Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and you’re investing with The Accelerated Investor Podcast.

So hey, welcome back to Accelerated Investor and we are continuing our series on private investing. Talking a little bit about the stock market real estate, why passive investors invest as a private money lender, hard money lender with an active investor. And also today we’re going to talk about why I hate the stock market. I don’t really hate the stock market like, you know, hate it with the, you know, with a passion, but just very, very little money in the stock market. I haven’t really made a lot of money in the stock market and the stock market just seems to go up, bend down and up and down and nobody has any real clue why it goes up and down. It has a lot to do with superficial confidence. But you know, I used to be a financial advisor from 1997 to 2004.

I was a financial planner series 6, 66 life and health license. I wrote fee based financial plans. I managed a bunch of money, I sold retirement plans and 401ks and mutual funds and blah, blah, blah, blah, blah, blah, blah, blah, blah. And I was so happy when I left that industry because I felt like I had no control. And so let’s talk a little bit about the stock market. And if I asked you, I said, look, if I asked you, are you in the market right now? Do you have money in the market, stocks, bonds, mutual funds, whatever you have, do you have money in the market?

If I asked you and said, hey if I asked you to pick one A or B, A would you rather protect your principal and in exchange for protecting your principal? You were willing to take a lower return, like a more of a fixed return, maybe 2%, 3%, 4%. Or are you B somebody who’s willing to risk your principal in order to get a higher return? And there’s going to be some volatility? You might have some loss of some principal, but you’re willing to risk that in order to get longer term growth. Which one of those would describe you? A preserve principal or return or B willing to accept the volatility of the market in order to get a higher return?

Now, let me ask you, what if you could have both? The principle preservation and a higher return. Now, the reason why I brought this up in this podcast is because that’s the exact question that I ask my private lenders the very first time that I meet them and talk with them. I ask them that exact question. And if you’ve listened to previous episodes where I talked about Kevin O’Leary and Kevin Harrington and the people that I’ve talked about raising tons of money, they all talk about creating a problem like teasing someone and then stirring the pot, creating the pain, and then really driving home the pain and then solving the problems, solving the pain. Kevin Harrington talked about tease, please and seize when we were talking at our live event in our mastermind. And so what have I just done? I’ve just teased them, right? I’ve just teased my private investors.

So take that, use that in your own business. Now let’s talk about the market, right? So if you’re A, if you are an investor and you’re looking for principle preservation, you’ve got a couple options. You can invest in things like CDs that pay one or 2%. You can invest in bonds that pay about 3% corporate bonds. You know, government bonds. You could also invest in fixed annuities. You could invest in fixed annuities and fixed annuities are generating, you know, about a, about a 4% return. That’s if you do a 10 year annuity, a 10 year annuity with a 10 year surrender penalty, big surrender penalties, big, big, big. You know, if you leave early, get whacked with all kinds of penalties and fees you could buy municipal bonds. If you’re wealthy and you’re accredited and you want to protect your income and protect your interest in taxes, you could do muni bonds, which might average about a 4% return.

So these are all different ways to protect principle and get a decent return. Now if you said, well, Josh, I, you know, I don’t want to get a 3%, 2%, 4%, 1% return. I need something more than that. Well, if you need something more, you’re going to have to move over to option B. Option B is going to risk some of my principle in order to get a higher return. And if I risk my principal to get a higher return, I could lose money, I could risk my principal for the volatility. And you know, I look at the history of the stock market. There’s many, many, many, many, many different publications have said, you know, over the last hundred years since the, you know, the modern stock market was founded essentially by JP Morgan at the turn of the century around the early 19 hundreds. Stock market is average about a 9% return over the last hundred years.

So would it be reasonable to think that the stock market probably average 9% return for the next hundred years? I think so, probably, right? So let’s just assume that the market, if you’re investing it in all stocks and all large companies, no bonds, no cash, no fixed income, no annuities, no CDs, your portfolio could get 9% return. Now if you do a blended portfolio, now every financial advisor is going to tell you, if you do a blended portfolio, you’re going to average about a 7% return because you’re going to drag your return down a little bit by incorporating cash and some fixed accounts and some bonds in there. It’s going to be about 7% return in a portfolio. And every advisor is going to tell you diversify and wait and you need a diversified portfolio. Okay, great. So we know if we do all stocks, we’re going to be at around nine.

