How to Get 15% on Your Money This Year
February 1, 2007

Jessie, a member of my extended family, has come to the ETR conferences and read all my books on wealth building, but she isn't happy with the advice I've been dishing out.

"For someone like me, it's not realistic to think about starting a business. I'm fifty-eight years old. I've already had a career. I just need to figure out how to make my money work harder so I can retire comfortably."

Jessie figures she and her husband need about $150,000 a year in income to enjoy the lifestyle they want. Right now, their passive income is next to nothing. She earns $35,000 a year as a substitute teacher. He owns a business that provides them with about $80,000 a year. They have about $600,000 in equity in their home and a summer cottage, plus about $250,000 in cash and savings accounts.

"We got a tip on a stock last year, and made a nice chunk of change on that," Jessie tells me. "A friend of mine says that he can get us into a hedge fund that guarantees 35 percent a year."
What is Jessie thinking?

We talk about the fundamentals of stock investing. I explain to her that, for a hundred years, the stock market has been averaging about 10 percent annually. I ask her if she really believes a hedge fund could outperform that long-term average by 350 percent. She doesn't know, but she's willing to find out.

"We don't have the luxury of being satisfied with 10 percent," she tells me. "We don't have your money."

Ouch.

I stop myself from saying that if they invest in some hedge fund Jessie's friend recommends it won't be long before they don't have their money either.

We talk about the normal relationship between risk and reward. I tell her that investing in something that you know nothing about and over which you have zero control is my idea of taking a lot of risk.

"How much risk are you willing to take?" I ask her. "To get that 35 percent, how much of your net worth would you be willing to lose?"

"What do you mean?" she wants to know.

I say, "Let's assume that this hedge fund has indeed delivered 35 percent to its investors for some period of time. To get that kind of return in the future, it needs to be more than good. It needs to be lucky. Would you invest in it if there was a 50 percent chance you'd lose every penny?"

"Hell, no," says Jessie.

"How about a 20 percent chance?"

No again.

"How about a 10 percent chance?"

Still a no.

The only risk she would take, she says, is a one percent risk. And she isn't too comfortable with that.

"Congratulations," I tell her. "You are a very conservative investor. But as a conservative investor, you have to be very careful. I'm a conservative investor, and I wouldn't think of risking more than two percent of my investment portfolio in hedge funds."

I'm not knocking hedge funds. I'm just saying that, as a conservative investor, I recognize that they come with significant risks. I'm willing to throw some money at one if it comes with good credentials ... but not much.

"So, what are you saying?" Jessie wants to know. "That it is impossible to get 35 percent on my money?"

"On stocks, on a consistent basis for a period of more than a few years, I am happy to go on record and say yes, it's impossible."

"So what can I get?"I tell her I think she could easily get the 15 percent she is looking for if she abandons her dream of making that kind of ROI lazily and passively and accepts the fact that she will have to work for it.

"Doing what?" she wants to know.

There are really only two options when it comes to getting a 15 percent return without taking any giant risks, I explain. And those two ways are by investing in a small business and/or real estate.

"If I wanted to hear that, I could read one of your books or go to one of your seminars," Jessie tells me.

"That's true," I admit. "And here I am giving you the same advice for free."

"I'm too old and tired to do that sort of thing," she says. "I need something simple and easy. Something I can do in my spare time that will be fun and won't stress me out."

"Like investing in hedge funds?" I ask.

"Right," she says.

"Oh. Now I get you," I say.

posted by M. Masterson @ 10:41 AM,

6 Comments:

At 11:44 AM, Blogger Ulli...The Wall Street Bully said...

Michael,

In my advisor practice, I run across prospective clients like that on occasion. I just shake my head, make similar arguments and walk away.

You can lead a horse to water, but you can't make him drink.

Ulli...

 
At 3:17 PM, Anonymous Nolan Matthias said...

How is it possible that someone can expect to give there money up to someone without any knowledge of what they are doing, and expect a good return.

Sounds like hedge funds are more about good sales people than realistic results.

Nolan M

 
At 11:00 AM, Anonymous David Morgan, Copywriter said...

Michael -- Of course that's good advice you gave.

There are times in our lives, however, when we cannot listen to reason nor accept reality.

Hopefully we get over it.

But it can be daunting when we are tired, maybe beaten in some ways, and feel that here we are being asked to start over... to actually take action and DO something...

And of course, only we can keep our ship from sinking (in some cases) or build a new reality for ourselves.

I've been re-reading Automatic Wealth and re-re-starting my career. Somehow closing the doors on 2006 lets a world of possibility open for 2007.

Best wishes,
David Morgan

 
At 1:57 PM, Blogger JEB said...

I can relate to Jessie to a certain extent. I'm the same age with similar figures applying to my situation, except that my present income as a self employed consultant and partner in a web development company isn't generating the kind of income stream she and her husband has. I'm also the sole provider as my wife can't work.

I agree that putting everything into a hedge fund is too risky - maybe she was reading too many of the Agora hype newsletters where a $ 4000 investment by some dishwasher or parking lot attendant has returned $ 783,870.00 or something wild like that in three months, as so often advertised!

It is a challenge, when neat 25 year investment plans no longer apply to your reality and quite substantial returns have to be made rather quickly but not in dreams and schemes but the real world.

 
At 5:14 AM, Blogger Tony said...

great advise mike.

I am in sort of the same situation she's in except that I am much younger (late twenties) and bringing less income. I don't have the money to capitalize on huge gains, but what I do realize is that there are risks to take.

IMO, i do believe there are risk in real estate, but that's another story.

patience is the true key to virtue, and if Jessie's story is like any of your other average stories, then I feel her hedge fund investments (considering she embarks on it), will bring about an awful time for her. hopefully, she finds what she hopes, but there are two many lessons and rules that she violates against Mr. Market within just a few paragraphs that you mentioned.
- Don't buy on hot tips
- Don't try to outperform the market
- Be willing to take risk.

And those are just a few I can think of off the top of my head.

As for myself, I'm forced to start slow, but i'm pleased to say that I am starting and am already seeing progress. I don't expect to actually view my rewards until the next 10-15 years from now.

 
At 6:42 AM, Anonymous Brad Emery www.ideas2earn.com said...

Sometimes it is a matter of explaining to people that they can do something and that it is not a huge change. Your friend already had a large chunk of her net worth in real estate, but didn't see it that way because it was her home. Equally she still goes to work every day teaching, and although she is tired she doesn't realise that a relatively small change could make a difference.

My suggestions would be that she look at going into the training business which can pay significantly more than being a substitute teacher, and it is not very different from what she is already doing.

Equally, assuming that they don't want to sell their house, they could remortgage it and buy a smaller property or two, and rent them out for an assured longer term income stream.

Sometimes people just need to feel that they are doing something but the jump from where they are to where you are is massive.

I was deeply in debt a few years ago and could not find the way out. Against standard advice I stared saving alongside making my credit payments and 5 years on I am in great shape financially. Making a start is often the key.

 

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