The takeaway from this article is that hoarding cash is not a good store of wealth, and that the key to long-term wealth is to acquire net income generating assets. Great points for sure, but I strongly disagree with his assertions that saving up for retirement is ill-advised and that traditional investments (stocks, etc.) are too volatile and risky to be useful.
He never explicitly gives any advice for acquiring net income generating assets, but reading between the lines (and given the context) the advice is to pursue entrepreneurship. While I strongly encourage people to pursue entrepreneurship when it makes sense for them to do so, I don't think it's a substitute for proper retirement planning and long-term investment as this article seems to suggest. And it's certainly not good retirement planning advice for anyone who doesn't already understand the basic differences between money, wealth, and assets as this article seems to imply.
Given the failure rate of entrepreneurs and start-ups on average, it seems quite strange to dismiss traditional retirement planning and long-term savings as too risky while encouraging entrepreneurship as the solution in the same article. Traditional retirement investment vehicles (low-overhead diversified ETFs with a mix of bonds, ratio depending on years until retirement, combined with taking advantage of tax-advantaged accounts such as 401Ks, IRAs, etc) isn't anywhere near as risky, especially over the long term. Remember, a single stock market crash in your 20s or 30s is going to have virtually no impact on your retirement savings in your 50s and 60s. When saving for retirement, you have to consider the timeframe involved. By the same token, risky entrepreneurship isn't all that risky when you're young.
I'm glad to see someone advocating sensible retirement planning here. Though the post had a few good points about how to perceive wealth vs. money, I cringed at the notion that most stocks are "buy and pray" investments. Stocks have a better risk/return profile than just about any other asset class with a given 10+ year time window over the last century, assuming proper diversification. I should also point out that stocks, by definition, are ownership.
That being said, it is important to further diversify within a stock portfolio by having a good mix US, European, Emerging Market, small/mid/large cap, etc. As one nears retirement, risk can be reduced along with return by shifting into bonds. Again diversification is useful here. Have a good mix of both corporate and government, high quality, high yield, floating rate, inflation protected, etc.
Of course, developing a skill is a way to increase your wealth, as defined by the article, but diversified equity and fixed income holdings are a way to protect that wealth for a time when those skills are no longer relevant, whether it is by the slow erosion of time or a sudden unfortunate event.
I also found the article to be lacking. The overemphasis on "income-generating" assets does indeed reflect a misunderstanding of any sort of risk profile, as does the "buy and pray" moniker.
Income-generating assets do have a place in your portfolio, but certainly should not be the majority especially if you are so far away from retirement. As you mentioned, as one ages the allocation can be changed. Towards retirement and into it, income-generation should have a much bigger proportion as it better reflects one's needs.
> I strongly disagree with his assertions that saving up for retirement is ill-advised and that traditional investments (stocks, etc.) are too volatile and risky to be useful.
With my retirement age ~40 years away, it's not clear to me that locking my money into traditional investments is a good idea: existing historical records are not statistically convincing (to me) over such a term.
A single stock market crash or economic crisis may not matter over the long term, but I'm sure you're not suggesting there will be only one such occasion: it seems more likely that there will be several, which may or may not be timed in my favour.
When I come to unlock a pension, there's no way to know what the state of the economy will be and where the legislation will have gone. However, if I am dependent on that pension, it puts me in a very vulnerable position where I am likely to be taken advantage of - perhaps by the state or by an uncompetitive financial market.
You talk about tax-advantage, but I would have to retain this over several successive governments. I personally don't believe that it's in the interests of society for significantly wealthy people to retain additional tax advantages. I suppose it's in my personal interest for now to take those advantages, but I don't feel like they can be relied upon, and seem likely be changed over this time period - perhaps even retrospectively.
Anyway, if I am not completely dependent on my retirement savings, but have a means of generating wealth in my retirement, then I am in a much better position.
