The Millionaire Next Door

A Bitter Lesson

From the news reports that I have read about the Madoff scandal, most of the people who were highlighted lost all or nearly all of their wealth through investing with Mr. Madoff.  What if these same clients had an investment portfolio similar to that of the typical millionaire in America? Then less than 30% of their wealth would be invested in publicly held stock, i.e. common stock managed under the Madoff brand. If they did the maximum they would have lost would have been less than 30% of their wealth.

Back in 1985, I put together the first set of commandments for building wealth based on my research of the habits of self made millionaires.  One of the most important commandments was “Thou shall not have a single source of financial advice.”  And since that time I have preached this message. 

When the investment gurus talk about diversification, they show how very parochial they are. Real safety is not in a diversified stock portfolio.  One of the reasons that real millionaires are economically successful is that they think differently.  Many a millionaire has told me that true diversity has much to do with controlling one’s investments; no one can control the stock market. But you can, for example, control your own business, private investments, and money you lend to private parties.

In a way, the credit crisis of 2008-2009 is serving as something of an intervention.  But for the treatment to work, people must begin to think and act for themselves when it comes to investing and especially selecting sources of financial advice.

3 thoughts on “A Bitter Lesson”

  1. Right on the mark here…and if you’ve bought into the typical broker’s ‘buy and hold’ philosophy for the last 10 years, you probably made a 0% return on your money in the ‘mutual fund’ market. Does that make you happy? You have to be an INVESTOR, not a BUY AND HOLDER, to be in charge of your money. If you’re an INVESTOR, you take profits when they materialize. If you’re a BUY AND HOLDER, you just see ‘paper’ returns, until the market goes down and you lose those ‘paper’ returns. If you’re not involved in your DAILY investments, don’t complain when you don’t really make any money over time.

  2. I would like to see some amplification of this idea with some suggestions. If one does not own their own business, and they do not have significant wealth to invest, how do they diversify out of stocks? I have about 65% of my net worth in stocks. I have done very well with stocks but would love to bring that percentage down if I knew a better way to diversify. Thanks!

  3. I could never put funds with a private equity manager or the Madoff ilk.

    If one can get a return through mutual funds (T Rowe Price) or index funds (Vanguard) or thru their pension (Thrift Savings Plan (Fed government)) that is as good as the return of the major indices (Dow, SP500, NASDAQ, Russell 2000, etc.) then why would one give funds to private firms?

    It can be trouble as these licensed brokers can turn into hucksters. Its well documented.

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