Back in January of 2017, most personal finance professionals, advisers, bloggers, and just about anybody willing to give you money advice said to avoid investing in crypto-currencies such as Bitcoin.
The price of Bitcoin at the close of 2016 was $963.74 per $1 USD. On the last day of 2017, the price was $14,156.40.
That’s a 1,369% gain in 365 days.
Whether you subscribe to the opinion that Bitcoin is a bubble or the future of currency, crypto-currencies are an extraordinarily volatile asset class.
Bitcoin was and still is a speculative investment with enormous risk.
Nonetheless, Bitcoin was an excellent investment choice in 2017.
What was #1? A currency called Verge rose 1,171,479%.
Past performance is not indicative of future results.
This is Not About Bitcoin
I’m not qualified to offer readers any advice on investing in Bitcoin or other digital currencies. I personally did not invest in Bitcoin and do not plan to.
Because I tend to make “smart” money decisions. Not risky ones.
I invest over the long-term and avoid the flavor of the day.
I don’t borrow money to invest.
But people do become very rich by ignoring the “smart” advice and making risky bets. Multi-millionaires have arisen out of the crypto-currency craze and will go on to live lavish lifestyles and start new businesses.
Are they smarter than us? Lucky opportunists? Just not afraid to take a risk?
Or are they doomed to lose it all when the euphoria is gone? Some might. But nimble investors will exit with profits.
Back in the dot-com era, famous entrepreneur Mark Cuban cashed out when he and his partners sold Broadcast.com to Yahoo in 1999 for $5.7 billion dollars.
Yahoo shut down Broadcast.com in 2002 and sold most of itself to Verizon in 2017 for $4.48 billion in one of the saddest tech stories of the past century.
The crypto-currency craze may mint more billionaires in a similar fashion, but far more amateur speculators stand to lose a lot of money if (or when?) the hundreds of recently minted digital coins falter. Trying to predict which digital coin will ultimately prevail or fail is a tricky game.
Netscape was an innovative company there for a while. So was Pets.com… and Webvan… and Amazon.
The vast majority of people do not have the stomach to risk everything they have on a big idea that could make them super-rich. Perhaps it’s because being super-rich does not necessarily make you happy (so I’ve heard). But losing a lot of money will most surely make you very unhappy.
So why bother?
The Infinite Ceiling
In a recent post called What If I Don’t Go Back To Work, I wrote about the prospect of potentially focusing on my online business full-time instead of going back to a 9-to-5 job. When Business Insider picked up the story, they reworded the title to focus on one point I made.
That a day job might not be the best way to build wealth.
The traditional smart advice kids hear in high school is to get a college degree, maybe a masters. Then land a full-time job, contribute to your 401(k) for 30-40 years and Voila!, you’ve made the smart money moves required to retire by age 65.
Talk to the Mark Cubans and Steve Cases of the world and they’ll tell you to take big risks while you’re young. Start a business or make high-risk investments for big returns. If you lose it all, you’ll have time to clean up your failures with a full-time job later on.
As we age and shoulder more responsibility, taking big risks is more difficult because the consequences of failure may reverberate down to our dependents.
Not to say you can’t dabble in cryptos, buy a few speculative call options, or work for a startup. But taking a significant risk where you put it ALL on the line to strike it rich is not considered a smart money move when you have a family.
When I wrote that piece about potentially not going back to work, I was fully intent on going back to work. And I still am.
Earning a salary and benefits from a full-time job can be rewarding both professionally and financially. But my earning potential as a full-time employee in my field is capped at a ceiling. This is true for most full-time jobs and careers.
My online business, on the other hand, has no earnings ceiling whatsoever. It’s what makes the internet such an exciting venue for business.
By returning to a full-time job, I will not be pursuing that infinite ceiling with 100% of my energy. Instead, I’m doing what my parents and most everyone else thinks is the smart thing to do. I’m getting a job for the steady salary, benefits for my family, and peace of mind.