We do all fixed income, we’re going to be around three. And if we do a blended portfolio, we’re going to end up at seven and that’s the gross return. The gross, not the net. This is before fees, before commissions, before expense ratios, before 12 B1 fees. And so if you look at the stock market over the last hundred years, and average 9% return, if you factor in, you know, different types of expenses, you know, actually, let me bring this up now. So there’s this book, right? Tony Robbins, one of my favorite books Unshakable, one of my favorite books. And Tony in this book has interviewed hundreds of maybe not hundreds, maybe 50 of some of the world’s best money managers and investors. Carl Icahn, Ray Dalio, and guys like this and they all talk about what’s happened in the market. Well, your average investment, your average mutual fund, your average stock, your average bond, your average, that’s really made for the common person that just wants to throw their money in a 401k and let it ride.

And they also talk in this book about all the problems with that approach. And if you look at the average return over the last a hundred years being 9% in this book, Tony Interviews multiple different money managers and sort of global icons of finance. And Tony talks about how, you know, Forbes did an independent study and they studied thousands of mutual funds and found that the average expense ratio in your average mutual fund is 3%, 3.14%. So if you get a gross return of nine when you factor in your total expenses of 3.1% for your netting around six if you do a blended portfolio and your gross return is seven after factoring in your all your different expenses, you start at 7% your net is 4% net return, okay? And so even when I was the financial advisor and looking at prospectus and looking at expense ratios, typically the only thing that advisors will recommend and that will refer to is the what’s called the expense ratio.

If you look at Morningstar, you look at different websites about their covering mutual funds and different expense ratios and the returns, they all mentioned the expense ratio. Well, what we found is that the expense ratio is only 1 of 12 different expenses, 1 of 12 different expenses that are buried inside the prospectus of the mutual fund. And so if your gross return is 9% you’re going to net about 3%. love, love, love this book, highly, highly recommend. If you care about your money, you care about investing, read the book on Unshakeable. Now if you continue on like inside that book and for some other resources that we’ve read about, you know, some other things that I tell my private lenders. So these are some of the things that I bring to their attention and the reasons why I really don’t like the stock market.

So I don’t know if you’ve heard of a fellow named David Swensen. David Swanson is the Yale endowment fund manager. He manages Yale’s endowment fund. He started actually managing that fund when he was just 31 years old back in the 80’s. He’s now in his 60’s, I believe. And he grew the endowment fund from $1 billion to $25 billion. And I’ve heard that Yale now one third of all of Yale’s expenses are actually paid by this endowment fund. One third of their teacher salaries, their, you know, their costs to run their buildings and just run the university.

One third is actually paid now by this endowment fund. And in the book Unshakeable David’s Swensen and talks about how mutual funds are a $13 trillion lie and they charge exorbitant fees for underperformance. And they talk about how 96% of actively managed mutual funds underperform their related index. So if you have a large cap stock, let’s say large cap stock mutual fund, and it’s actively managed by a fund manager, 96% of the time you just be better off buying and owning the S and P 500 the S and P 500 is an index fund that just owns 500 of the largest companies in the country.

They buy the index and then it’s not actively traded. It’s not actively moved around. So not only do you not have active management, but you also have way lower fees. So 96% of the time you’re better off owning the index, which with my stock market investments, that’s all I own is index funds. And secondly, instead of a 3.4% expense ratio, you can get down as low as 0.2% expense ratio. So you can cut your expense ratio down by more than a hundred percent a hundred times, actually not 100% a hundred times. David Swensen says that mutual funds are simply a fee factory. Now Dalbar, which is also referred to in Tony’s book, and I’ve done some of my own independent research on Dalbar. Dalbar had an amazing study that was done. Now Dalbar is the financial community’s leading independent research firm that was founded back in 1976 they do independent research and they saw that research to the market and they ran a study in a 30 year period from 1985 to 2015, 30 years.

