enough to guarantee you a good life. It's total nonsense - I've said it before but "everybody sells something" is the better model because seen through that framework, you look at your career as a combination of selling your time and skill set as [hours worked] x [rate per hour], which is more accurate - but folks believe it. The world is perfectly content to let you work three minimum wage jobs the rest of your life and die with no fulfillment. It's also going to let you escape if you understand that everything is merely [capital] x [return on capital]. We're all like machine operators adjusting those two levers.

Sorry ... this comment has gone on to long. I sat down for a cup of coffee and got carried away thinking (or typing, I suppose) to myself. It's a tricky problem; the definition. To some degree, it's going to vary from person to person based on their own assumptions about life and the nature of fairness.

This is my fear I am low income worker and worry about my kids falling in the same class. School was hard for me and is also for my kids. It hurts me to seem them struggle in school my one son doesn't want to go to collage because school is so hard for him. That is why I have them invest in stocks I feel it is one way for them to get financial get ahead. What investing done for me is give me hope that someday my kids and grandkids will not be looked at as family that is poor. At my work what I call the big shots will come and talk to me about stock these are people with collage degrees making 6 figures. I find it funning why ask me you have the collage degree. Investing in stock is easy just buy what you use every up every day. Pop, Food ,Drugs, Personal Care Product. Investing in stocks that makes these 4 product lines will make you money over time and pay dividends. I had my teenage kids buy stock with there money through Loyal 3 you can invest to buy stock with little as 10 dollars with no fees. Some people my laugh at what can you do 10 dollar investment with time you would be surprised. Its about the education that they learn along the way that counts. JOSHUA was Ronald Read self made???

It sounds like you are on the right track, knowing your own strengths and weaknesses. College isn't for everybody and it's important to know that. You can become rich without it, you just have to be strategic about your actions.

Here is what I would do. When Dr. Stanley looked at self-made millionaires, he found that something like 92 out of 100 (if I recall correctly) had graduated from college. However, 8 out of 100 hadn't. That's still a lot of people. They knew that college wasn't for them and they found a way to become financially independent without the degree. I'd start a research file on every one of these exceptions I could find - those 8 out of 100 people who were able to make a lot of money without higher education.

How did they make their money?

How did they grow their income?

What types of industries or career paths helped them move upward?

The other day, I wrote the case study of Dolly Parton, for example. She made between $450 and $900 million and never went to college. I'd look at people like Rose Blumkin, who amassed $100+ million despite only going to elementary school and not being able to read or write English! I'd read through both the American and Global Forbes 400 list, writing down the names of anyone who didn't go to college so I could study their life and see how they did it. I'd find articles like this one detailing people who made millions or billions of dollars despite dropping out of high school or college.

All of them ended up owning assets - stocks, real estate, copyrights, a private business - that grew to the point they were pumping out tons of cash for them every month. They went from making barely enough to pay the bills, perhaps working minimum wage jobs, to having tens of thousands, hundreds of thousands, even millions of dollars coming in every single month. Those assets went out and made money for them so they didn't have to get a paycheck like everybody else. The question is: How did they get those assets? That is what I would be studying. You have to use your own personal strength and weaknesses to decide what is right for you.

Ronald Read is a good example. To answer your question: Yes, he was self-made. He bought stocks year after year, decade after decade, reinvesting his dividends into the best companies in America; stuff like Coca-Cola and McCormick. He ignored stock market crashes and focused on the size of the checks that were getting mailed to him. By most estimates, by the end of his life when he was earning barely more than minimum wage at his job, he had to be pulling in $20,000+ per month in dividend income from his investments. It took him 50 or 60 years to get there, but he did it. Like the tortoise and the hare in the old kids' story, he stuck to his plan and bought ownership whenever he could.

P.S. Don't ever let anyone laugh at your efforts because everybody has to start somewhere. If you're writing a book, you have to write the first sentence. If you're painting a canvas, you have to make the first brushstroke. If you're composing a symphony, you have to write the first notes. Building a portfolio is the same way. You can build it $5 here, $20 there. Be proud of that accomplishment. As long as you have enough time, it can amount to something. That's how compounding works because it takes just as much time to turn $10 into $20 as it takes to turn $100,000 into $200,000. As the account balance grows, it starts to produce more utility.

Joshua, Thanks for the positive thoughts. I believe your blog will be around for years to come so will I .
This is like a small town café where people come together and share thoughts but without the rumors .

Todd, you might also look into community college as an option. With high college prices, the return on investment in colleges can be negative, unfortunately, if a student has problems studying or ends up with a non-marketable degree. Community colleges are typically much more affordable, can generate transfer credits for colleges, and are frequently more willing to help out with students who are struggling (my Mom taught math in community college for a while, so I've seen this first-hand).

Ronald Read was awesome. He is a good lesson because often people think the wealthy spend lots of money. Actually, as the Millionaire Next Door book that Joshua referred to discusses extensively, the *asset* rich tend to be very careful about expenditures. The *income* rich however, can frequently be *asset* poor: living only from paycheck to paycheck with little savings.

Making a dollar is uncertain, difficult, and subject to many taxes. Saving a dollar has 100% chance of working, and is taxed at 0%. The expenditures and liabilities in one's personal income and balance sheet are worth much attention!

Todd, hope to see you around here more. Like Joshua and Connelly said, I really recommend you read The Millionaire Next Door. It's from 1996 - but the main points are still true. It was definitely one of the sparks that led me on my current journey to financial independence.

All interesting points Joshua.

I mostly wanted to point out that for the highest and lowest quintiles, no matter the individual effort or lack thereof, frequently the outcomes are just going to be good or bad, respectively. This statistical outcome is incredibly counterintuitive to me, and probably to many.

Ordinarily, one figures that working hard and smart will suffice for success (or, selling stuff that gives a high return on capital, as you prefer). Or if one is too indolent, then that will result in bad life outcomes.

Yet even at the top and bottom quintile (so, 40% of society in total) we see very strong effects when conditioning on wealth. (But as you mention, there could be other confounding factors such as genes, attractiveness, longevity, whether neighborhoods are dangerous, etc, that could be skewing these statistics due to not being controlled for).

This seems somehow absurd to me. Now I can understand the spoiled attitudes of some of the undergraduates I met at Princeton. Or the incredibly negative attitudes of some highly intelligent people I met who worked in lower class jobs.

I mean, it's not logically impossible to move from the bottom rung to the top or vice versa. Look at Andrew Carnegie (who, by the way, was one hell of a good investor). Or Joshua here (and congratulations on that).

Yet, on one hand, if one has parents who have made a trust fund that is pumping out a gigantic amount of cash every month -- even if one dissipates all the assets during one's life (which seems to be an alarmingly common outcome!), then still, one will probably have high enough capital in terms of degrees, high-value skills, network, forms of leverage, relatives to call upon, that adverse career outcomes won't be a concern.

On the other hand, if one starts on the low rung, and all of one's peers are giving one pressure to engage in irreversible behaviors that will result in very bad outcomes (have babies out of wedlock and early, watch tons of TV while eating a terrible diet, do not study and obtain degrees, make poor financial decisions, ...), then it will be super hard to escape this path.