This is why I find entrepreneurship a good investment: it gives me valued skills that I will most likely retain into older age (even if I fail at first). Whereas, people who remain in traditional jobs have some danger of being obsoleted, or competed out of their jobs in older age.
> A single stock market crash or economic crisis may not matter over the long term, but I'm sure you're not suggesting there will be only one such occasion: it seems more likely that there will be several, which may or may not be timed in my favour.
Certainly, there should be several cycles expected in the economy and stock market every decade, but this is not entirely negative.
1) You are not investing all at once. Instead, you are dollar cost averaging - each paycheck, some of you money goes into the market, at either a high, or a low.
2) You are not divesting all at once. While taxable accounts have minimum distributions, no tax accountant is going to suggest that you take out all of your money at once. If you have 'enough' 1-3 years of divesting in a down market will leave you with a principle that will restore in a 1-3 year up market.
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> Whereas, people who remain in traditional jobs have some danger of being obsoleted
You are going to be in much more risk of obsolescence if you don't improve your skills as an entrepreneur than if you don't at a traditional job.
The stock market has historically never dropped in value over a 15 year period. If you continually invest through a crash, you will make insane amounts of money.
Lets say you started investing in 2006 (before the crash), specifically in SPY. Lets say you put $10,000 / year into SPY.
You'd have spent $80,000 over those years, and today, your SPY holdings would be worth $118,176.92. You'd make a 47% profit because you invested through a crash.
Crashes are the most amazing thing for your investment portfolio. Investing THROUGH a market crash makes insane amounts of money.
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The risk however, is the day you retire. If you retire during a market crash, you will lose a lot of money. But a crash during your 40 year investment period? That's the best possible scenario. Every crash will lead to insane gains in your portfolio. As others have noted, you can mitigate this risk by simply moving your money away from stocks as you near retirement age.
Bonds don't make as much money, but they're a lot more reliable.
> The stock market has historically never dropped in value over a 15 year period.
Feel free to clarify this, because I don't agree.
The records of the FT30 index only go back to 1935[0] - which is not nearly long enough to make reliable predictions about the next 40 years - but still, it dropped in value in the following 15-year periods (before taking into account time value of money):
> it seems more likely that there will be several, which may or may not be timed in my favour.
This is why people are advised to move into bonds as they get closer to retirement age. Easier said than done though, if you just saw the stock part of your savings get cut in half. Very tempting to stay in stocks until it comes back.
+1 entrepreneurship is risky and not for everyone.
I have generated wealth by working for other people, diversifying, having low living costs, and getting most happiness out of life from being with friends and family.
In other words, a mixed strategy of setting goals for lots of free time and consuming less than I produce.
Agreed that he misses the point with retirement. "Saving up" for retirement doesnt mean $1M in cash, it usually means $1M in income producing assets pieces of profitable businesses and future promises of more (bonds).
He never explicitly gives any advice for acquiring net income generating assets, but reading between the lines (and given the context) the advice is to pursue entrepreneurship. While I strongly encourage people to pursue entrepreneurship when it makes sense for them to do so, I don't think it's a substitute for proper retirement planning and long-term investment as this article seems to suggest. And it's certainly not good retirement planning advice for anyone who doesn't already understand the basic differences between money, wealth, and assets as this article seems to imply.
Given the failure rate of entrepreneurs and start-ups on average, it seems quite strange to dismiss traditional retirement planning and long-term savings as too risky while encouraging entrepreneurship as the solution in the same article. Traditional retirement investment vehicles (low-overhead diversified ETFs with a mix of bonds, ratio depending on years until retirement, combined with taking advantage of tax-advantaged accounts such as 401Ks, IRAs, etc) isn't anywhere near as risky, especially over the long term. Remember, a single stock market crash in your 20s or 30s is going to have virtually no impact on your retirement savings in your 50s and 60s. When saving for retirement, you have to consider the timeframe involved. By the same token, risky entrepreneurship isn't all that risky when you're young.