What’s the fastest way to become a millionaire? Start with a $1 billion and invest in real estate.
It’s an old joke, but in the case of Donald Trump there’s something to it.
We don’t know the president’s true net worth, other than broad estimates in public filings and his own bragging on Twitter.
Trump talks up $10 billion. Forbes puts the number at $3.5 billion. Either way, he’s rich. But could he have been far richer than even his claim of $10 billion just by diversifying.
Forbes identifies real estate as the main driver of Trump’s wealth. New York real estate he owns is worth $1.7 billion, Forbes reports. Non-New York real estate comes to $630 million.
Tack on another $620 million in value for the golf clubs and resorts. Then $270 million in cash and personal assets, such as stocks and bonds.
Finally, his brand business you know, Trump University, Trump steaks, Trump ties and putting his name on other people’s buildings that’s worth $230 million. Depending on who you ask and what day you ask, apparently.
So what if Trump had put his money into stocks instead?
Let’s start at the beginning. As the story goes, Trump inherited two things from his father, Fred Trump.
One was a serious cash cow in the form of a government subsidy to build affordable housing in the outer boroughs of New York.
The other was $200 million from those investments. Unfortunately for Donald, the government program ended soon after he inherited it in 1974.
So young Donald went upscale, taking huge bets on Manhattan skyscrapers in a bid to turn his inheritance, already substantial, into a major fortune.
He succeeded, yet in the 1990s Trump was threatened with bankruptcy after an ill-advised investment binge that included hotels, casinos, more big buildings and an airline.
It’s a testament to Trump’s craftiness that he was able to convince his lenders to hold off or face years of litigation.
Along the way he has made friends and, of course, enemies. By one count, he has been named in more than 4,000 lawsuits over the decades. So Trump spends a lot of money on lawyers.
None of it seems to matter to him personally. As he once tweeted, "Money was never a big motivation for me, expect as a way to keep score. The real excitement is playing the game!"
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Excitement, wealth. That appears to be the point for someone like Trump. Yet he could have done it in an easier, less dramatic and, frankly, much more lucrative way.
How? Just owning the stock market.
Assume Trump inherited $1 in 1974, right on Jan. 1. If he had invested that dollar in the broad stock market and reinvested all dividends, by the end of 2016 he would have had $84.11.
Scaled up, the $200 million in "starter" money from his father today would be worth $16.8 billion. That’s a far cry from $3.5 billion.
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Wait a minute, you might say, if he invested $200 million in 1974 and has $3.5 billion today, that’s a return (over 43 years) of 6.9% per year. Not too shabby!
Ah, but here’s the magic of common stock investing using low-cost index funds. Because of reinvested dividends, the adjusted growth rate of stocks over all those years was 10.9% per year.
That seemingly small difference, the gap between 6.9% and 10.9%, explains the huge difference in outcomes. The power of compounding creates a gain that’s close to five times more money.
If Trump had just bought the market and played golf, instead of being ranked 544 on the Forbes World’s Richest List, he could have been at 54, rubbing shoulders with the likes of Ray Dalio and Carl Icahn.
What’s more, he wouldn’t be spending so much time in court, nor would he have risked a massive, career-ending personal bankruptcy case along the way.
Less "excitement" and more money. It’s an easy decision, yet like Trump so many retirement investors remain determined to take risks they don’t need to take.
Investing is easy. It’s risk that’s hard to measure. Understanding that is the key to retiring with more.