Are the Top 1 Percent Safe? Take Steps to Create a Secure Future
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cover story feature Retirement Planning Are the top 1 percent safe? Take steps to create a secure future. 52 AUGUST 2015 // dentaltown.com cover story feature hen talking to a new client, percentage of your income, you’ll retire investments (mutual funds, exchange- something I fear most is just fine,risk free. How many people can traded funds, stocks, or bonds). These hearing about a serious say that? Most people have to take on direct investments carry different risks, W investment loss. Suffering more risk and deal with more volatility and are often the silent killer of many the aftermath of a bad investment is a dis- because their income isn’t high enough to early-retirement dreams. I say “silent,” tressing experience for anyone, and while retire comfortably without getting a good because most people won’t openly discuss some dentists can bounce back from investment return along the way. them: Who wants to admit to losing small setbacks, big losses can put you in money in a really bad investment? financial ruin. It’s time to make your income Many people invest in opportunities The majority of successful dentists your greatest asset that appear attractive without having are in the top 1 percent of income earn- I’m not recommending that you pour adequate knowledge to distinguish the ers nationally. This affords you a huge all of your money into such a conserva- good from the bad, and without adequate advantage when planning for retirement, tive, risk-free portfolio. I’m simply illus- financial strength to weather the poten- but you are not exempt from seeing your trating the point that most of you don’t tial losses. In other words, long before finances turn upside down. What’s sad is need to take much risk if your primary they’ve achieved financial independence, that you all have been in the trenches— goal is to accumulate enough money to they start making serious commitments you’ve studied your brains out and you’ve retire early and comfortably. For most and gambles. Any gain is gobbled up by sacrificed for years to get to this point. people, it’s the accumulation of a large loss, and retirement gets delayed, often There’s no doubt you’ve earned it. portfolio that really matters—not so much for years. Something I can’t quite wrap my the return along the way. Your income is I’ve seen these investments pull mind around is just how rare it is for an your greatest asset because it allows you retired professionals back into the above-average earner to convert his or her to pile up large sums of cash quickly, as workplace, force them to overextend income into an above-average retirement. long as you don’t screw it up! their working years, and put strain on Shouldn’t it just happen naturally? Well So why do so many dentists struggle their marriages, families and friend- yes—that’s exactly my point. to retire on time if it’s really this easy? ships. The truth is, it’s very difficult So I’m going to clue you in on some- The answer is simple: They screw it to avoid financial risk when you start thing that will blow your mind. Ready? up. They compromise the no-brainer moving into private, direct investments. These investments (unlike mutual funds, stocks or bonds) have very little oversight from a third party, like a People in the top 1 percent can retire quite easily by saving professional accounting firm. With no 15 percent to 20 percent of their annual income into a third-party oversight, it’s hard to see exactly what’s going on and whether or risk-free portfolio earning between just 3 percent to 4 percent. not the opportunity is legitimate. Apply this logic until you become financially independent. Financial inde- pendence means you have 20 to 30 years’ The no-brainer retirement plan retirement plan by taking unnecessary worth of your annual personal spending People in the top 1 percent can retire risks that end up making it impossible to earning the risk-free rate I discussed quite easily by putting 15 percent to 20 accumulate a large portfolio. They have earlier. If you remember only one thing percent of their annual income into a one big loss—one big mistake. They just from my bad-investments spiel, remem- risk-free portfolio earning between just 3 don’t have enough years behind them to ber this: Avoiding big losses is more percent to 4 percent. The risk-free port- recover, nor to accumulate enough liquid important than making big gains. Here’s folio is something professional finance assets to have a killer retirement. an example. people use as a worst-case scenario. It’s Let’s dive into this subject a little fur- the 30-year, U.S. Treasury bond. Not a ther by looking at some common risks. Mismanagement and great return—but an option that gener- poor execution ates adequate income for someone with a Direct or private investments Several years ago, I was hired to very large portfolio. Direct investments in real estate, research a potential investment in a new Just think about that for a min- businesses or investment funds are massively multiplayer online (MMO) ute. If you do nothing but save a small very different from publicly traded Continued on p. 55 dentaltown.com \\ AUGUST 2015 53 cover story Continued from p. 53 feature video game. Stargate Worlds, in associa- This wasn’t your classic, small-time tion with Metro-Goldwyn-Mayer, prom- Ponzi. The guy was sharp, articulate, and ised to be an exciting competitor to the very informed. The prospectus displayed popular World of Warcraft MMO series. very detailed descriptions of projects and The video-game community was buzzing conservative statements about risk and with excitement, and investors committed prudent investment practices. Statements millions of dollars of capital to Cheyenne were delivered to investors on a regular Mountain Entertainment (CME) to help basis and consistently high returns were build what was then one of the most delivered year after year. Dividends were anticipated games in MMO history. paid regularly, keeping investors happy I visited CME headquarters in Mesa, for more than 20 years. At its peak, the Arizona to do some onsite research. After fund was reported to have held $813 mil- interviewing some of the staff and man- lion dollars. agement, I recommended that my clients When it all fell apart, Lewis was withhold investing, because I identified convicted and sentenced to 30 years in some red flags that turned me completely prison by a federal judge. I know people off the venture. During my visit, I saw personally who were taken in by this guy. an overly ambitious executive developing It was a Bernie Madoff-type situation that multiple games at the same time, not just happened in my own backyard! Stargate Worlds. He felt these were good I share this story because the inves- opportunities. But any competent analyst tors in this scheme, as well as many of would have seen them as I did —they the investors in the Madoff scandal, were distractions. were not financial illiterates. They were To make a long story short, CME entrepreneurs, business owners and exec- went bankrupt and millions of dollars’ utives, some with substantial financial worth of code never even made it to backgrounds. But Lewis was paying 30 market. The game wasn’t developed in percent to 40 percent in annual returns. time to meet contractual deadlines. The Hindsight is 20/20, but greed often investment opportunity was wasted, and makes people take more risk and ask investors’ lifestyles were jeopardized. fewer questions than they usually would. My clients had the foresight to ask for a There’s absolutely no reason to invest second opinion before committing large in something that claims to offer such high amounts of capital to this particular returns over such a long period. Think venture, and I’m sure they will continue about it for a minute: this fund raised $311 to exercise the same caution in the future. million from investors. He was promising Remember, no good idea can overcome 40 percent and higher returns. Let’s just poor management and poor execution on imagine for a second that the investors in someone else’s part. Exercise extreme prej- the fund continued to receive their returns udice when investing directly into another over the next 20 years. The fund would business. If not, you may end up hanging have been large enough (approximately yourself out to dry. $600 billion) to buy Disney, Coca-Cola, Amazon, and McDonald’s—combined. If Fraud the fund had persisted for 30 years at these I grew up in a small town in Idaho, returns, it would have been large enough where one of the largest Ponzi schemes to purchase the entire U.S. stock market in U.S. history took a heavy toll. James (approximately $22 trillion). After just two Paul Lewis of Financial Advisory more years, the fund would have been large Consultants met with individuals in enough to purchase every stock on the my small community, and promised a entire planet (approximately $42 trillion). consistent, high return through various When it comes to private, direct small-business investments. investments, there is always a level of FREE FACTS, circle 52 on card dentaltown.com \\ AUGUST 2015 55 cover story feature uncertainty that follows. This is espe- saturating their portfolios with any one yield a higher return than the alternative cially true when the company in which particular investment.