Thanks for posting not only this information, but also for creating the pointers leading back to the source documents!

While I'm still working through the original paper pertaining to "The Wealthy Hand to Mouth", my first impression would be that many of the readers on this blog share at least the preference of gathering capital assets versus expending on other items; I often find that I would rather buy a couple of extra shares rather than buy a "want" item, even though I could handily afford it! For people like us, it seems that we get off to the idea of owning more and more of the brands and businesses we see around us.

It's funny how these preferences are so different from the rest of the internet (and world, somewhat transitively).

Sites on how to spend money are far more popular than those on how to save and invest it. It may not seem that way from our blinkered perspective inside the financial independence or early retirement or investing spheres, but it is definitely that way.

This article makes me unfathomably happy.

"Health, family, and financial security come first as the foundation on which all other important elements of a life well lived rely." * - Yes indeed these are the three highest life goals, even higher then the major life goals. Just goes to show that "the rich" are people just like any of us down here in povertyville.

I thought about it all night, I'm wondering if the richest households have a fixed opportunity cost that is set to their highest life goals. Such consistency of opportunity costs could help explain why "The vast majority of wealthy people say they have a clear sense of purpose in life." **

I never really understood people who knew what they wanted in life. My goal throughout high school / college / etc was always to have a goal. In fact my best friend has been in college for ten years earning multiple Bachelor's degrees. He never found anything that he really wanted to do either. There's nothing that makes us jump out of bed with excitement each morning.

If you ask him what the opportunity cost of eating McDonalds is, he would probably say not eating BBQ wings. If you ask him what the opportunity cost of not watching Antman in theaters is, he would probably say not watching Jurassic World.

But I get it now. Opportunity cost is unique for everyone based upon their major and minor (and highest) life goals. The end result of doing the homework and knowing what those goals are is finally joining the 94% who say they have a clear sense of purpose in life. My opportunity cost of eating out (three meals a day) is getting further away from good health.

And there's so much more in this executive summary as well! "98% either agree or strongly agree that health is their most important personal asset." *** It is clear to me now why I was treated much better when I was skinny then when I was obese. It is not because people are deciding to be evil. It is because my obesity signals to 98% of (the people surveyed) that my values are at odds with their highest values. Even if they are only doing it subconsciously these people are being gravitated upon to accelerate towards their highest goals of health.

(What other hidden signals are there that the rich know and the poor do not know? It really makes me wonder.)

These kinds of things are so much fun to read and learn.

* page four executive summary
** page four
***page six

I really enjoy your posts, and I look forward to seeing how your own life journey develops. That's what I like about the mini-community that's sprung on in the comments section here (and eventually in the forum, whenever it launches). You see waves of people improving and reaching their goals, slowly.

Hi Joshua. Have been lurking for a while, but this post inspired me to chime in with a question. I wouldn't ask this question in "real" life for all the reasons you've touched on in the past that motivate "stealth wealth".

But I am genuinely uncalibrated.

I retired at 46 (now 48) with about $11M. Killed myself to earn it through 3 entrepreneurial CEO jobs so have never spent much time learning about managing wealth, etc….and am only now trying to get a fix on what to do next.

So as a I assess my situation, its a bit shocking to read your above statistics. If your numbers are correct, I am in the top 0.2% of wealth in this country? (249,159/115,610,216). Is that possible?

I'm not challenging your research. But am just sharing that I don't "feel" like I'm among the richest 0.2% in terms of wealth.

We live in a nice house ($600k)…..and have the rest of the capital invested 70/30 in stock-index-funds/5-year-CD's.

We "earn" a little over 2% per year in interest/dividends…which generates about $200K per year. From this we pay taxes and reinvest a portion to pace inflation…..The balance (~$100K/year we spend freely)…..

At this pace we feel confident that we can maintain this lifestyle for years to come….but certainly don't feel "rich"….

I realize we could probably spend more….which might make us feel a little wealthier….but if we want it to last potentially 50 years, it doesn't feel like we would be wise to go too crazy at this point….

Am I really that out of synch with how wealthy we are….or is the data in your source somehow leading me to apples-versus-oranges confusion…..?

Thank you for your thoughts….Sam

My guess is it's a psychological effect -- people feel that they are middle class when they have something from $40k of income and no assets to hundreds of k in income and multi-millions of dollars in assets. The Financial Samurai discussed why this effect exists:
http://www.financialsamurai.com/who-are-middle-class-citizens/

In an ordinary interest rate environment you would be making way more in bond income and dividends so you might well feel richer from a cash flow perspective.

Sam, when you say "we earn a little over 2%", I think you are discounting the capital appreciation portion of your holdings as well. Your $7.7m index funds would have appreciated 11% last year if you were holding a total market fund, which means that it resulted in capital appreciation of ~$850k, contributing another $17k to your "2%" earnings this year. Next year, it will appreciate again, and your "2% earnings" will grow even further. All of this doesn't also factor in that dividends and distributions tend to grow above inflation in most cases (if inflation was 3%, dividends could have grown 7-9%). This means that when you reinvest to pace inflation, you're actually compounding your holdings even more than you need to.

The Trinity study isn't perfect, but over 30 year periods, a withdrawl rate of 4% tends to result in 90%+ success. On a portfolio of 11m, that means you can "safely" withdraw $440k a year, pay your taxes, then spend it all and be fine in the long term. Ask yourself this: when you retired at 46, what was your exact portfolio amount, and now, two years later, what has the portfolio grown to? Inflation has run at about 1% in the past two years (part of the reason why you are only getting 2% earnings, btw), so if your portfolio has been outpacing it (I'm willing to bet it has smashed inflation by 10%+), it means you're spending too little, not too much.

It's hard to transition between building wealth and spending it, as accumulation requires both offense (like being a CEO) and defense (saving and controlling spending - which you undoubtedly had to learn to do as an entrepreneurial CEO). Because you have such a large nest egg, it's time to switch mindsets. Still though, spend on things and experiences that make you happy, money is just a tool, as Joshua likes to constantly remind us on this blog.

Ang -- Thank you for the thoughtful response. You make a lot of insightful points about my not accounting for capital appreciation, etc…..And I don't mean this to sound glib, but I think you are kind of confirming my real question/point.

Somehow it just doesn't sound like someone in the top 0.2% of wealth should be signing up for a program where he has a 10% chance (re: Trinity Study) of being flat broke at 76 years old after only spending something like $350K per year (after tax) for just 30 years…!

Shouldn't someone in the top 0.2% of wealth in the richest country on the planet be able to live a much more extravagant life? Fast cars, planes, boats, etc!

Joshua just provided a fantastic response above, but I'll continue to answer your questions here if you have anymore.