The S and P 500 index over that 30 year period, averaged 10.28% return per year. Yet at the same exact time, over the same exact 30 years, the average investor made just 3.66% return. Now, why? Because your average investor doesn’t know when to get in and out of the market. The average investor is paying these over 3% in fees, okay? Because they’re investing in actively managed mutual funds. There’s churn, there’s buying and selling, and they’re actively investing in actively managed mutual funds that underperform the index. And so if Dalbar says that you know the index is the better play to go and that’s average 10.28% guess where I’m putting my money? That’s right. And if you look at the independent study that was done by Forbes also, that was referenced in Tony’s book Unshakeable. The average cost of owning a mutual fund is 3.12% the expense ratio, which is what most people look at, they said, oh, the expense ratio is 1.2% to 1.5% but that’s only 1 of 12 different expenses that are in the prospectus.

And I’m actually embarrassed by the fact that when I was a financial advisor, I didn’t know this, I was selling mutual funds thinking that the expense ratio was just one to one and a half percent. And sure enough, guess what? The actual fees were more like 3% because they’re buried in the prospectus. Even your financial advisor doesn’t know what the real fees are. So some of the fees are cash drag, 12 B one fees, marketing fees. They’re not expense, you know, in the expense ratio, there’s transaction costs. Not reflected in the expense ratio. And then if you’re investing in a 401k the 401k typically has management fees that they charge. You know, so for me and for my team and my staff and our employees, we’ve set up what we call a Simple IRA. Simple IRA, they don’t charge for active management or 401k fees. We’ve set up a Simple IRA that costs just $35 per year in the basically annual fee. That’s it.

And I encourage all my staff to primarily consider investing in index funds, right? Not The actively managed funds index funds. And so if you look at another study that was done, they call it the lost decade, right? So after the internet bubble crashed in 2000, 2001 all the way through 2012 the S and P 500 was basically flat, okay. So if you took the price per share of the S and P 500 in 2001 and then the price per share in 2012 it was essentially unchanged. It went down, down, down, down, down, and then came up. Then it went through the great recession of 2007 and eight nine and then came back up and essentially by 2012 you’re right back to where you started in 2000, 2001. so if you invested $100,000 in mutual funds, guess what? After 12 years you haven’t made a nickel.

You’re still at $100,000 in your mutual funds. But because the average investor has invested in actively managed mutual funds that charge about a 3% fee for commissions and expenses, 3% per year has now cost you over 10 years, costs you $30,000 in fees. So your account at the end of the 10 years is actually only worth $70,000 you got a 0% return, but you actually got a negative 3% return. Negative three when you factor in the fees, you took the risk, you’re the one that invested, you’re the one that we had your money at. Risk to financial advisor got paid, the Mutual Fund company got paid and you got smoked, you got smoked. Okay, so we have $70,000 left in the account, so you lost your principle. They made money no matter what you lost money. Now check out this statistic also reference in Tony’s book Unshakeable is that according to FINRA now FINRA is the financial industry regulatory authority.

They monitor and they basically are the regulating body for the financial services industry, for stocks, bonds, mutual funds, variable annuities, etc. They did an independent study of money managers who manage mutual funds and they found that 49% of all the money managers owned zero shares, zero shares of the funds that they manage. 49% of the fund managers did not own a single share of the funds that they manage. So guys, look, the chef that’s in the kitchen cooking the food is making it and serving it to everybody else and not eating any of their own cooking. They’re just managing money, okay? And look, if you, let’s say you made $1 million investment in mutual funds, and let’s say the expense ratio with all the expenses is 3% doesn’t sound like a lot, 3% but on $1 million portfolio, that’s $30,000 a year. Now in addition, on $1 million investment, you may have a 1% or 2% commission.

That’s another $10,000 to $20,000 in expenses. So if you invested $1 million bucks and the first year you’ve essentially got 5%, roughly 5% of your account is gone in fees, expenses, and commissions. So you invested $1 million bucks, you’re now down $50,000, $50,000 you’ve lost, you’re now at $950,000 so you would actually have to earn right a 5% return in the first year and have all that return disappear through commissions and expenses. Your right back to $1 million bucks. Now, if let’s say in the first year you earned a 0% return, you now at the end of the year, now have $950,000 left, right? The next year you’re going to have to earn about a six or a six and a half percent return just to make up for the loss that you incurred in the first year. Now, in the second year, you’ve got to get more than 5% return because you’ve lost your principal. And so instead of paying $50,000 in expenses, you could one, invest in index funds.

