https://www.financialsamurai.com/the-two-levels-of-rich/
It’s safe to assume the vast majority of you reading Financial Samurai want to be rich. I trust those of you who’ve been reading this site between 2009 and 2012, when I was writing heavily about investment strategies, have indeed become much richer. The compounding forces since then have been enormous.
We are probably one of the richest communities on the internet today based on all the surveys I’ve conducted. For example, 35% of you have a net worth of between $300,000 – $1 million. While 25% of you have a net worth over $1 million. Not bad compared to the median net worth figures who have less than $100,000.
Despite our good fortune, it’s worth discussing the two levels of rich. Because since I started this site, it’s clear one level of rich has pulled far ahead. And that one level of rich didn’t do so by investing in index funds.
I know we all love index funds. They are the personal finance community’s #1 recommendation for where to invest our money in stocks. However, it’s hard to get really rich off index funds alone.
In addition, if you want to achieve financial independence well before the traditional retirement age of 65, investing only in index funds is probably not going to cut it.
The only way to get rich sooner off index funds is to consistently invest large sums of money. But that’s kind of like saying to get richer, start with a lot of money.
The reality is, there’s a whole other level of rich that has little to do with investing in index funds. As one centi-millionaire once told me, “Investing in index funds is what middle-class people do who don’t know what to do.”
I’m a fan of index funds. Over a 10-year period, the vast majority of active fund managers underperform their respective indices due to high fees and poor investing acumen. However, as I look back on what enabled me to leave my job in 2012 and stay unemployed, it wasn’t index funds.
I view investing in index funds as a low-cost, lower-risk way of investing in public equities. Investing in an S&P 500 index fund or ETF is my default setting when I’m buying the dip, but don’t have strong conviction.
I understand the downside of investing in an S&P 500 index fund or ETF. A typical bear market lasts about a year and has about a 35% drawdown. I’m good with that.
Investing in an S&P 500 index fund is like investing in a super-tanker. It doesn’t move very fast – at historically a 10% annual return – but it also doesn’t easily veer off course or sink to the bottom of the ocean either. Sooner or later, the super-tanker will get to its destination.
Index funds have acted like a pleasant tailwind pushing me more towards an ever-moving financial independence number. But they weren’t the difference maker.
The first level of rich is what I consider the mass affluent class. The mass affluent class is highly educated, motivated, and upwardly mobile. The mass affluent class is considered rich by general standards, but often doesn’t feel rich.