Being an entrepreneur, you know that without risk cannot come great reward. However, you're at the point where you've won the game. There's no need to take any further risk, and you're worried about the 10% failure chance in the Trinity study. Well, let's first talk about the Trinity study. The study assumes that you withdraw 4% in the first year, and then continue to withdraw that amount after adjusting for inflation without caring about what the market does at all. So instead of just spending $440k every year, you would scale it up to say 460k in year two if inflation was running at 4%, then 485k in year 3, and so on. However, in real life, that's not what would actually happen. In your case, if the market ever tanks, you can scale back your 4% withdrawl rate down to the distribution (today it's 2%, but once interest rates rise it will likely be more) to preserve principal. This means your chance of never running out of money is very close to 100%, and when weighed against the statistical possibility that you could pass away tomorrow or at any time before 30 years, means that you have nothing to worry about.

I think the biggest thing is tackling any mental hurdles you have about uncertainty in life. Nothing can ever be 100% guaranteed, but you've put yourself in a position through your hard work to be in the top 0.2%, and it's time to enjoy it. Practice optimism. You've founded three companies, you are well equipped to tackle any hurdles life may throw at you. Things can only get better! Write a book and title it "How I learned to stop worrying and enjoy my $11 million", you've won the game. Withdraw that 4% and spend it on fast cars and boats.

Thanks Ang -- "How I learned to stop worrying and enjoy my $11 million"…..Sounds completely ridiculous, doesn't it…! I grew up poor so I fully get what you are saying!

You are out of sync. You are outrageously wealthy. Not just globally, but also in America. Congrats - you definitely earned it. But listen to Stanley, Taleb, and many others - don't move to a richer neighborhood. Stay where you are. That's the way to be happy.

First, to answer your question: Yes, you are in the top 0.2%. Congratulations! At 48 years old, that is an extraordinary accomplishment of which you should be extremely proud! Very, very few people will ever come close to that. To put this into perspective, when you retired two years ago, you had so much money than the median high school graduate in the United States would have taken roughly 8.5 lifetimes to amass the equivalent amount if he or she never spent a penny during any of them and piled the money up in a savings account. No food. No shelter. Nothing. If you control your risks and invest prudently, by the end of your life expectancy, you should have an estate that puts you among the handful of richest people to ever have existed in all of human civilization. That isn't hyperbole, it's a fact.

One of the reasons you are (understandably) miscalibrated is the artificial interest rate environment in which we currently find ourselves. Your cash and bonds are returning, all things considered, practically nothing, meaning the utility you get from each dollar in principal is significantly less than it would have been during other time periods. In the mid 1990's - take a year like 1997 - you could have parked your 30% allocation in 5-year Treasury bonds and collected around 6.3% in annual interest; add a couple or few percentage points for corporate bonds, all significantly in excess of inflation. That same year, you could have paid cash for real estate properties in the Midwest and collected at least 8% to 10% in passive income without utilizing any leverage. It would have been all but effortless for someone experienced with capital allocation to extract $440,000 a year in income on your portfolio without hurting long-term prospects.

Those days are far behind us and you are (it sounds like - I couldn't say for certain without seeing the list of assets and the method through which they are held) behaving intelligently by taking a 2% distribution. Is that low? Yes. In fact - again, I can't give you any insight without seeing the specifics - I'd say it's extremely conservative. If I had a relative approach me with an identical principal value, at the same age, under present conditions, it wouldn't be terribly hard to arrange it so they were collecting $300,000 pre-tax per annum, while still providing reinvestment to protect against inflation. If they really wanted more, I could probably get it up to $400,000 without "reaching for yield" or lowering credit quality but it would require me to take a much more direct role - as in, I'm going to have to go spend months finding the perfect office building, in the perfect location, with the best ironclad contracts in a fantastic suburb that can produce at least 7.5% per year in cash flow with no debt, I'm going to hand-construct a bespoke portfolio for them of certain blue chip stocks, and I'm going to have to go through bond inventory listings to find the best trade-off of credit risk and income potential. I might even engage in some yield enhancement strategies that are far beyond the normal thing I'd discuss on this blog as they have no business being in the hands of most people but I could put to work with little risk.

The reason you probably don't "feel" rich is that American consumerism tends to distort reality. When you look at Dr. Stanley's research, he created a category that he called "the glittering rich" - which are people earning several million dollars a year, living in seven-figure houses, driving new cars. Depending on asset yields, this tends to happen somewhere between $30 million and $100 million. That's probably the picture you have in your head. Even with mediocre return levels, you should eventually get there at your present portfolio value.

Here's what I would do - and this is something that I have only suggested to a handful of other people in my lifetime because you've already knocked it out of the park and don't sound like the type to abuse it: Take a one-time 3% distribution from your portfolio. Stocks are at an all-time high, interest rates are bound to rise and depress asset values at some point so it's as good a time as any. On $11,000,000, you'd be talking about $330,000.

Stick the money in a stand-alone account. in a newly established, separate checking account. Do not co-mingle it with any other funds. Name the checking account "Experiences".

This might sound odd but every bit of behavioral research I've ever seen on the topic - and my own firsthand knowledge - has shown that people, even if they think otherwise, get far more lasting happiness and utility when they splurge on once-in-a-lifetime experiences rather than things. Experiences are best enjoyed in the prime of life, when you can walk without a cane, stay up to watch the sunrise without worrying about your heart giving out on you, and jump on an airplane without a doctor's note. At 48, this is the perfect time.

For example, if you're a science geek, read a copy of Darwin's Origin of Man then book an escape for two to the galapagos islands so you can walk where he walked, see what he saw. Take it out of the experiences account. Pay to open the right doors to become an extra on your favorite television show. Buy a charity dinner with one of your heroes so you can spend three hours in New York over delicious food conversing with them. Book a session at a recording studio, hire backup musicians, and put an album on iTunes, no matter how terrible it is - have fun with it. Or shoot the lights out and do something J.P. Morgan himself did: book an around-the-world excursion on something like the Silver Sea World Cruises, circumnavigating the planet ... 116 days, 62 ports, 8 routes, and 25 countries. You'll experience more than most people do in a lifetime. You can even schedule land excursions with experts and live out a real-life Indiana Jones adventure; see and do things that billions of other people will never have the opportunity to see or do.

After you've done all of this, never touching any money except the cash you took as that special dividend for your experiences account - woken up in Italy, attended the Grammy Awards, self-published a book, attend the film premier and after-party for the next James Bond movie release, go to France and have creed custom blend a cologne for you, seen the Northern Lights - whatever it is you wouldn't, ordinarily do - stop and think about the fact that you've amassed so much money, your accounts are replenishing themselves with dividends and interest while you are experiencing this.

You might think this sounds like a joke. You might think I'm kidding. If you listen to me, and you know yourself well enough to understand the sorts of experiences that will give you the most utility, 30 years from now you'll look back and send me a Christmas card. It will not only be a blast, it will give you a heightened appreciation for the power contained within the portfolio you've built.

And if you have trouble enjoying a one-time special dividend at the onset of your early retirement to do this, remember: If you and your spouse die tomorrow, someone is going to spend it. It's either your heirs, a charity, or the government. You did the work. You gave up countless hours of your life for it. That pile of money represents that trade-off; you're looking at time capital you sacrificed. Cash some of the chips in while you can enjoy them most. A 3% one-time distribution shouldn't have any meaningful utility effect over the next 30 years for you under your present circumstances.

