1: How To Get Rich
First things first. I have been advised that if I don’t promise to tell you how to get rich in the markets, you won’t read this book. So let me get that out of the way.
How to Get Rich: Invest $100,000 in a low-cost equity index fund for 50 years. This should make you about $11 million. [1]
Yes, it’s no get-rich-quick scheme, and there is fine print: This performance is not guaranteed. You must reinvest all dividends. You must make the investment in a tax-free account. Inflation will maul you. But no investment strategy is more likely to make you rich than the combination of significant savings, equity returns, and time.
I have also been advised to tell you how Wall Street will take you to the cleaners. So let me get that out of the way, too.
How to Get Taken To the Cleaners: Invest $100,000 in an average-cost equity mutual fund for fifty years. This should make you about $6 million …and cost you about $5 million.[2]
That’s right. Thanks to the magic of compounding, $100,000 invested in a low-cost fund for half a century should grow to $11 million. Thanks to the black magic of advisory fees, meanwhile, $100,000 in an average-cost fund should grow to $6 million. That average-cost fund, in other words, will probably cost you $5 million over fifty years.
Wait—where will that $5 million go, again? Will you get swindled? No, assuming you choose your own fund, you will just be making a poor choice. The primary source of a mutual fund’s return is the market, not the fund, and the average fund subtracts more value than it adds. Every dollar you pay in fund fees, moreover, is a dollar that will no longer compound in your account, and over the long run this will cost you far more than the fees (in this example, $4 million vs. $1 million). In other words, you will take yourself to the cleaners—with Wall Street’s help.
Here are two more ways to get rich: 1) save more, 2) work in the money-management business. If you do the latter, you can make a pile of money even if your returns are poor. And here are two more ways to get taken to the cleaners: 1) trade too much, 2) shove your money under a mattress. Frequent trading will likely cost you several percentage points of return per year. After fifty years of average inflation, meanwhile, every dollar you have now will be worth less than a quarter.
Again, the key to investing intelligently is avoiding mistakes and letting the markets do the work. The mistake you make by buying an average-cost mutual fund is that “average-cost” is actually mind-bogglingly expensive. The mistake you make by shoving your money under a mattress is that currency is usually a terrible investment. The mistake you make if you trade frequently is that, in most cases, you would do better if you just bought and held. This last mistake, by the way, doesn’t only hurt day traders. It hurts almost all of us. The first step toward avoiding it is to draw a distinction between investing and entertainment.
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