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Surprisingly enough, the businesses owned by self-made millionaires are usually quite ordinary. People become rich in construction, and in sub ­trades like dry walling and roofing. They become rich running dry cleaning establishments and cafes. Some of them are truck drivers and auctioneers, farmers and crane operators, computer software designers and machine tool manufacturers. Virtually any field that offers an opportunity to excel and earn high profits can serve as a springboard to riches. They key is to do the work better and more efficiently than others, and then to hold on to the profits and excess cash that you earn as a result.

People often ask me what field they should go into if they want to make a lot of money. The answer to this question is constantly changing, just as the wants, needs, demands and desires of consumers is constantly changing. During the 1990‘s boom in technology, and the explosion of the Internet-based companies, millionaires were being created at the rate of 10,000 per week! When these stocks option fueled companies collapsed, most of this new wealth disappeared, only to reemerge in the booming home and real estate markets nationwide. No one knows for sure where the rapid growth opportunities of tomorrow will occur, but they will continue to rise and fall as long as customer wants continue to change and create opportunities for ambitious entrepreneurial minded people.

As it happened, I had just been reading about how much a person would have to save to become financially independent. I knew that if a person saved $100 dollars per month from the age of 21 to the age of 65, and he earned an average return of 10% on his savings over that time period, he would be worth more than $1,000,000 by the time he retired. I suddenly realized that that young man, living in a group home, repairing furniture, with no advantages or opportunities, could actually become wealthy. If he just kept saving one hundred dollars per month, he would retire wealthier than 95% percent of the population.

He would end up better off than most doctors, dentists, lawyers, architects, engineers, salespeople, small business owners, corporate executives, and people in show business. All he had to do is save $100 dollars per month and he would retire financially independent. If he could discipline himself to save every month, the power of compound interest would do the rest.

Making money is a basic skill. It takes knowledge and practice to master, but since hundreds of thousands, and even millions, of men and women have learned how to make money over the years, it is obviously a learnable skill. In fact, if you can drive a car, operate a cell phone, use a computer, or carry out many of the standard tasks that are a part of daily life, you definitely have all the intelligence and ability you need to earn all the money you want.

In the pages ahead, I will show you a variety of ways to achieve financial independence, and even get rich in America. After that, it is up to you to take action, and keep on taking action until you get the results you desire. There are no real limits except the ones you place on your own imagination

All financial success, especially business success, is based on the old adage, find a need and fill it. The subjective theory of value says that all value is in the eye of the beholder. Something is worth only what someone else will pay for it. All successful business is based on someone bringing together the factors of production, labor, capital, raw materials and management, and creating a product or service that a customer will pay for at a price that is in excess of the cost of producing it. This is a way of adding value to the combination of ingredients that come together to create a product or service. This difference between what it costs to produce and deliver, and the price a customer is willing to pay for it, is called profit, or added value.

Profit is the stuff out of which fortunes are made. Whenever you see an opportunity to give people what they want at a price greater than it costs you to produce it, you see an opportunity to make a profit. If you can create a profit making system, you can build a business, and begin moving toward financial success. Almost any profitable business or occupation can make you financially independent if you manage it intelligently.

Studies have shown that there is no perfect correlation between two different asset classes. Stocks of large companies do not move in lockstep with stocks of small companies. Bonds do not move at the same time as stocks. Therefore a portfolio with one asset class will not behave the same as a port-folio with two or three asset classes. In Figure 4.1 we see real returns on stocks, bonds, and treasury bills for the year 2000. Note that the returns vary widely. Contrast those returns with the returns on the same three asset classes in 1999 in Figure 4.2 and you see yet another picture.

The closer we look, the more obvious it becomes that one asset class can complement another, and the greater the number of asset classes that are not closely correlated, the better. I like the metaphor of the eight-cylinder engine. You get a smoother ride with a V-8, because as one cylinder is coming down another is on its way up, while another is bottoming out, and so on. In Figure 4.3, the 50 percent stock/50 percent bond line shows a steadier return compared with the 100 percent stock line or 100 percent bond line. “Poor performance in one investment can be offset by good performance in another,” writes Frontier Analytics, a leading firm in asset allocation, regarding this graph. Add more asset classes and you may further reduce volatility. More does not necessarily mean better; so the added value of an advisor is to achieve the right mix.