You're rich, Sam. Acknowledge it just once, take the special distribution on top of your ordinary withdrawals, and then go back to your regular 2% payouts. You'll thank me someday. In the meantime, you'll get the added bonus of recalibrating how far ahead of the general population you are.

What a great response, thanks Joshua.

By nature, I tend to be very skeptical when accepting financial advice {or "any" kind of advice for that matter :<) }….but after reading your thoughts over a period of time, I think you've got both components of trust covered. (competence and integrity).

I love your idea of setting up an experiences account. Its a clever way to overcome another part of my nature, extreme frugality - a trait I'm actually proud of…(though my wife might say otherwise)…..Suppose this trait also stems from the back-of-my-mind thought that I hope to leave a big estate to cancer research one day when we are done with it…..

As for accepting that we really possess in the top 0.2% of wealth in this country, I'd be stretching to say I fully internalize it. You're "glittering rich" comment is spot on….Whether Trump has $1B or $10B, my $11M is not even rounding error...

Finally, your $300k comment intrigues me:

"...it wouldn't be terribly hard to arrange it so they were collecting $300,000 pre-tax per annum, while still providing reinvestment to protect against inflation"….

I'd love to hear how you would implement this as it's a full $100K or so more than we are currently generating….If you think other readers would also find interesting, please share!

This is the best advice anyone could ever give a newly retired person with self-sustaining assets.

Sam , just put all in customer staples stocks that have increased there dividend for the last 20 years. And don't look at the stock price just look at the quarterly dividend's. And spend only the dividends you will not run out of money UNLESS people stop eating, drinking , taking there meds and wiping there butt. Its that simple. Look at all the stocks that increased there dividend during the great recession of 2008-20? I have been investing since May 31 1988 started with 100 shares of KO and 100 share of WBA I am now getting almost 100% of my cost back in dividends EACH YEAR. Can you image getting 9 to 11 million dollars EACH YEAR in dividends 27 years from now. You will be 75.

Todd - You sound like Warren Buffet! He supposedly is putting 90% of the estate he is leaving for his wife in an S&P index fund….Like everything he does, I am sure it will work out great, but I just don't have the stomach for it. I keep looking at what happened in 1929, 1966, 2000, 2008, etc…..Sometimes it can take over 20 years to reattain your inflation adjusted price (e.g. 1929 to 1955)…..
But congratulations to you! You have an iron will to have held strong through the last couple of miserable periods! I can say from first hand experience, I couldn't do it!

Sam, As a entrepreneurial CEO of 3 company's I can't believe you could not handle a portfolio full of blue chip consumer stocks they are FAR LESS risky in them then there was is your start up company's. As far as what happen in 1929 if you look at a blue chip fund back then the Pioneer fund 11,000,000 dolllars invested in it would be worth in 1955 - 90,200,000 dollars WITH OUT dividend reinvestment I think that beats inflation. That is a 8.4% compound return on your money and you would have taking the dividends in cash. When times are tough it is best to turn off the TV. Even in WWII Germany defaulted on it bonds but German Stocks survived. I was told this by a fellow investor so It would be nice Joshua could confirm this. Use the past are your guide, there is a pattern to investing. I love to back test investment theory's and the answer is always the same STICK and STAY it is going to PAY.

Interesting perspective, Todd. But there is a key difference when you are running your own company….You're simply not "allowed" to bail….All the people to whom you are accountable (investors, employees, customers) effectively "force" you to stick and stay…. But with an index fund and an account at Vanguard, $7.95 and a few clicks later, you are out!

But unlike the stereotype, my sell finger only gets itchy when the market goes up "too much"….For instance right now I am very nervous about having too much in equities…I couldn't imagine holding 100% at these valuation levels….

As for the Pioneer fund, I am not familiar with it. My only reference point for my comment was Robert Shiller's website. He has an inflation adjusted chart of the S&P 500 going back 100+ years. If you Google it, you can see there are multiple periods where it took decades to recover from a previous inflation adjusted high….

But I certainly don't want to dissuade you from whats been working for you. Maybe I need to do some homework on the Pioneer fund….

Sam I have heard Robert Shiller talk on CNBC before and he seems to be always seem always bearish. I love reading and listening to Jeremy Siegel he has written books about investing called The Future for Investors also a good book to read for you would be call Coffeehouse Investor also I like the ideal of one handling there money in a way written in a book called The Proof of the Pudding.
What every you do you are a success already. I wish I had 11 million dollars but you work hard took large risk and earned it.
Just don't turn it over to some one else to manage it that is the quickest way to lose it.
As far as rental property it not for every one I had rental property once got tired of trying to get my rent much easer going to the mail box getting my dividend check and see them go up every year. No calls about fixing something like the sink is leaking , toilet not flushing, and my neighbor is making to much noise.
I don't own the Pioneer fund but I have used it as study guild to what has happen in the stock market during difficult times in our history.
I hope Joshua doesn't kick me off this blog for my rattling on things. As most of you can tell I am not high income or well educated. I feel that I am the Ronald Read of the blog ,which I drive a 25 year old car work blue collar job live in a small town in Iowa of 2300.

The one thing you didn't mention is if you want to be fully retired, meaning just doing your own thing and managing your assets, or if you are doing something business wise that is more active. That's important to know because that could impact your investment decisions.

It sounds like you cashed out of your three companies. The challenge with that is that you need to figure out how to invest your money! And as you're seeing, it's a challenge and you'll need to make trade offs. OTOH if you're involved with some other projects, you of course have the capability to invest there. Depending on your personal needs, that may give you rewarding experiences.

In my case I am lucky. I've done very well with real estate investments in San Francisco, and have not held a w2 job since 1999. What works for me is that I'm involved in managing my properties personally (in SF it's very tricky being a landlord, so I hate handing that off) and I've also,been active with new acquisitions. Although the work is intellectually a challenge, it's really quite light as far as busy work is concerned. And I can do things, come and go, as I please. My wife and I have also set goals- such as her being able to qui her job (goal #1, as she likes to remind me) plus we want to live 4 months of the year overseas, and have designs to buy a home overseas if this idea sticks. so our real estate portfolio is being expand and managed to reflect these desires. I find real estate very flexible in terms of being able to accommodate life goals.

I suggest that you think about your assets, what kind of live you wish to lead, and see how you can commingle the two. Cheers.

Thanks for your insights, SFrentier. Sounds like you've carved out a great life with a good partner to help you make it even better!

As for "retiring" vs one-more-redeo, I'm committed to the former….as long as I don't screw up the investment part!

I feel like I've been in a fog for the last 25 years of doing nothing but business….My wife has been a saint through it all and we are committed to seeing what else there is to life….

I used to always wonder when I'd see all these people on the streets on some random Tuesday afternoon, why aren't they at work?….What's it like to be able to go to the grocery store at 10:00am on a weekday? Now I know and I really, really don't want to go back….

Now…as for investing in real estate, that might be a different story…There is something inherently enticing about investing in something you can touch….and perhaps even control a little….

