Are the Top 1 Percent Safe? by Reese Harper

by Reese Harper

When talking to a new client, something I fear most is hearing about a serious investment loss. Suffering the aftermath of a bad investment is a distressing experience for anyone, and while some dentists can bounce back from small setbacks, big losses can put you in financial ruin.

The majority of successful dentists are in the top 1 percent of income earners nationally. This affords you a huge advantage when planning for retirement, but you are not exempt from seeing your finances turn upside down. What's sad is that you all have been in the trenches—you've studied your brains out and you've sacrificed for years to get to this point. There's no doubt you've earned it.

Something I can't quite wrap my mind around is just how rare it is for an above-average earner to convert his or her income into an above-average retirement. Shouldn't it just happen naturally? Well yes—that's exactly my point.

So I'm going to clue you in on something that will blow your mind. Ready?

The no-brainer retirement plan
People in the top 1 percent can retire quite easily by putting 15 percent to 20 percent of their annual income into a risk-free portfolio earning between just 3 percent to 4 percent. The risk-free portfolio is something professional finance people use as a worst-case scenario. It's the 30-year, U.S. Treasury bond. Not a great return—but an option that generates adequate income for someone with a very large portfolio.

Just think about that for a minute. If you do nothing but save a small percentage of your income, you'll retire just fine, risk free. How many people can say that? Most people have to take on more risk and deal with more volatility because their income isn't high enough to retire comfortably without getting a good investment return along the way.

It's time to make your income your greatest asset
I'm not recommending that you pour all of your money into such a conservative, risk-free portfolio. I'm simply illustrating the point that most of you don't need to take much risk if your primary goal is to accumulate enough money to retire early and comfortably. For most people, it's the accumulation of a large portfolio that really matters—not so much the return along the way. Your income is your greatest asset because it allows you to pile up large sums of cash quickly, as long as you don't screw it up!

So why do so many dentists struggle to retire on time if it's really this easy? The answer is simple: They screw it up. They compromise the no-brainer retirement plan by taking unnecessary risks that end up making it impossible to accumulate a large portfolio. They have one big loss—one big mistake. They just don't have enough years behind them to recover, nor to accumulate enough liquid assets to have a killer retirement.

Let's dive into this subject a little further by looking at some common risks.

Direct or private investments
Direct investments in real estate, businesses or investment funds are very different from publicly traded investments (mutual funds, exchange-traded funds, stocks, or bonds). These direct investments carry different risks, and are often the silent killer of many early-retirement dreams. I say "silent," because most people won't openly discuss them: Who wants to admit to losing money in a really bad investment?

Many people invest in opportunities that appear attractive without having adequate knowledge to distinguish the good from the bad, and without adequate financial strength to weather the potential losses. In other words, long before they've achieved financial independence, they start making serious commitments and gambles. Any gain is gobbled up by loss, and retirement gets delayed, often for years.

I've seen these investments pull retired professionals back into the workplace, force them to overextend their working years, and put strain on their marriages, families and friendships. The truth is, it's very difficult to avoid financial risk when you start moving into private, direct investments. These investments (unlike mutual funds, stocks or bonds) have very little oversight from a third party, like a professional accounting firm. With no third-party oversight, it's hard to see exactly what's going on and whether or not the opportunity is legitimate.

Apply this logic until you become financially independent. Financial independence means you have 20 to 30 years' worth of your annual personal spending earning the risk-free rate I discussed earlier. If you remember only one thing from my bad-investments spiel, remember this: Avoiding big losses is more important than making big gains. Here's an example.

Mismanagement and poor execution
Several years ago, I was hired to research a potential investment in a new massively multiplayer online (MMO) video game. Stargate Worlds, in association with Metro-Goldwyn-Mayer, promised to be an exciting competitor to the popular World of Warcraft MMO series. The video-game community was buzzing with excitement, and investors committed millions of dollars of capital to Cheyenne Mountain Entertainment (CME) to help build what was then one of the most anticipated games in MMO history.

I visited CME headquarters in Mesa, Arizona to do some onsite research. After interviewing some of the staff and management, I recommended that my clients withhold investing, because I identified some red flags that turned me completely off the venture. During my visit, I saw an overly ambitious executive developing multiple games at the same time, not just Stargate Worlds. He felt these were good opportunities. But any competent analyst would have seen them as I did­—they were distractions.

To make a long story short, CME went bankrupt and millions of dollars' worth of code never even made it to market. The game wasn't developed in time to meet contractual deadlines. The investment opportunity was wasted, and investors' lifestyles were jeopardized. My clients had the foresight to ask for a second opinion before committing large amounts of capital to this particular venture, and I'm sure they will continue to exercise the same caution in the future.

Remember, no good idea can overcome poor management and poor execution on someone else's part. Exercise extreme prejudice when investing directly into another business. If not, you may end up hanging yourself out to dry.

