The Two-Headed Wealth Killer

There is a two-headed snake that is wrecking the finances and retirement plans of many Americans. These twin killers are stocks and debt. Although seemingly unrelated on the surface, these two things will prevent you from doing the one essential thing for achieving financial freedom: putting your money to work for you.

Warren Buffett once famously said, “If you don’t find a way to make money while you sleep, you will work until you die.” In other words, if you don’t learn to put your money to work for you, you will always be working for it. If you don’t find a way to make passive income independent of your day job, you will always rely on your job to pay your bills.

Most Americans understand that investing is one way to make your money grow. However, most have it ingrained in their financial DNA that the only way to invest is in the stock market. The conventional wisdom is to put some of what you earn away in the stock market. Most don’t have time to actively trade stocks, so they entrust their portfolio to a financial adviser or just put money in a mutual fund through a 401(k) or IRA. The hope is that the portfolio will grow enough to adequately provide for their needs by the time they retire.

What investors don’t take into account is that stocks can be volatile and underperform, and the fees associated with investing in mutual funds or relying on a financial adviser to manage your stock portfolio can also eat up wealth.

The volatility of stocks can sink portfolios, and it spares nobody—even Richard Branson, who has suffered severe losses due to stock market volatility recently. Richard Branson, once worth over $6 billion, saw his fortune plummet by more than half since 2021 due to significant losses from his stock holdings. Branson’s portfolio primarily consisted of cash-burning U.S. companies, some of which saw their values decline by up to 95%.

Branson’s fall from grace illustrates the dangers of overreliance on stocks in an investment portfolio, and if you’re a potential retiree relying on a 401(k), IRA, or stock portfolio, the timing of stock market volatility can derail your retirement plans.

For example, in 2008, during the financial crisis, the stock market lost half its value. Potential retirees suddenly saw half their retirement savings disappear overnight and were left in financial shambles.

It’s not just stock market volatility that prevents the average American from reaching their financial goals. The fees associated with relying on someone else to manage a stock portfolio can also drain resources.

For example, financial advisers, mutual fund managers, ETF managers, and hedge fund managers all charge a management fee as a percentage of assets under management. These fees range from 0.25% to 2.5%. For example, the average mutual fund fee as a percentage of AUM is 1.1%.

Stocks can be volatile, and the fees associated with managing your stock portfolio can be draining, but that doesn’t stop the average American investor from relying heavily on them for their investments. So, while the average American allocates the majority of their portfolios to traditional assets like stocks and bonds, the ultra-wealthy go a different route. They prefer income-producing commercial real estate (CRE) and private investments (i.e., investment in private companies or private equity).

CRE and private investments offer the one thing Warren Buffett declared essential for breaking free from your job: passive income. Leveraging the expertise of others through passive cash-flowing investments—whether equity or debt—in CRE or private companies is how the ultra-wealthy are able to achieve above-market returns insulated from market volatility in their sleep. And multiple streams of income can compound wealth and accelerate the timeline for retiring early.

While an overreliance on stocks is one obstacle to Americans investing in passive income opportunities like CRE and private equity, another significant obstacle is debt.

You know American overspending and debt are out of hand when a Mexican Tik Toker calls Americans out for it. Mexican TikToker Angel De La Rosa, known as @minipapixm, recently went viral for pointing out these financial struggles. He noted that many Mexicans own their homes and cars outright, whereas Americans often find themselves in debt, trying to keep up with a lifestyle they can’t afford. He’s not wrong. Many Americans find themselves trapped in cycles of debt.

A recent survey by the Fed revealed that 67% of employees couldn’t cover a $400 emergency expense.

Investing in cash-flow alternatives begins with savings, and if you continue to spend beyond your means and go into debt to do so, you’ll never be able to break out of the debt cycle. Whether you make $50k/year or $500k/year, broke is broke.

If you want to get ahead, avoid stocks. Model the ultra-wealthy, who consistently allocate more than half of their portfolios to cash-flow alternatives like CRE and private equity/debt. Also, avoid the other wealth killer, debt.

Spend less, save more, and put your money to work for you. It’s the only way you’ll be able to break free of your jobs and gain financial independence.