Letter to the Editor of The Wall Street Journal
In response to Getting Going article by Jonathan Clements, October 11th 2006
The recent article by Jonathan Clements on the new book Why We Want You to be Rich I wrote with Donald Trump had very little to do with the message of our book, and everything to do, apparently, with his personal agenda.
We wrote the book to stress the importance of and dramatic need for financial education. Why is it we do not teach financial education in our schools?Â Through financial education you can become an active investor rather than a passive investor.
Without financial education, you may indeed be best served by being a passive investor and turning your money over to a financial advisor to invest in mutual funds. However Mr. Trump and I stress that by becoming financially educated you can become an active investor and create a better financial future for yourself and your family.
It is your choice. Do you want to be a passive investor, or an active investor? Do you want your financial future controlled by your employer, government, financial advisor, or financial journalist? Or do you want to be in control of you life?
While our advice may fly in the face of the traditional advice (â€œsave money, invest in mutual funds and diversifyâ€) it provides a fresh alternative to this tired mantra. How many people do you really know who have become financially free through saving money and investing in mutual funds — in comparison to people who have built successful businesses or invested in real estate?Â We trust your readers know the answer.
Mr. Clements does not argue with the fact that we face a â€œgrowing trade deficit, burgeoning national debt, a depreciating dollar and baby boomers with inadequate savings, all of which makes our financial future shaky.â€ However, in the face of these dramatic economic shifts, his advice is to do more of the same old advice, â€œpurchase funds with rock-bottom annual expenses.â€ In essence, remain a passive investor, ignore these dramatic uncertain economic times and hope for the best. We suggest that it is time to change the status quo, get educated and become an active investor.
In comparing the differences between the various investments â€” businesses, real estate and stocks or mutual funds â€” we stressed the difference in the amount of control you have as an investor. For instance:
Ask yourself, do you have more control over your mutual funds or your own business?
Can you call the mutual fund manager and discuss the investments he is making? Not likely.
As a shareholder of a blue chip company, can you call the president of the company to discuss the corporate strategy? You can certainly place the callâ€¦ but will the president take it? Not likely.
Mr. Clements fails to even mention the topic of control even though it was a significant part of his discussion with me. Owning your own business not only enables you to have more control over your investment, it also allows you significant tax advantages.
Even more blatant is Mr. Clementsâ€™ assertion that you â€œcan borrow against funds held in a brokerage-firm margin account and investors make tax-deferred exchanges all the time, by trading within their retirement accounts.â€ He doesnâ€™t tell you that when you borrow on margin you are borrowing against your own personal equity, and you are personally liable for any loss. In contrast, when you borrow your bankerâ€™s money for a piece of real estate you can receive non-recourse financing, where only the underlying real estate serves as collateral. You are NOT personally liable in a non-recourse loan.
What he also fails to tell you is that by holding stock and/or mutual funds within a retirement account, you are converting the tax rate from a long-term capital gain rate of 15% to an ordinary income rate when you withdraw the money from the account at the much higher level of income tax.Â In other words, you are foregoing paying 15% on income today so you can pay up to 35% on it later. (Plus any related state income tax).
Why would anyone ever do this?Â Because Mr. Clements would tell you that when you retire your income tax rate will drop and therefore your tax rate will be lower. This may be true if you are not richâ€¦ or not planning on ever becoming rich. Do you really want to plan on being poorer?
Why We Want You to be Rich was written because Mr. Trump and I want you to plan on being richer, not poorer, in your retirement years.
Finally, Mr. Clements contradicts himself, providing the very proof that a mutual â€œfund company â€˜receives 80 percent of the returns.â€™â€ When he states, â€œMr. Bogle does indeed note that, if you invested $1,000 at 8% a year and paid 2.5% in total annual costs, your gain after 65 years would be $32,465, or almost 80% less that the $148,780 your would have amassed if you hadnâ€™t incurred any costs.â€ You can do the math.
However, we would further state that the same $1,000 a year could generate a much greater return than even the 8% if you become financially educated and become an active investor.
In the final analysis, we would tell Mr. Clements that it is not what you do for your paycheck that is important.Â It is what you do with your paycheck that will make you poor or rich.
Financial education can give you back control over your financial life.