Still, much of the work regarding proper diversification is based on academic studies. This is called modern portfolio theory (MPT). One of the important assumptions MPT is built on may also be called the butterfly effect. It suggests that there is an interaction of all things, so that a butter-fly flapping its wings in Florida affects, if only in a small way, the air in New York and California. If there is an interaction among assets, and if there is a way of putting this interactive denominator to work in portfolio design, then we may be able to develop a plan that is less risky than the portfolio’s riskiest asset. Strange as it may seem, we may get a free lunch. At the same time, we may produce more return than cash, short-term bonds, or CDs, which are highly predictable assets but have poor long-term results. When securities get into oversupply in one sector of the economy, money begins to move to another sector or asset class that has less supply. When securities go down because few people find them attractive, they eventually become cheap enough to begin to attract bargain hunters willing to take the risk of owning what others do not want. Although we do not know when and where money will move next, diversification helps keep us invested

In the era of the do-it-yourself and self-management, security selection is not as simple as going to Home Depot to pick out garden plants. One needs to be objective (disinterested, even) about money in order to manage it best. Many times the investor must go out on a limb to pick the fruit, and unless a person is well trained and doing constant research he or she will not have the courage and wisdom to make quick moves to buy or sell. With new Internet services arriving, there is some expert advice to be found on the Web, but it does not have the human touch that retired clients enjoy.

Psychologists and priests know that people like to hash things out with people, not machines. Neuwirth Research, Inc., of New York reported that 72 percent of people surfing the Internet for financial advice still use a pro-fessional advisor. When money becomes a significant asset, most of us need a significant other. Like an endowment fund CFO, you can hire a financial advisor to help you strategically allocate your assets, develop an investment policy, and then monitor and review your investments in a timely fashion.

All investors deserve the facts and should not be given puffed-up expectations that can lead to much anxiety and stress. According to Ibbotson Associates, since 1971 through 2000, the S&P 500 had an average annual rate of return of 13.2 percent, Ibbotson Small Company Index did 14.7 percent, and MSC-International EAFE Index did 13.1 percent. In only eight of the past thirty years did the S&P 500 fall below a 6 percent annual return. Yet even with these terrific returns, a 4 percent to 6 percent annual withdrawal may be an appropriate beginning withdrawal rate. Some advisors, such as Bill Bengen in El Cajon, California, have argued that even with an optimal stock and bond mix—60 percent large-cap stocks, 40 percent intermediate government bonds—you should begin with a 3.9 percent withdrawal rate the first year (adjusting that rate each year for inflation) so as to not run out of money.

Since 1994 Mr. Bengen has been studying the problem of withdrawal rates versus investment return. More recently, he ran investment scenarios using portfolios ranging in asset allocations of 0, 25, 50, 75, and 100 per-cent stocks and 100, 75, 50, 25, 0 percent invested in intermediate treasury bonds. These five asset allocations were tested using initial withdrawal rates of 1, 2, 3, 4, 5, 6, 7, and 8 percent the first year. Using actual historical data from 1926 through 1992, he found that an appropriate asset allocation for a retiree’s portfolio must include no less than 50 percent (and up to 75 per-cent) in stocks. He writes, “Stock allocations lower than 50 percent are counterproductive, in that they lower the amount of accumulated wealth as well as lowering the minimum portfolio longevity” (Journal of Financial Planning, October 1994, p. 176). Bill admits that such a low initial withdrawal rate, 3.9 percent, may be unacceptable for many people whose number one goal for these assets is to create income during retirement. But since leaving an estate to a spouse (or heirs) is important to most of us, having some assets last a long time is a goal to consider as well. Finding the balance between stocks and bonds and between expected returns and withdrawal rates is the investor’s greatest challenge.

In the end, many retirement plans will fail for these two basic reasons.

