Costly Mistakes Business Owners Make With Their Money … and How To Avoid Them

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Issue-#178_Handcuffs_300-sizeIf you’re like most of the business owners and entrepreneurs I meet, you work very hard. But as the saying goes, “It’s not how much money you make. It’s how much you keep.” And many business owners I talk to are frustrated because they don’t have as much to show for all their hard work as they think they ought to.

If you’re discouraged by seeing your hard-won profits disappear due to the roller coaster stock market, you’ll find this money and investing IQ quiz eye-opening.

Ready to test your knowledge? This three-question quiz will take far less time than going through your inbox, but the knowledge you’ll gain could let you take back control of your finances and have a retirement income you can predict and count on.

By the way, for best results, select your answer before you read the correct answer immediately below the four choices.

Question #1:

According to Morningstar, Inc., the top-performing mutual fund for the decade ending December 31, 2009, enjoyed an 18% annual return.

However, the typical investor in that fund wasn’t so fortunate. What does Morningstar say was the annual return of the average investor in the top-performing fund?

A. 15%

B. 11%

C. 3%

D. Minus 11%


D. Almost no one gets this right. The typical investor lost an average of 11% every year for ten years, even though the fund prospectus showed the fund rose by 18% annually!

You’re probably wondering how that’s possible. It’s simple. …

Mutual funds are required by law to advertise only the results of “buy and hold” investors, even though on average, funds are held for less than five years.

The reality is that – in spite of our resolve to behave logically, rather than emotionally – we typically buy a fund after it’s had a strong run and sell as it hits bottom.

It’s pretty hard to buy low and sell high if you buy high … even your most clueless customer knows that. Which brings us to …

Question #2:

According to DALBAR, a well-respected independent research firm, mutual fund investors consistently underperform the market indexes.

DALBAR’s 2012 Report revealed the actual returns investors have gotten over the last two decades. By how much have investors in equity mutual funds beaten inflation?

A. Less than 1% per year

B. 3% per year

C. 5% per year

D. 7% per year


A. The average equity mutual fund investor got less than half of the return of the S&P 500 over the last two decades – beating inflation by less than 1% per year.

The average fixed income investor got only 15% of the return of their benchmark, Barclay’s Aggregate Bond Index.

And the average asset allocation investor got less than 30% of the return of the S&P 500 – 2.12% per year to be exact – and didn’t even keep up with inflation.

Which may be why so many investors today are asking themselves if it’s worth all the roller coaster ups and downs and sleepless nights.

The rule of thumb I live by is, “If you don’t know the value of your retirement account on the day you want to tap into it, you don’t have a plan!” That only makes sense, doesn’t it?

Question #3:

What percentage of mutual funds, financial advisors and investment services underperform the overall market?

A. 100%

B. 80%

C. 50%

D. 25%


B. The consistent finding of most studies of long-term performance is that only around one out of five advisors (20%) are able to do better than a buy-and-hold strategy – whether those advisors edit investment newsletters, manage mutual funds or run hedge funds (according to the Hulbert Financial Digest, the definitive guide to investment newsletters). That means fully 80% of all mutual funds, financial advisors and investment services underperform the market.

And it’s not just because of the fees they charge, although fees do significantly drag down your returns. It’s because all the experts are humans, too, and are “predictably irrational,” buying and selling at the wrong times, just like the rest of us.

I learned about the fallibility of the experts the hard way. My husband and I have been investing since 1987 and we did all the “right” things – the things you and I have been taught to do. But we were frustrated, because we weren’t getting the kind of long-term gains we were promised.

Assuming that we were the problem, we decided to hire an “expert” to manage our portfolio. We researched the advisors profiled in several of those “Top 10 in the Country” lists and ultimately hired three very pricey money managers. And all three of those so-called “experts” lost us money – during the longest-running bull market in history!

On a related note, how long of a track record should a mutual fund or an advisory service have, in order to rightfully claim any expertise beyond sheer luck?

It may surprise you to know that successful track records need to be at least 15 years long to be meaningful.

That’s in stark contrast to all those lists you’ll find touted by personal finance websites and publications showing top funds for the past three years or even five years. It turns out even a ten-year track record is no better than a one-year track record, according to the Hulbert Financial Digest.

So how did you score? Were you surprised by any of the answers?

What You Can Do Now To Get Off The Roller Coaster

At the beginning of this quiz, I promised to tell you how to win control of your finances and grow a retirement income you can predict and count on.

Here’s how to do it:

  • Find a financial vehicle that increases in value every year – even when the stock and real estate markets are tumbling – and has a solid track record going back a century or more
  • Be sure the vehicle has ironclad guarantees
  • Only deal with companies that will let you use your money – for business expenses, cars, vacations, home remodeling, a college education, whatever – while continuing to grow your money as though you never touched a dime of it
  • And don’t settle for any plan that doesn’t offer you tax advantages

That way, instead of being held hostage to the whims of Wall Street and the greed of banks, finance and credit card companies, you can literally Bank On Yourself.

Does That Sound Impossible?

That’s what John Phillips used to think. John retired from law enforcement and decided he wanted to start a gun shop and range that could be a law enforcement training facility open to the public. But it was during the financial crisis, and banks had their capital on total lockdown. But even in good economic times, banks don’t like to lend money to people in John’s industry.

Fortunately, he had started two Bank On Yourself plans a year-and-a-half earlier. He took a $35,000 loan from his plan – with no questions asked other than, “How much do you want?” and “Where should we send the money?”

John set up a schedule to repay the loan to his plan on his own terms, instead of the bank setting the terms. He invested the money in his business and has since paid back the loan and borrowed a larger amount – four times.

He recaptured the interest he would have paid to a bank or finance company, and his plan kept earning the exact same interest and dividends – even on the money he had borrowed to finance his business.

Today, John’s gun shop is thriving and the gun range will be opening soon. When it does, it will be one of the largest gun ranges in the country.

Best of all, John has full control of the business and of his money.

The fact of the matter is, almost anyone can fire their banker and become their own source of financing.

Pamela Yellen is a financial security expert and New York Times best-selling author of Bank On Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future. Readers of Thriving Business can get a FREE Report on how to fire your banker and become your own source of financing, while growing your wealth safely and predictably every year. Click to download your FREE Report!

*Originally published as Issue #178 on March 15, 2013

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