However, in my recent quest to educate myself on investment alternatives, I read a book by Robert Shiller called Irrational Exuberance….

Among other interesting data he shares, he shows a long-term inflation adjusted plot of home prices in the US…..The thing that really jumps out is that while there are some interesting moments, (especially in the last decade), over the long term, real estate barely beats inflation…..

And furthermore, along with most things at this moment, real estate seems to be running about 25% above its historical median inflation adjusted price, according to his chart….

An important caveat I suppose is that San Francisco is kind of a world of its own, but I don't happen to live there….We are in Fl where the macro trends seem to prevail…..

Do you have any special insights on this…..All I've done is read Shiller's book (and lived in several different homes over the years) but would be interested in hearing if you see things differently?

Also hoping Joshua might bring some insights to this ….

Cheers

A couple of things

1) Robert Shiller has done a lot of good work around attempting to "simplify" valuation of markets into an easy to understand number that takes into consideration many factors. However, it sometimes cannot account for noise in the data or account for ALL factors that influence market valuations. For example, his PE 10 figure currently does not consider the low interest rate environment (which inflates equity P/E until equity yield is somewhat in line with the risk free rate) or the fact that any attempts to pick up earnings from the past ten years will include 08-09, a one time punch to corporate earnings that immediately corrected the next year. I don't think his theories are wrong, and over time his quantitative view will most likely mirror very closely actual reality. But it's important to consider a multitude of viewpoints. Read a lot of different sources (for example, this blog which you are reading already), even if you disagree with them, just so you can have the context of other viewpoints when picking your own

2) Real estate is typically focused not so much on appreciation (which barely beats inflation) but cash flow. There is a huge community at Biggerpockets.com where there's a ton of discussion (a good rule of thumb is to aim for 10% cap rate, I think Joshua has discussed in the comments section somewhere about how 10% seems to be the magical return number most investors over long periods of time demand, whether it be from equities or real estate). Although SFrentier might have hit just the perfect timing on some of his purchases with regards to appreciation, I guarantee you the vast majority of the returns he's considering came from rents. Cash flow is king in property, don't buy any to count on only appreciation.

Hi Sam, happy to help where I can 🙂

So it definitly sounds like you, at a minimum, need a good long break from the hustle and bustle of running a business! I don't know if you have kids/dependent at home, but if you don't, and like traveling (or are curious about it), that could really recharge your batteries. I've been fortunate to have travelled extensively, and I can tell you, it makes you look at life differently. Especially now, it's so easy to travel on your own as well. It's not that expensive, as you want to ingratiate yourself in local culture and not five star hotels! The key is to spend a lot of time in each place and not run around form monument to monument. It's 'the journey is the reward' sort of experience. Best part is, you get to choose the countries and cultures, based on intuition and fleeting curiosities. The reason I bring up travel, or getting away from your day to day, is that when you come back, you'll have a better perspective on what you want to do back "at home."

As for real estate investing, it's a very broad field, and can be approached from many angels. Without writing a book(!) here are my key tips for starting out:

1- ALL real estate is local. What works in SF will kill you in Texas. I always suggest trying to invest locally, as you need to know your area intimately- the population base, where job growth is, property types/management needs, how easy it is to add new housing, appreciation (or lack of) potential.

2- decide if you're just looking for hands off alternative investments, or more hands on investments. The former can be purchased as commercial triple NNN properties with long term leases by established players. i.e. You could buy a strip center with walgreens as an anchor. You could also purchase shares in an LLC that owns a shopping mall, office building, etc.

3- As for home prices barely keeping up with inflation, remember, all RE is local! That has not been the case at all in highly desirable and expansion restrained areas like: SF/Bay Area, costal CA, Hawaii, Manhattan, to name a few well know areas. And I bet that there are pockets in other parts of the country that have done well appreciation-wise as well.

4- RE tends to go in 7-10 year cycles and yes we are in an upward trend now, depending on location. But you can always find undervalued properties and locations that have growth potential. It really depends on the specifics.

5- be very careful of "turn key" operators (they sell you homes or apartment bldgs, then manage them for you). You basically loose control of your investment, and are relying on others to make decisions for you. I could never do that, and personally believe that it's best to make your own investments, learn them from the ground up, then later decide if you want to off load management, etc. Also most turn key properties are class C and under, which is why they cash flow right away. The question is, will they cash flow a year or two from now, or will they turn into the next meth lab. Or what happens when we have a correction? High vacancies, lower quality tenants, etc. I always advocate buying high quality class A or B properties. As an example, you could look into medical office buildings as a niche. You'd have the resources to get started. That is usually the challenge for most people- to buy quality assets you need capital going in.

6- here are a few resources I recommend:
Book- "the real estate game" William Poorvu (Harvard prof, interesting book with great overall strategy and approach to RE.)
Book- "the millionaire real estate investor" by Gary Keller (also a good general approach book)
Online community: biggerpockets.com (lots of topics, much I disagree with, but also smart investors post there. Setting up key words and searching the user forms yields the best info IMO)

Hope that helps, and feel free to comment back. Cheers.

Hey Sam,

Joshua already gave you some excellent advice. I think you may find this video helpful too, albeit on a smaller scale. https://www.youtube.com/watch?v=5TNIgmVM6ZQ

In regards to higher yields, active real estate investing in certain areas could help, but it may not be a risk you want to or really need to take. And, it may be out of your "area of competence". Tons of physicians lose their butt's investing in complex, illiquid real estate investment opportunities. Above all else, I would simply make sure to talk over any major decision with a trustworthy advisor who's interests are aligned with your own and who is not incentivized to push a certain financial product. You've probably been a target (different financial marketing lists,etc.) for a while now as an accredited investor and likely have these bases covered, but I just thought to mention it. And, if big paper losses cause you to lose sleep, one idea may be to simply keep a larger emergency cash reserve that will help provide you with a greater peace of mind - If it were me, I would want at least 3 years of essential expenses in liquid cash accounts at various banks so that I know come hell or high water, I can pay for my living expenses without relying on the performance of my securities. Lastly, reading Ben Graham's guidelines for the defensive investor in The Intelligent Investor may be something to look into also. You've won the game. Just set up your affairs so that possible bad behavior (selling out in a crash) is minimized.

There is one other thing I thought to mention and it seems pertinent since you were a ceo. If you really don't want to do one iota of work, then you don't need to consider this. But, if you want to increase the income line and are willing to work a little, you could consider acquiring a car wash or something similar that requires less operational time. The standard advice would be investment real estate, which is likely to be less of a hassle than a car wash. The issue with real estate, aside from proper selection of the investment, is learning how to manage the property properly or finding competent management which can be very difficult depending on the size of investment. And heck, maybe you just don't want to be involved with things like that and I don't blame you one bit.