1. Too much emphasis is put on average rate of return found in recent past data.

2. Too often proposals are created to show that a client’s wildest dreams can come true.

Consultants should be asking for a client’s input into a plan, but should they ask the client to tell them what they think is the most suitable plan? That’s like the surgeon asking the patient where to cut. For many people, the big mistake of our time is simulation-based retirement planning that puts little emphasis on the possibility of error and gives little guidance as to the most probable successful outcome. I say to clients, “Use your common sense. If it sounds too good to be true it probably is. Or if it appeals to a little greedy voice down in your soul, then run from the temptation.”

Although good advisors never depend on good luck to replace skill, there are times when some retirees can get lucky. For my example, I looked at a twenty-year period from the beginning of 1980 to the end of 1999. If we invested $250,000 into the S&P 500 and withdrew at a rate of 8.5 percent (plus 3 percent increase per year) as T. Rowe had done in their example above, by the year 2000 this account would have been worth $296,173, rather than zero. Examining the same twenty-year period with a withdrawal rate of 6 percent (increasing at a rate of 3 percent per year), by 2000 the $250,000 would have grown to $1,077,908. Rather than running out of money in the fourteenth year or the twenty-seventh year this more recent twenty-year period delivered stunning returns with plenty of money for years ahead and for leaving to charity or to heirs. Even after the major corrections in the market in 2000 and 2001 you would not have lived penniless. While good prevails, there are those unforeseen crises that influence markets throughout the ages.

In another withdrawal test (B), using the same portfolio balance as we just discussed, T. Rowe Price assumed a withdrawal rate of 8.5 percent per year (with a 3 percent increase on the withdrawal rate for inflation) over the same period, from December 1968 to December 1998. The average return of each of the thirty years was 11.7 percent and is illustrated by the upper line in Figure 3.1. What happened to the portfolio affected by the higher and more common withdrawal rate is illustrated in the lower line of Figure 3.1. That is, $21,250 (8.5 percent of $250,000) was drawn the first year, $21,875

(8.75 percent of $250,000) the second year, and so on. Following the lower line in Figure 3.1, the $250,000 account would have been at the zero mark by the fourteenth year (in 1983). Hardly a nice picture to watch as the sixty-nine-year-old, retired at fifty-five, goes bust. What went wrong? T. Rowe Price calls this investment problem “the risk of relying on an average return.” We will name this problem the average return blunder. Assuming an advisor had accurately predicted the average annual return of 11.7 per-cent for the portfolio over the next thirty years (the upper line in the figure) and his or her bar chart had showed that at the 8.5 percent withdrawal rate the principal was safe, then why was the fund so quickly depleted? Why did the account go bust? Every retiree must ask, Can this happen to me?

My experience is that people want to feel that their advisor can be honest with them—even if it hurts. We are not in your life to spin gold out of straw. Financial advisors never should promise to make a retiree rich. That assertion is unethical. Our job is that of a guide in a jungle, not a guide to some unknown gold mine. Our objective is to be realistic and not contrive a rosy future. One client said, “I want to see the spending plan for the next thirty years in the form of a chart. I like to see colored graphs.” We worked up a plan that showed exactly what income he would have from year to year and where it would come from. No stratified rock formation looked as impressive. Our certified financial planner (CFP) showed every source of spend-able dollar each year—yellow bars for nontaxable money were stacked on green and blue bars for retirement and personal savings. Seeing our illustration, the client’s eyes sparkled as if he were gazing at the Hope diamond. Then I put a little water on the fire. “Remember,” I said, “markets do not produce returns in a predictable upswing slope. So your principal and even income may vary from year to year. Graphs do not tell this side of the story.” If I had not added the warning that returns are not a linear thing, the presentation would not have been balanced.

The really hard message to get across, when looking at graphs, is that forward-looking assumptions had to be made in order for the computer to run the numbers. We have seen these things before. Remember that old insurance policy, the one that was supposed to be worth so much after forty years? Now look at the cash value! Big deal. Same thing here. Because we are addicted to bar charts and graphs, we give them too much weight in an ever-changing and unpredictable future. Computer power can make a few hours of data entry look like a sophisticated life plan, but it’s more like a lullaby that lulls some into dreamland. I tell clients, “I will be with you through the thick and thin. We are in this together, and that is what I get paid for—not for creating fancy graphs.” I then smile, and most nod and smile back with some understanding. A few conclude that I am not the advisor for them.