This post is part of a series:
Part I Part II Part III Part IV Part V Part VI Part VII Part VIII Part IX
When we left off yesterday, we were pondering a conundrum. What do you do when you have large investment gains on paper, but you know that you’ll have to pay a massive tax on them if you sell?
After all, the whole point of investing is to become financially independent. But if you constantly lose 15-30% of everything you make to taxes, it’s very hard to break out. You lose the power of uninterrupted compounding.
In my case, I had some large gains in Bitcoin. And as I watched my Bitcoin holdings appreciate in value, I started to realize that we had been going about it all wrong.
We have been conditioned to think that the key to getting out of the rat race lies in building a big “nest egg”. That’s been financial planning 101 for decades now.
As such, we are taught to chase capital gains. That’s why investors obsess over portfolio returns.
It’s dated now, but I remember Dave Ramsey telling people to slog their money away in mutual funds that would grow their wealth 7-8% a year. That’s the nest egg mindset.
Then you get things like the “Rule of 72” and other slogans that further pushed the capital gains approach. It’s all been a scam. I’m not mincing my words on that.
The reason is twofold.
First, there’s a massive industry that exists to extract 401(k) fees, actively-managed fund fees, assets under management (AUM) fees, and trading fees.
And these days every online brokerage makes money by selling order flow to the hedge funds. The hedge funds pay for the ability to front-run every trade that we make.
Front-running is where they get to see our order. If we are trying to buy something, they buy it first. Then they sell it to us at a slightly higher price. It’s risk-free profit.
This happens all the time now. It’s the only way trades can be commission-free.
Okay, here’s the second reason the nest egg approach is a scam… There are only two possible outcomes with it.
The most likely scenario is that we slog our money away in financial assets – stocks and funds – and we watch our portfolio go through a roller coaster of booms and busts over the next twenty, thirty, maybe forty years.
Then we hope whatever is there in the end will fund a decent retirement after the taxman claims his lot. And with inflation baked into the cake, there’s no guarantee it will.
The less likely scenario is that we hit it big with some investments and we work up to our nest egg “number” in less than twenty years. Then we start to think about retirement… and we realize just how fragile our situation is.
For one, we’ve got the tax issue. The number we see on paper isn’t our actual number. Not after the taxman gets ahold of it when we sell.
And then we have to come to grips with the fact that if we do retire, the only way we’ll have money to live on is if we sell off our assets. This requires us to gradually deplete the nest egg we worked so hard to build.
The more we deplete our assets, the more uncertain our future is. And the less we have to pass on to our kids and grandkids.
And that brings us to the logical conclusion. The nest egg approach forces us to choose between income and assets. If we want our income to go up, our assets have to go down.
That’s the scam.
If we want to achieve financial independence, this is exactly what we shouldn’t do.
Fortunately, there is a solution. There’s a better way. More on that tomorrow.
Until then, don’t forget to check out our new video workshop. It’s only available until October 8th at midnight.
The workshop details exactly why the “nest egg” approach doesn’t work. Then it presents the driving ideas behind our new project The Phoenician League.
As I mentioned a few days ago, The Phoenician League is our new membership designed to make building monthly cash flow as simple as sending some emails. I’m serious about that.
That’s because the membership connects people to professional investment networks… and to each other. It’s the “Who Not How” principle in action.
What’s more, The Phoenician League provides a tried-and-true system for working up to $10,000 a month in investment income in potentially six years or less.
It’s just a process that anybody can follow… especially when they have direct access to the professionals they need to make it all happen.
For more information, you can access the workshop right here: https://phoenicianleague.com/workshop
As always, we have a transcript available for those who may not have time to go through the entire video.
Just remember, access closes on October 8. Please give it a look before then.
-Joe Withrow