You may find this post below by Joshua useful as well. You'll notice that the private businesses and real estate are what really juice the income yield in the examples in the below post, which is why that part of your allocation (active things) can be sort of the x factor - i.e. it may be nice to have a little office building or apartment worth 500k pumping out 40k a year. I would want to make sure, though, that the real estate would not be more than 10% of my net worth (especially one, single building). Also, if you really are a deca-millionaire, I would make a one-time laundry list of items that you've always deprived yourself of and acquire those - say a nice car you've wanted or whatever.

https://www.joshuakennon.com/mail-bag-what-would-you-do-if-you-woke-up-with-10-million-your-existing-knowledge-but-no-other-assets/

Your enemies include financial sales people, behavioral glitches that may cause you to screw up a high stock allocation by selling at inopportune times, health insurance issues, and lawsuits (umbrella insurance).

Hi Sam,

Congrats on retiring with such a huge nest egg. I have two books to recommend..

1. Poor Charlies Almanack (it will change the way you think).. Just read the reviews

http://www.amazon.com/Poor-Charlies-Almanack-Charles-Expanded/dp/1578645018

2. Greenwald's Value investing from Graham to Buffett and Beyond

http://www.amazon.com/Value-Investing-Graham-Buffett-Beyond/dp/0471463396

If you live long enough and invest well you are going to join BBC (Billionaire boys club)

Yep you're way out of synch. Look around you your average american is getting poorer by the minute. You're so rich you're probably the 1% of the 1% but I like that you live like you're not all that rich at all.

you are in the top % as you calculated but your investment is much to conservative. You could allocate half of your holdings to large cap dividend stocks and earn the same amount as you are currently earning on you whole portfolio. Allocate a third to REITs and BDCs and earning 9% plus on that holding group and spread the result into preferred stocks, bonds and alternative investments and comfortably generate $750,000 a year in income. Would that make you feel rich?

Another good article. I started with zero dollars and a useless undergrad degree but am solidly on the way to reaching this target. My wife and I have mid-level corporate jobs in one of the highest paying cities in the US and have no kids. We'll end up wealthier than the vast majority high-level VPs that have kids and/or get divorced. Plus the stress level for us is nearly non-existent and we're getting to the point where we can pretty much do anything at anytime. Fly to Aspen for the weekend? Why not.

But mainly it is all about having a long-term plan - investing regularly without fail, paying off tax-deductible low-interest rate mortgage debt, and still living well below our means. Seems like it should be more complicated but it's not. Too many people make terrible financial choices every day. More kids than they can afford, vacations and shopping they can't afford, failure to invest sufficiently, etc.

The second you get comfortable the second you realize you're in trouble. You said you have debt, so you're not a solidly on your way there, you're a long way away. Keep in mind the economy is at it's strongest it will get (USA) when shit starts to hit the fan as it inevitably will, I hope you're prepared.

Thanks for sharing some of your been-there-done-that….One thing I learned from running businesses is that if you don't know what you are doing, you will lose money!

I think I will move really slow on this front but will begin by taking some of your book recommendations….

Will also keep lurking on this blog….Seems like a pretty diverse group of people, respectful of different places on the learning curve, etc….

P.S. Completely agree about traveling….We bought a smallish camper and are on a tour around the country as I type this….As for 5-star hotels, if I don't see another hotel for the rest of my life, it will be too soon…! Nothing better than pulling into a campground with a flannel shirt and some old jeans and starting the next interesting conversation with Hi.

Thanks Ang….Always so interesting how two people looking at the same data can see two entirely different things…..Where as you insightfully see the low interest rate environment as altering the "reference point"….making it a more difficult comparison….and therefore something perhaps not to be taken as concerning….

I've been seeing the low interest rates as simply "overstating" earnings….I know how much benefit our business's income statements got when our "interest expense" fell dramatically…..If interest rates go back up, this will correct and hurt future earnings…..and in turn drive P/E ratio's even higher (unless of course the "P" decreases to offset)…Either way, doesn't sound like a great time to be long equities….

Maybe the two perspectives offset..., no way to know….? but I have gathered from a variety of metrics that we are certainly higher on many fronts than history would say is "normal"…

As for real estate, appreciating that its more about cash flow, I think I'll wait until prices come back down to historical medians before getting very serious….This will also give me plenty of time to finish our camping trip!

Sam, I definitely agree with you that equity returns could be lower in the near future. But I have a different opinion than you of why P/E compression will occur.

While interest expense increases might hurt the bottom line of some companies that are heavy in debt, I think the major reason why prices will decrease on equities is because opportunity costs will have changed. For example, right now, long term treasury yields are about 3%, while average stock PE is about 20. This means that the average stock is "yielding" 5%. The 2% gap (plus a hidden growth component assumed on stocks) is the equity risk premium. Now suppose interest rates increased to 5%, to maintain the 2% gap, stocks must now "yield" 7%, which means P/E will be closer to 14-15. This could then result in a loss of 25% on your equity holdings.

So I agree with you on the dangers present in equities right now, but that brings me to the next question: what's the alternative? If you had to choose what to do today, you have a few options. One is to buy equities, and trust in the fact that companies will continue to innovate and grow. Another is to hold bonds, but that will give you even less protection against interest rate increases, as both your yield and your principal would then be at risk of the opportunity cost tradeoff. Then you can invest in real estate or private businesses, which could give you a higher return (as you know from being a CEO). And finally, you can hold cash and wait (losing purchasing power to inflation as time goes on - although this disadvantage is overstated nowadays as inflation is running 1-2%).

For me, I think bonds are the riskiest asset, and I don't have the knowledge or desire to invest in real estate or private businesses. I also cannot predict the future, and so I invest in equities when I have the cash, because people whose job it is to know interest rates have been predicting increases for 3 years now, and it hasn't happened. So I put my money to work as soon as I get it, in the most passive instruments I can find (as I don't want to deal with the work or any headaches that come from owning real estate or private businesses, even though historically, these asset classes have done very well for its owners)

Ang - I was with you right up until until your stated conclusion.

You've framed the list of alternatives very intelligently, but why do you then select "any" option that is fraught with danger?

I've heard the "no alternative" argument before. But its always struck me as a false choice. e.g. Would you rather get punched in the nose or kicked in the knee? How about answering, neither.

As you point out, with inflation running 1-2%, why not just weight your portfolio more towards 5-yr CDs yielding 2.25%….

Then whenever things "reset" you can take the early withdrawal penalty and go shopping during the next blue light special?

And if we are both wrong and things never "reset" (arguably a low probability event), you've at least not lost any purchasing power….

I think the disconnect here is partly due to the difference in our situations and partly due to a misunderstanding.

First, the misunderstanding. The reason is because I can't predict WHEN interest rates will rise. Back in 2012, pundits were already predicting a rise in interest rates, and valuations were already at all time highs. If I had sat out the 2013-2014 markets because of my fear of P/E compression, I would have missed out on 50%+ returns with an investment into a normal total market equity fund. You never know if things will "reset" aka crash or if companies will just grow into their prices. Worst case scenario you could just be standing on the sidelines forever, as companies continue to innovate and grow their earnings. In a period of rapid growth, trailing mathematical screens will always look higher than "normal" as investors are pricing in expected growth. You can look at a loss scenario and say: "I don't want that". But on the other hand, you can also commit a mistake of omission as well. See this post by Joshua on Warren Buffett's mistake: https://www.joshuakennon.com/warren-buffetts-12-billion-disney-mistake/

Secondly, the difference in situations. You have already won the game, you have no need to risk your capital anymore, and can live off of a withdrawl rate of 2% on your portfolio. That means if you wanted to do some market timing to preserve your capital, it's completely your prerogative and I would have no complaints. For me, I'm about to turn 29, and barely have 250k in assets. That's why I'm willing to take a little more risk and invest in equity markets so I can grow my purchasing power and not just keep pace with inflation. Granted, I don't have the risk appetite or desire to go out and start my own business or invest in real estate, but to each his own you know?

