Tue 15 May 2007
Would You Rather Have $500,000 or $5,000,000?
Posted by RichSlick under Money Management
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The difference between ACTIVE investments vs. Passive Investments is a whopping $4.5 million dollars according to some extrapolation I did based on this article from SmartMoney.com.
For some reason, I was expecting that article to state something like, “These pentamillionaires got rich by spending less than they earn” or perhaps, “These pentamillionaires got rich investing in mutual funds.”
Why did I expect those two statements? Because every pf blogger out there seems to think that the afore mentioned sentences are the best methods of becoming rich. According to the article, passion & dedication were the keys to reaching vast wealth NOT passive investments!
While there are plenty of people who would be happy with 500k, I’d rather have 5 million, but then again that’s just me!
May 15th, 2007 at 11:56 am
Interesting article. Obviously this can be great for some people. I think most bloggers would agree that spending less then they earn and investing in mutual funds is a more gauranteed means of achieving wealth and financial security.
I’ll use myself as an example
I save the max in all tax advantaged accounts I can (~$32k a year with employer contributions). I put them in long term investments. With 3% inflation, I could earn a measly 5% return through age 55 (28 years) and still have an annual retirement income of about $40k in today’s dollars (after tax) in retirement without touching principle. I’m not an expert on the odds, but I would say that that gives me about a 98% chance of success. I could work 10 more years and make it over $50k.
I think that makes for a lot better success rate than even the %50 for people doing their own business.
$500k vs $5M is one thing. but, realistically, it might be $1.5M vs $5M. I wouldn’t take the risk for that. What would you do with an extra $3.5M? Buy a mansion and a Benz? I’d rather have a ranch on a few acres and my pickup truck. But that’s me.
May 15th, 2007 at 12:12 pm
Sorry, I don’t buy it.
Saying that most very rich people got very rich by starting a business does not mean that starting a business is a good way to get very rich. Investing your life savings in Google turned out to be a good way to get very rich too, but not recommended.
Put another way, if you had a 5% chance of being worth $5M by starting a business, or a 95% chance of being worth $500K with careful saving and investment, which would you choose?
Also, keep in mind that ‘net worth’ when you own a business includes a lot of value that is not readily accessible. To me, that needs to be discounted when compared to liquid investments.
My wife and I are taking the slow and steady route. By spending much less than we earn, by age 30 our net worth was ~3x our combined gross income. Might we have done better if we’d started a business? Maybe. But frankly I’m a lot more comfortable with cash in the bank than a nebulous value assigned to a business.
May 15th, 2007 at 2:53 pm
Yep, pretty much what was said here. It’s easy to put the numbers up if you ignore the risk. I was able to loan money on Prosper for 29%. Do you realize how well 29% compounds? You can almost double your money every 3 years. However, it turns out that a fair percentage of those people didn’t pay me back and defaulted on the loans. Thus for those people that I loaned money to at 29% I ended up losing money (though I’m close to break even). Sometimes the risk just isn’t worth the reward.
May 15th, 2007 at 3:05 pm
The article fails to mention the 100 people (guesstimate) for every 1 pentamillionaire who started a business, did everything right with the right qualities, etc., but failed anyway. Survivorship bias plays a big role in these statistics (as it does when one is talking about mutual fund returns, too).
“Every pfblogger out there,” eh? Nice generalization. I guess you’ve got your pentamillion dollars, so you have all the answers.
May 15th, 2007 at 6:50 pm
John,
Have you ever run your calculations by assuming 8% inflation? I say 8% because that’s the REAL inflation rate and not the convoluted manipulated one the government puts out every day. I went and bought 3 NY Strip steaks and a pound of beef skirt at the grocer and was amazed it cost $39!
3.5 million may be needed in 30 years to pay for that truck or a couple of steaks.
I like to do both. Get Rich Slow (500k) is fine by me but I’d take some risks to try to Get Rich Quick. The net result is that I’m Getting Rich Slick.
The article didn’t provide disclaimers for liquid vs. business values but I could argue that mutual fund money isn’t cash until you liquidate your funds too.
Flexo,
I don’t have all the answers, just different ones than most people and that has made me more successful than the “average” person.
This was the main point of the article. Do something different with a passion and you’ll get to the top 1%.
Lazy Man,
The Prosper creators are getting filthy rich, the borrowers get money they may never pay back. The lender seems like the person taking the biggest risk with smallest reward. For me, I stayed away Prosper with a 10 foot pole because of the above reasons.
May 16th, 2007 at 9:23 am
I like that way you characterize that Slow and Rick to Slick, very neat.
I’m like you, I would try to do both simply bc there are more opportunities in this country to make money. It also good to get rich quick if you know what you are doing, but I would not ignore the slow way either.
May 20th, 2007 at 10:53 pm
I’m one of the PF bloggers that you missed, too.
Passive investments have their place but generating your own wealth through your own efforts (commissions, business equity, royalties) will get you to $5 million a lot faster than doing what everyone else does.