Ask any financial advisor for their top five long term investments, I would wager that the majority would include retirement annuities, your house, and well-diversified exchange traded funds. What would you say if I told you that these were the WORST long term investments? You may think that I have gone bonkers, joined the circus and am now bouncing jelly beans off my belly and pulling live pigeons out of my ear. But let me explain.
1) RETIREMENT ANNUITIES
I hate annuities
Retirement annuities are crap investments. The only beneficiary is the annuities salesman. According to billionaire investor Ken Fischer, if you invest $1 million investment it will help to put a kid through private college. The problem is that it is not your kid. It is the kid of the annuities salesman. Fisher says you would be better off cutting a check directly to the salesperson and then investing the balance directly in stocks and bonds.
Do not be fooled by the sales rhetoric. Annuity salespeople will regale you with the tax benefits, the power of compounded growth, the discipline of saving (a lie that we have debunked), supporting your dependents and long term stability. If you are financially educated and disciplined, you can do better with direct investments.
Annuities are black-box investments – there is no transparency and accountability of results. The fees are bordering on criminal. Moreover, when you retire with that annuity, you will get a stream of income akin to a quaint Scottish brook. You deserve the whitewater rapids on the Zambezi River.
2) YOUR HOUSE
Repeat After Me: Your House Is Not An Asset
The American dream is built on homeownership. The 2008 financial has its roots in the 1990s. In 1995, Bill Clinton took time off from using Monica Lewinsky as a human humidor. He rewrote the Community Reinvestment Act. This pressurized banks to lend to low-income neighborhoods and facilitated the rapid increase in subprime lending. Clinton did this to strengthen his political base in those lower-income households. He made it easier for these families to attain the American dream, and thereby increased the probability of being reelected in 1996. Bill is a cunning fox.
Homeownership enslaves people financially. According to Zillow, one-third of homes in the United States in 2018 were "free and clear" - they were not encumbered by a mortgage loan. Two-thirds were encumbered. There is nothing like a 30-year mortgage bond to tie you down financially. If you have a mortgage and a job, the pressure to stay in that job until that death pledge has been paid off is immense. Mortgages are the single biggest reason standing in the way of financial freedom. To make matters worse, most people believe their home is an asset.
Robert Kiyosaki, in his book Rich Dad Poor Dad, says the asset/liability test is simple. Assets put money in your pocket. Liabilities take money out of your pocket. If you living in a house, and it is mortgaged, you are paying rates, taxes, and interest on the loan. It is a liability. If it is "free and clear" it is still a liability. You still have to pay rates and taxes, not to mention lights, water, and general maintenance. But property prices always go up. That is a fallacy. Americans who bought houses before the financial crisis of 2008 will paint you a different picture. Real estate is like any asset – its price can rise or fall and if you are banking on your house price appreciating in value, then welcome to the world of speculation. Real estate is a very powerful income-generating asset, but it is only an asset when it generates income and puts money in your pocket.
3) EXCHANGE TRADED FUNDS
"There is a manifest destiny for ETFs. That they are the structure people will use to get exposure to securities in the future, and mutual funds will be banished to the dustbin like typewriters have been replaced by computers. It's just a better technology and so it will come to replace funds over the next 20 years."
The growth in exchange-traded funds (ETFs) has been exponential. It took 8 years (2000 to 2008) for the U.S. ETF industry to reach $1 trillion in assets. Growing from $3 trillion to $4 trillion took only 2 years (2016 to 2018). According to Blackrock, the New York Yankees of ETFs, global assets under management in ETFs is $4.7 trillion as of 2018. To understand the size and scope of this number, the nominal GDP of the United States was $19 trillion in 2018. China boasted a nominal GDP of $12 trillion, Japan $4.8 trillion and in fourth place Germany with $3.6 trillion (come along now Angela Merkel, put your back into it). Total assets under management in ETFs was the size of the world's third-largest economy.
So what do I hate ETFs? I think ETFs are fantastic instruments for the financially illiterate. They are funds that trade like stocks. Most ETFs track stock market indices. The Satrix ETF listed on the South African Stock Exchange tracks the JSE Top 40 index. The ETF exposes you to great South African stocks like media giant Naspers, Standard Bank, mining group BHP, luxury goods company Richemont, cell phone company MTN and paper company Mondi. The ETF acts like a diversified portfolio and therefore is an inappropriate tool for financial freedom. Buffett said diversification is for people who don’t know what they are doing. Buffett himself recommends that average investors invest in low-cost ETFs. Rebel financiers are not average investors.
The objective of rebel finance is to help you attain investment mastery through education and coaching.
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