If you’ve read any of my writings, you know I come down hard on conventional investing wisdom as inferior at best and a downright failure for most people at worst.

But before I continue my rant on this flawed philosophy, I need to discuss two of its popular principles:

• Building a balanced portfolio of stocks, bonds, and mutual funds through 401Ks and IRAs
• The four percent rule

The first principle is to contribute the maximum amount to your employer’s 401K and invest it in a diversified portfolio of stocks, bonds, and mutual funds. Then, when you decide to stop working, you regularly sell off your portfolio shares to produce the cash flow to pay your bills. This is where the second principle comes in.

The second principle is the Four Percent Rule. The Four Percent Rule (the Rule) was developed in 1994 to provide an easy way for retirees to determine how much they should withdraw annually from their portfolios.

Regardless of how you feel about conventional investing wisdom, let’s apply the Rule and see what it tells us. Firstly, what annual income would you like in retirement? Let’s say your number is $100K per year. Then, using the Rule, how big would your portfolio have to be to achieve this income?

$100,000 divided by 4% = $2.5 million

In other words, to have a retirement income of $100K per year, you need a portfolio of $2.5 million. If you have this size of a portfolio, there is a name for you, multimillionaire. Since the Rule is for everyone, it might be interesting to know how many Americans are millionaires. According to a CNBC article, approximately eight percent of Americans have a net worth of one million dollars or more. So that means that even fewer are multimillionaires.

How close is your portfolio to $2.5 million? Not that close? Perhaps we set our sights too high. According to Wikipedia, the median U.S. household income was approximately $63K in 2018. So let’s rerun the Rule with the median U.S. income.

$63,000 divided by 4% = $1.575 million

For eight percent of you, congratulations! You’re part of the minority of Americans for whom conventional wisdom works.

So why doesn’t the conventional path work for ninety-two percent of the population? I believe there are two main reasons:

• Stock market returns are too low and too volatile
• People don’t invest enough

Stock Market Returns Too Low and Too Volatile
Conventional wisdom says to make riskier investments and have your portfolio balanced more heavily towards stocks and away from bonds to get higher returns in the stock market. The problem with this is that you might make more money if you make riskier investments, but you also might lose money, so that’s not a good solution. As far as shifting your portfolio more toward stocks, since bond yields are so low today, I think most investors are already skewed towards stocks because it’s the only place to get any significant positive returns.

To have a less volatile portfolio, you typically allocate more of your portfolio towards bonds. But, unfortunately, while that might work, as we just learned, it also drags down your returns. Ergo, this whole conventional wisdom thing seems to be breaking down; it’s a no-win situation.

People Don’t Invest Enough
People don’t invest enough either because they’re just super spenders or don’t make enough money. There are two lifestyle solutions to these problems. If you’re a super spender, that’s a more straightforward fix; spend less and invest more. On the other hand, suppose you simply don’t make enough money. After you pay all your bills, there isn’t that much left over to invest. In that case, you must continually improve yourself and become the best at whatever you do for a living, so you get the highest possible salary and regular promotions and pay increases. Provided you don’t spend the extra money; now you can invest more for your future.

Conventional financial planners have a fix-all solution for those who don’t invest enough money; work longer and spend less in retirement. That’s it! Sounds awesome; work until you’re old and decrepit, and then live like a pauper. This doesn’t sound like the American dream to me. To facilitate spending less in retirement, the conventional financial planning industry is starting to recommend a three percent withdrawal rate, not four percent. Let’s apply the now three percent rule to the median income and see what it tells us.

$63,000 divided by 3% = $2.1 million

So, we’re right back where we started. You need to be a multimillionaire just to have the median income in retirement.

Thankfully, there is an answer, and it involves leaving the stock market (conventional investments) and moving to alternative investments. Alternative investments (alternatives) include real estate, precious metals, notes, business equipment, private lending, private shares of small businesses, cash value life insurance, and many others and are not publicly traded. The benefits of alternatives over conventional investments are numerous. Alternative investments:

• Provide annual returns of 15% – 30%
• Are less volatile than conventional investments
• Provide cash flow
• Allow you to pay little to no income taxes on their returns
• Are stable enough that banks will loan you money to buy them
• Provide real diversification

Let’s explore further how alternatives can help by looking at the three factors that affect your ability to accumulate money for retirement or financial freedom:

• The amount of money you invest
• The return you earn on that money
• The length of time your money is invested

The Amount of Money You Invest
The amount of money you invest doesn’t have to be your money; it can be other people’s money (OPM). Banks will loan you money to buy alternative investments, like a piece of real estate, so you don’t have to rely on your cash alone. Banks will not loan you money to buy conventional investments.

The Return You Earn on That Money
According to Investopedia, the S&P 500 Index’s average annual return since its inception in 1926 has been 9.8 percent. But, according to The Balance, the average equity fund investor only earned 5.19 percent annually. Think about that, a measly 5.19 percent! And that’s before inflation and taxes!

With alternative investments, it’s commonplace to get annual returns in the 15% to 30% range, and sometimes that’s before the built-in tax advantages that some alternatives provide.

The Length of Time Your Money Is Invested
With alternative investments, you can invest more money using OPM and get higher returns without additional risk because of the nature of alternatives. All this allows you to accumulate more money in a shorter period. Shouldn’t that be the goal? Instead of working longer and living like a pauper in retirement, shouldn’t the goal be to work less and live like a king?

My upcoming book Get off You’re A$$ and Manage Your Money: Why You Need Alternative Investments goes into detail about why you need to make the move to alternatives in order to retire or become financially free. It is just a week or so away from being published, and there will be a link to it from the home page as soon as it’s available.

Remember, when you make better financial decisions, someday you can make work a choice instead of a necessity.