Ang - Nice post We both wish we were Sam, he is in a place that some day we will be in someday financially independent. You are right about your thinking no one can time the market, it is Time in the Market that gets you there not Timing the market. When my Uncle past away in 2009 his Trust had 75% in Bonds and 25% Stock now 2015 Stock is at 58% and Bonds at 42%
plus her income of the stocks have double. The trust wants to sell stock but my ant told them no she told them that why sell something that is giving more income every year and increasing in value. They bought there first stock in 1962 and still holding some of it. She is 85.

Ang - Touche! I didn't realize you were 29! With that many years ahead of you, there is only 1 answer, Put 100% of all extra dollars in a low expense equity index fund and forget it….Then spend the other 99.9% of your productive time on your day job. Congrats on all you seem to know already!

Thanks Sam, has really been a great time conversing with you. Please participate more often around these parts, it would be a pleasure to continue trading thoughts with you

Todd -- I'll check out Jeremy Siegel….

And I share your distaste for leaky toilets….but always wondered if this might be the secret of why there might be an opportunity?

As for your not being "well educated", the very fact that you are engaging in a finance discussion on a blog like this would suggest otherwise!…. So therefore I wonder if you might hide behind this type of facade while laughing all the way to the bank?

its actually more complicated, because cashflow and appreciation are tied together. As rent increases, a property's value usually increases as well. The trick is to be able to buy something at modest rent, then reap the equity gain when rents are higher. This tends to happen more dramatically and faster in blue chip markets like SF/Bay Area, costal CA, Hawaii, Manhattan, etc. Additionally, these areas are land restrained, usually have good employment opportunities, and are international destinations, so many people with financial means want to move here. It's all these factors that make appreciation so powerful.

The challenge is that it's hard to find cash flowing RE in those impacted markets. You can find it in spades in the other cities and cheaper areas. The problem is that those locations rarely appreciate. There is usually plenty of land to build out, the jobs are limited, and often the cashflow can be unreliable. Beware of cheap homes or apartment complexes that offer a high return from the get go. They can be very unstable, or yes they'll give you great cashflow, provided you can deal with difficult tenants.

You can search on biggerpockets for "appreciation vs cashflow" and read numerous debates on the topic. But I can tell you that most of those 10% return properties that BP advocates for have little future appreciation. OTOH most CA investors agree with the statement that "cashflow pays the bills but appreciation makes you rich.

If you're more hands on like me, you look for turn around projects where you are developing/upgrading/adding value to the property. In my specific case Cashflow is used to cover expense, and only recently has gotten beyond our daily needs and starting to pile up a bit. But it pales in comparison to what we have gained from equity- roughly half our equity gain came from development/changes of use, and the other half from pure market appreciation. Almost non of it came from cashflow.

Ah yes, the age old debate on real estate.

To me, I think to be an appreciation investor, you must have a lot of knowledge and experience to avoid being burned. As you said, you're a very hands on investor, who has the ability to distinguish between projects and valuation of housing. That makes you a value investor in the real estate sector. But the big danger in that is you require a lot of liquidity in order to make that work, especially if your initial cash flow does not cover expenses/mortgage if you have one. For me or someone who is just starting out, a cash flow screen promotes liquidity (at the cost of appreciation, like you point out) in case prices ever crash. I think a reliance on appreciation is far more speculative than I have the stomach for, but like you said, appreciation is what makes you rich.

A few general comments on topics brought up here:

1- Real estate appreciation is speculative: I disagree with that. The cities and metros I mentioned above have consistently appreciated. The trick to mitigating downturns is to look for 1) value added properties and 2) gentrifying areas. My projects in SF have doubled or occasionally tripled in value in a ten year time span.

Some caveats: 1) you usually need to have access to capital to play in these blue chip markets (the old adage it takes money to make money applies.) Furthermore, substantial outside capital is circling these markets offering all cash on purchases. But a local operator like me has still been able to out maneuver these guys- I managed to buy my two latest projects and get ideal bank financing to boot. 2) if you're not really talented in the RE development arena, and an expert in your local market, you usually end up not buying a value added play. And then you are pretty much relying on market appreciation. That makes you susceptible to a downturn and you'll need to hold the asset until the market bounces back. However I will note that even if you brought retail during the worse imaginable time- 2007 in SF, by 2013 you were made whole and by now you're probably up at least 20% on your investment (and if it's leveraged with a bank loan, you're already doing well on it.)

2- Interest rates: the low rate environment is a bonanza for RE investors. Commercial loans are usually fixed for 5-10 years (or 15 years if amortized over 15 years, which if you can swing, are killer.) But 2-4 units falls under Freddie/Fannie and offer 30 year fixed. I have these for all my investment properties, and it's a real gift to know that your mortgage payment will not increase over 30 years! This is something that only the U.S. Gov does- guarantee these low rates for 30 years- no where else on the planet does that exist. Talk about long term security on your debt obligations.

The topic of how a rate increase will effect RE and stocks is multifaceted. In short, I agree that an increase will put initial downward pressure on RE prices, but eventually higher rates lead to higher inflation, which will catch up to the intrinsic value of the RE asset. You just need to be able to hold on and ride that wave.

3- One other comment regarding expensive metropolitan areas, housing prices and distribution of capital: often people blankly say that RE prices are limited by income growth. Well that's not really true. We have seen a decoupling of income and RE values in SF for awhile now. First remember, many buyers are trade up buyer, so they already have hundreds of thousands in existing equity in their homes and are trading up. Secondly, many local families have done well with stock options at their companies. Start ups go public or get brought out; larger companies have massive stock value gains (which employees participate in.) I've known numerous people who have only worked for established tech firms yet still made over $1 mil from employee stock purchase plans. And lastly, these are generally international destinations, so we get lots of successful foreigners moving here or buying a second home. Globalization has only increased property values in destination cities. These are three factors that go well beyond the typical area income to housing value calculus.

SFRentier - I'm enjoying this discussion…hope you are too….and hope even more that it make us all richer...

I'll keep it going with an observation about your comment on how interest rates affect stock and real estate prices.

To begin, the US has $18T in debt. If interest rates go up, interest payments on our debt will go up as the debt is renewed at higher rates. This is generally bad. I therefore believe the powers-that-be will (and have) attempt(ed) to keep rates low as long as possible.

But competing with this goal, there exists 2 mathematical truths:

1) Interest rate = Nominal rate + Inflation rate.