I grew up in a small town in Idaho, where one of the largest Ponzi schemes in U.S. history took a heavy toll. James Paul Lewis of Financial Advisory Consultants met with individuals in my small community, and promised a consistent, high return through various small-business investments.

This wasn't your classic, small-time Ponzi. The guy was sharp, articulate, and very informed. The prospectus displayed very detailed descriptions of projects and conservative statements about risk and prudent investment practices. Statements were delivered to investors on a regular basis and consistently high returns were delivered year after year. Dividends were paid regularly, keeping investors happy for more than 20 years. At its peak, the fund was reported to have held $813 million dollars.

When it all fell apart, Lewis was convicted and sentenced to 30 years in prison by a federal judge. I know people personally who were taken in by this guy. It was a Bernie Madoff-type situation that happened in my own backyard!

I share this story because the investors in this scheme, as well as many of the investors in the Madoff scandal, were not financial illiterates. They were entrepreneurs, business owners and executives, some with substantial financial backgrounds. But Lewis was paying 30 percent to 40 percent in annual returns. Hindsight is 20/20, but greed often makes people take more risk and ask fewer questions than they usually would.

There's absolutely no reason to invest in something that claims to offer such high returns over such a long period. Think about it for a minute: this fund raised $311 million from investors. He was promising 40 percent and higher returns. Let's just imagine for a second that the investors in the fund continued to receive their returns over the next 20 years. The fund would have been large enough (approximately $600 billion) to buy Disney, Coca-Cola, Amazon, and McDonald's—combined. If the fund had persisted for 30 years at these returns, it would have been large enough to purchase the entire U.S. stock market (approximately $22 trillion). After just two more years, the fund would have been large enough to purchase every stock on the entire planet (approximately $42 trillion).

When it comes to private, direct investments, there is always a level of uncertainty that follows. This is especially true when the company in which you've invested is producing financial or accounting records. You never know when you could be dealing with a self-serving sociopath.

Concentration risk
In professional finance, a concentration ratio tells you how much of your assets are invested in one particular deal. Dentists can use a concentration ratio to help guide their emotions when pressured into making a particular investment. The golden question is this: How much of your personal net worth is invested in one asset type?

Let's use a simple example. In 2005-2006, the real estate market saw some short-term appreciation. This caused many investors to become greedy and concentrate their portfolio and much of their liquidity in real estate holdings. This imbalanced approach resulted in large amounts of their wealth vanishing in the subsequent crash.

If investors had maintained liquidity outside of their real estate holdings and had kept a more modest concentration of total net worth in this particular asset class, then they would have been able to weather the storm.

Even the most aggressive investors in Silicon Valley tech startups avoid saturating their portfolios with any one particular investment. Maintaining a diversified portfolio with less concentration risk is absolutely essential to preserving your wealth.

My no-brainer guidelines
Investors should take baby steps as they build knowledge and investment acumen. If you don't know the difference between an actively managed and an indexed mutual fund, you probably shouldn't be dabbling with an investment in the restaurant business, an IPO, or a real estate development.

As a general rule, build up a broadly diversified portfolio of public securities (mutual funds, exchange-traded funds, stocks and bonds) until you have practice equity, retirement plans, and investments that reach 20 to 30 times your annual personal living expenses. Reach this level before you invest in any direct, single investment (if you're so inclined). Broadly diversified mutual funds with very low expenses should contain the majority of your assets until these basic measures of financial security have been met.

Once you've achieved this level of wealth, keep it diversified and protect it forever. Keep investing the same way indefinitely—through a broadly diversified portfolio with global exposure. Statistically speaking, it's likely that this strategy will yield a higher return than the alternative of pursuing higher-yielding, direct investments. It will also help you sleep better and is entirely passive (taking none of your personal time).

But if you're inclined to be a little more aggressive (and many of my clients are), limit your concentration risk to 10 percent to 20 percent of your additional investable assets, especially when the opportunity is outside your area of expertise. I'll revise this advice if you're considering investment opportunities in which you will be personally involved in management/execution (for example, buying a second dental practice or dental-related business). If you have control over the outcome of a business, then your personal level of risk (execution risk) is lowered substantially. By following this rule, dozens of individuals I know would have been able to retire earlier and avoid significant relationship and life-balance headaches.

High-risk investments won't jeopardize your future if you make them in small enough quantities; however, you should consider them only after you have accumulated enough "safe stuff." The problem happens when people risk too much of their capital, often too early in life, leaving them with very little time or additional resources to recover from a bad fall. In my experience, an average investor who avoids mistakes will always outpace a superior investor who makes one big mistake.

You're in the top one percent, my friends—let's keep it that way. Slow and steady wins the race.

Reese Harper is the founder and CEO of Aquire Advisors. His firm helps dentists make smart financial decisions and plan for a secure retirement. He lives in Salt Lake City with his wife and four kids. Learn more at

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