But I’m going to attempt to have it both ways. Return to work for the security and “smart” money and still pursue the infinite ceiling by growing my online business on the side. Though less of my brainpower will be focused on entrepreneurial pursuits, the work I’ve done since its inception has positioned it for growth.
Fortunately, the side business I’ve chosen does not require full-time attention for success.
The Smart Money Move of Today
The S&P 500 returned 21.83% for 2017, including dividends.
That sucks compared to Bitcoin and Verge. But awesome by any other measure.
By simply following Warren Buffett’s advice and buying an S&P 500 index ETF such as the SPY, you experienced excellent returns since the last recession.
A 20% gain from index investing in one year won’t make you rich. If you’re content to invest all of your tax-advantaged contributions and surplus cash flow into equity index funds and ETFs, you’ll only match the market indices and keep up with everyone else doing the same.
But just by owning stocks, you’re better off than about half of all Americans who do not.
Index investing is the “smart” money move of today. Your money will grow a lot more than the one-half of Americans not invested, but you’ll only earn about the average compared to the other half.
Combined with low annual expenses and a high savings rate, following this path is enough to become wealthy. Especially in a bull market like we’re in right now.
But it’s not enough to become super-rich, loosely defined as wealth beyond financial comfort, to the point of having more money than you know what to do with it.
To build a significant net worth, let’s say to enter the wealthiest 2%-3% of U.S. residents (net worth greater than about $5 million in today’s dollars, according to this calculator), it’s going to take more than a high savings rate and consistent index investing for most of us.
What’s Really Preventing us From Becoming Rich?
For more than a decade, I built, tweaked, and refined a few elaborate money spreadsheets on a daily basis. I was so concerned with counting each and every penny I earned and spent that I ignored the precious resource I was wasting.
Even though I still believe it’s important to start saving and investing early and to cherish every penny in your name, counting your earnings doesn’t earn you more. Tweaking your budget, clipping coupons, switching to a higher-interest savings account, or even pursuing a higher education degree will not make you rich.
As written by Jeff Haden of Inc., in the article entitled The Only Way to Get Really, Really Rich (No matter how you define rich):
…the only way to become really rich financially and really rich personally–in other words really, really rich–is to start your own business. Even if it’s just on the side. Even if it’s just a slightly stepped-up hobby.
There’s no reason not to. You don’t have to quit your job right away; in fact, you probably shouldn’t. (One of the best ways to minimize your risk is to keep your full-time job while you build your foundation for success.) Plus the basics of starting a business are easy; you can do it in one day.
It’s a worthwhile read for anyone contemplating entrepreneurship or in the midst of building their business. Your own business has the potential to make you both financially rich and rich in life, due to the sense of purpose and excitement that comes with entrepreneurship.
And the article is a reminder that the “smart” advice we were given in our youth and still receive today is more accurately described as safe advice, not a path to riches.
So you could say that working for someone else and deploying a basic equity investing strategy is preventing you from becoming rich, counter to what you normally hear.
See, I told you this wasn’t about Bitcoin. But, you know, even if you invested $1,000 in Bitcoin on December 31st of 2016, which would have taken some fortitude, that investment would “only” be worth $13,692. A nice chunk of change, but hardly life-changing.
To get rich via investing alone would take many big wins like that, and a lot of time researching investments in hopes of beating the market returns that come from indexing. Which, by the way, 80% of professionals can’t do.
Why not take some of that money and invest it in starting your own side business? Business ownership is how a big portion of the Forbes 400 Richest Americans acquired their wealth as Haden points out in his article. And it’s how many of the top 2%-3% earned their wealth too.
This is certainly not what I had in mind when I started my business. But it’s become more clear since. Though my business was never meant to make me financially rich and probably never will. I set out to make a few extra bucks a month to help support my family. Based on that, it’s been a success.
Craig is a former IT professional who left his 20-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more.
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