2) Low interest rates cause inflation (e.g lots more money available for cheap borrowing).

[Note that while you typed above that "higher rates lead to higher inflation"….Its actually "lower" rates that lead to higher inflation. E.g. Raising Interest rates is a tool used by the Fed to "lower" inflation. Not trying to be annoying, just pointing out a detail that will become important in just a moment.]

So here's the catch-22: As low interest rates eventually cause higher inflation, interest rates must rise to accommodate its rising inflation "component". Its just Arithmetic.

The order of this sequence is important. Note that inflation occurs "before" higher interest rates. This explains why Real Estate and Stock prices have "inflated" so much during QE1,2 and 3 while Interest rates have been held at historically low levels….

(Note that the price of toothpaste and typical CPI components have not yet responded but don't let this fool you. Inflation has been rampant, its just been contained so far to areas that "investors" (who have access to all the cheap dollars) can allocate to Stocks and RE). (Executives using cheap debt to buy back their company stock and increase the value of their stock options are a perfect example of this…and this has been occurring at breathtaking levels)

But as the Fed gets ready to respond to high inflation (note Yellen's recent concerns about high "risk asset" prices) by raising interest rates, the ride is going to be over….It may not be immediate. It will actually take some time for these higher rates to work their way through the system, but as it plays out, prices will be depressed.

So when you say you just "need to hold on and ride that wave", tread lightly. Because once it starts, I believe we'll be waiting for a very long time for the full cycle of rising interest rates to play out….

Yes, rising rates are a counter to higher inflation- I was focusing on the end result when I wrote my comments. But I think you're overstating the negative impact of a rate increase on the stock and RE markets, as the fed rate increases will be very gradual.

Also, the government will welcome some inflation, as it will make their debt number seem smaller. Printing more money is a much easier way to pay off their obligations. Have you considered that?

I think we might be making the same point. We "want" inflation in order to reduce the burden of paying back our $18T of debt.

The way way you get inflation is by lowering rates.

However, the catch-22 is that by the very fact that lower rates cause inflation, low rates cannot be sustained long term. The math won't allow it! ( Int rate= nominal + inflation )

This reality puts the fed's goal of "gradual" increases at significant risk.

I fully agree they "want" to follow an orderly gradual process, but if you look back at the Carter years for instance (18% interest rates), what we want is not always what we get!

Yes I agree with you that when inflation hits, it is not something the fed can fully control. But that's why I'm in real estate, because in the long run it doesn't really matter. When rates start rising it will put downwards pressure on RE prices. But when inflation becomes part and parcel of the cost of living, there is no choice but for everything to go up in price, food, rent, incomes, etc. It has to, or else you get revolution on the street. I'm not an alarmist, and I don't think we will get hyperinflation (one's definition may differ) but even what we had in the late 70's was a different world than the last 30-40 years. And if that type of scenario repeats itself, if you're sitting on good RE, with fixed rate loans, your rental income will adjust, and eventually your asset value will reflect all that inflation as well. Being able to hold on for that ride could have a huge positive wealth impact. Even if prices for everything hypothetically double, leveraged assets of 2x value will generate a lot more wealth relative to your day to day living costs. If someone thinks I'm off on this analysis, I welcome your input.

As for your particular situation Sam, the point I was making earlier is that if you want to be relatively passive and just enjoy the spoils of your assets, you can certainly do that. But if you want to be more engaged and challenged (and you may feel that way after you do a great decompression) RE can give you that challenge. It's kind of like when the local tech guys here make a bunch of money on a successful start up. They usually don't just sit on the beach for the next 40 years, but after the time off/round the world trip/etc., they tend to invest as angels in other start ups, get advisory roles, etc. that way they remain engaged, even if they don't really need the money. For me the plan is to own only RE that is easy to manage (for now) and that I can hand off to someone when we start spending more time overseas. We are close to having enough money for our needs, and unless I get the hankering to trade up our home (views, that's the one thing I don't have 🙂 then I have to think twice about getting involved in another project. That, and I also think we are nearing a market peak locally, so I'm trying to line up some dry gunpowder in case we have a correction, so I can consider better deals. But I'm also asking the question "why buy more, take more chances" when we may have enough for all that we want to do. Trying to match up lifestyle goals with business ambition is the balance I'd like to achieve, but the answers are elusive at this point!

Thanks SFrentier --

Not sure if you are 30 or 70 but sounds like you've really got your life/thinking together!

So about the only words-of-wisdom I can pass on are some that were passed on to me.

Buy-low-sell-High, Know when enough-is-enough, Follow the golden rule; and Always put your marriage first.

Will look for you on the next post from Joshua that sparks our mutual interests….

Likewise; enjoyed our interaction, and see you on a future post. Cheers.

Thanks David,

Funny you should mention, Ben Graham's book, Intelligent Investor….I am currently right in the middle of it. (How can one not read the book that the most successful investor on the planet described as the best book on investing ever written!)

By luck of doing what has been simplist , in practical terms, I feel like I am largely following his advice. Essentially splitting my portfolio between stock index funds and fixed income…..and tweaking the respective balances between 25% and 75% based on relative valuations….and settling for a 50-50 split when conditions are "normal"….

But this is not nearly as interesting of an approach as what you just forwarded that Joshua outlined in his earlier post on how to invest $10M. His approach just feels so much more hands on and "real".

But the timing of the release of his latest post on Trump couldn't have been better played to juxtapose. Is it really possible that Trump would have been $10B richer had he just bought an S&P index fund all those years ago? Just doesn't seem fair…!

But if its true, it suggests that being an active investor in real estate has been a very expensive hobby for Trump…..and therefore probably would be for me as well….

Thank you for forwarding all of this!

I have enjoyed traveling for 6 months out of the last two years, to Europe, Canada, and China. I recommend traveling. It gives one many insights into human behavior and life.

For those who are working in large companies or academia, I suggest checking whether there are travel options, such as global pay, visiting office in country X for reason Y, visiting scholarship, etc. This can be tax-advantaged over just say buying aircraft flights oneself.

It is also surprisingly inexpensive to just pick a target country and stay there for some months, as opposed to hopping from place to place a lot, which tends to incur more frictional costs (travel, hotels, etc). This also allows one to meet more locals!

Finally, I wanted to say I was really impressed at the tone of the conversation here about Sam having been financially successful in business, and various investing options. I feel that if this conversation were had among many people in the U.S., some people would start complaining about how "life isn't fair to the average person" and wringing their hands about "capitalism and privilege." Now, certainly, life is not fair. But it is nice to see this self-selected community where essentially all of the commentators just want to learn and improve career-wise, financially, or otherwise.

As Laozi wrote, "A journey of a thousand miles begins with a single step."

Thanks George! I will check these out.

I might wonder if the blue bloods aren't dead, and if their considerable wealth has merely been overshadowed by the new billionaires. The fact that the top .001 percent keeps getting richer faster than everyone else might obscure the continued legacy of old dynasties that have sunk into the .1 or 1%. Families who accumulate and then lose wealth in a couple generations are quite separate from old money families who have a culture that is tied to the accumulation and protection of wealth.