If you want to invest in the markets, you’re going to get a higher return with lower fees or B, you can also make the opportunity to look at some private placement opportunities. You can look at real estate, you can look at private lending, you can look at apartments, you can look at some crowd funding platforms and invest in real estate where the returns are more fixed, more predictable, okay. Based on the cashflow and the after repaired value. Now it’s interesting, one more thing I want to share with you is that my, one of my financial advisors, so I don’t invest in anything that my financial advisors are trying to sell. I don’t buy any stocks or bonds or mutual funds, but I do have a financial advisor and that financial advisor writes a financial plan for me and my wife.

And that financial plan has all the projections of how much money we need to say if and how much money we need to put away for the kids’ college and blah, blah, blah, blah, blah. And we’ve gotten most of that stuff already taken care of. And so, you know, at this point, my college kids college is paid for. You know, I’m just investing for the long haul now. And if I look at my financial advisor, his name is Adam, I have two different guys, Adam and Brett and Adam shared with me a, a matrix that showed what was the number one asset class to invest in and from 2001 to 2015 it’s 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 15 years, okay. The number one asset class to invest in was drum roll please. Real estate.

Guess what? A diversified portfolio. If you did a diversified portfolio of cash and fixed income and an equities and commodities and international and large cap, mid cap, small cap in real estate, that was actually one of the worst ways to invest. Okay, so what I am going to give you any financial advice here, this is the podcast. I’m not your financial advisor, so don’t take this as financial advice, but what I can do is I can tell you what I do. I invest in real estate and I invest in real estate in a diversified way. I invest in apartments. I invest in private lender loans. I invest in rental properties that I personally own. I invest in apartment deals that I personally own, so I diversify my risk by investing in my own deals and investing with other operators. I invest in debt by making loans and I invest in equity, in investing in deals, in equity, and every single one of those investments I expect to get way north of a 10% return and I expect every single one of those, that 10% return or more.

A lot of times we’re getting 12%, 15%, 20% return to be net after all the expenses and after all the fees, okay? Now, before I wrap up here, the one thing I must tell you that the stock market does have one major benefit, which is the liquidity. Liquidity, okay? Real estate is not readily liquid, right? You got to get a loan. You’ve got to sell a building, you got to refinance a building, you got to buy it, you got to sell it. It’s not readily liquid. So I would encourage you to really think about your portfolio and look at what you’re investing in. If you’re investing passively, if you want to keep some money on the sidelines and you’re going to invest that in the markets, invest in the stock market, but invest in index fund, higher return, lower expense ratio, that’s your best option. And that way you could have some liquidity in case there’s an emergency, right?

Real estate, private placements, investing in businesses, oil and gas, investing in cannabis, crypto currency, no matter what it is, those are not readily liquid typically, right? But if you’re investing for the long term, you don’t need to be liquid anyway. You don’t need to be liquid. If you’re going to be investing for when you retire, you’re investing for the long haul. You’re creating passive income. You don’t need to be liquid, okay. So that right there is how I invest some money for liquidity and index funds. The rest of it is in private placements in businesses, in real estate for the long haul to get amazing, amazing returns and real estate is also the most tax advantaged investment in the history of the world.

The tax code was basically written for property owners, so you’ve got appreciation, depreciation, you’ve got principal pay down, accelerated depreciation, which you don’t have in the stock markets. That’s why I hate the stock market. It’s why I love real estate investing and I hope you enjoyed some of the statistics, some of the data, some of this information you learned here. If you enjoyed it, share it and I’ll see you on the next part of our private money private investing series. Thanks for being here.

You’ve been listening to Josh Cantwell and the Accelerated Investor Podcast. Leave a comment on our iTunes channel and let us know what you want to learn next, or who you’d like Josh to interview. While you’re there, give us some five star rating and make sure to subscribe so you can be the first to hear new episodes. Follow Josh Cantwell and his companies, the Strategic Real Estate Coach and Freeland Ventures on all social media platforms now and stay up to date on new training and investment opportunities to start your journey toward the lifestyle you’ve always dreamed of. Apply for coaching at JoshCantwellCoaching.com.