From Felix Großmann and Gerd Kommer
Books, financial blogs and seminars on the question “how do I get rich?” exist like a dime a dozen. Many of these are “financial pornography.” Financial pornographic publications on the topic of “getting rich” are characterized by the fact that the statements and promises in them about getting rich by investing part-time are generally unrealistic, full of obvious errors from a scientific point of view and, overall, simply dubious. This applies to stock market investments and this applies to real estate investments.
A good example of this is the investment guide book “I'll make you rich - the man who makes millionaires” by Markus Frick, published in 2001. Those who wanted to become rich on the stock market through Frick's books and seminars have, in many cases, become poorer instead. In 2011, Frick was sentenced to a fine by the Berlin Regional Court for the offense of “market manipulation” to the detriment of investors and, in another criminal case in 2014, to a two-and-a-half year prison sentence. Frick is certainly an extreme case in the area of toxic get-rich-on-the-stock-market promises, but extreme cases like this illustrate the basic principle.
What does “unrealistic, factually questionable and dubious” mean in this context? Who sets the standard for this? Quite simply: science, especially statistics. Just as science sets the standard for judging unrealistic, dubious statements and promises made by charlatans in the field of medicine and health.
Against this background, we would like to answer three questions below:
(1) Why is the goal of getting rich part-time on the stock market or getting rich with real estate unrealistic for normal people and households?
(2) Why do most private households still do well to invest in stocks as early as possible?
(3) If not through the stock market or through real estate, how else can you get rich?
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Regarding question 1: Why is getting rich on the stock market unrealistic for normal people?
Even if we rich For these purposes, we would define it rather modestly and statically as a net worth (gross assets minus debts) of one million euros, this million is still four times as much as a normal employee in Germany with statistical average values for income (Bierbach 2018), savings rate, additional investment costs, tax burden (i.e. with a normal employment history) achieved at the beginning of his retirement at the age of 65, even with an “aggressive” 100% stock portfolio. The average statistical expectation for the final asset value in this scenario is around 250,000 euros, adjusted for inflation.
That's also 150% more than that actual Median net assets of a typical 65-year-old German citizen of around 90,000 euros (excluding the present value of statutory pension insurance claims) (Bundesbank 2019). [1]
The fact that an average employee household would hardly be able to mentally sustain a 100% stock portfolio for over 45 years due to its high volatility is only mentioned in passing.
If such calculations are not based on capital market investments, but rather residential properties for personal use or rental, the result is not fundamentally different, if at all a worse one (see Kommer 2021).
And if we carry out such a calculation from the age of 25 onwards based on the higher salary of a “manager” (an employee with personnel responsibility), this employee, adjusted for inflation, will statistically have reached a final value of 430,000 euros (deposit volume) at the age of 65 after 40 years of work. This is also miles below our already rather low wealth threshold of one million euros at the age of 65.
If the threshold for being rich were to be set at “so much wealth that you never have to work for money again with a normal standard of living” instead of one million euros, then a significantly higher wealth threshold would result for practically every sensible combination of age and cost of living. This threshold would be higher the younger the person in question is. This is because a younger person who is no longer working has to use their assets to finance a longer remaining life expectancy.
All of this is actually banal and any academic wealth researcher would just yawn wearily in the face of such findings. The marketers of get-rich investment pornography still present the facts very differently in their advice books, YouTube videos and seminars - like Markus Frick did back then. According to these “experts”, anyone can ultimately become rich as an employee speculating in stocks or real estate as a part-time job. All he has to do is follow the respective get-rich recipe that is marketed by the “expert” in book or seminar form.
On closer inspection, these recipes are each a specific mixture of (a) systematically over-optimistic assumptions about the return and risk of the investments being promoted and - in relation to real estate investments - unrealistic ideas about the effect of credit leverage, (b) incorrect calculation methods or (c) the transfiguration of rare positive outliers as “in principle accessible to everyone”. Now, when someone questions and picks apart these three distortions in a specific "rich maker," their "smart" evasive maneuver is usually to redefine "being rich" into the much more moderate goal of "having more money than the average person" - a rhetorical trick that can be observed even in six-year-old children. But having more wealth than the average citizen is not the same as being “rich” or “really rich”.
Regarding question 2: Why should private households still invest in stocks as early as possible?
The answer to this question is also quite simple. Statutory pension insurance, as the sole pension provision for people born around 1960 and younger, will almost certainly not guarantee that they will maintain the standard of living they were used to before they retired. So if you don't want to lower your standard of living in old age, you, as a normal employee, have to build up private assets in addition to paying into the statutory pension insurance. He could do this through the timely loan-financed purchase of a self-used residential property or through capital market investments - ideally in the form of a cost-effective ETF portfolio on a buy-and-hold basis.
One of the most readable financial advice book authors, William Bernstein, once put this situation beautifully succinctly: “The point of investing [for private households] is not to get rich, but not to die poor” (Bernstein 2009, p. 48).
Investing money in stocks is not a route to wealth, but it is still the best way to organize your wealth creation and retirement planning. In Germany - and this is basically a tragedy - only around 10% of all households even own stocks. In the poorer half of the population, this percentage is close to zero. Every employee over the age of 30 who cannot or does not want to accumulate wealth through the loan-financed purchase of a residential property for their own use is well advised to join the “elite” minority of stockholders. With ETFs on a buy-and-hold basis, this is possible from cheap online brokers for as little as 25 euros a month.
Regarding question 3: If not through the stock market or through real estate, how else can you get rich?
Here too, a look at wealth research provides the answer and it is “essentially only through entrepreneurial activity”. [2]
In any case, entrepreneurial activity is the only unrealistic route to wealth if one excludes four other routes to becoming rich: (a) inheriting significant wealth, (b) becoming famous and then rich through an essentially innate artistic or sporting talent, (c) marrying rich and (d) winning a lot of money in the lottery. What these four “alternative” routes to getting rich have in common is that they are subject to no or very little influence (control) by the actor.
It is astonishing that the actually obvious insight that entrepreneurship is the only realistic, self-controllable way to become truly rich is so little known among private investors.
It becomes quite embarrassing when those who publish books, seminars, blog posts, articles or YouTube videos about getting rich don't even mention this empirically proven fact, which is logically almost self-evident and directly observable in everyone's personal environment, in these same publications, but continue to spread the fable that anyone can become rich through part-time speculation.
This is particularly true for the real estate sector. The crucial basic fact is regularly ignored in get-rich-with-real-estate books and seminars that have long been uncounted: There is very little evidence that private real estate investors systematically become “rich” with fewer than three to five residential units and achieve long-term attractive returns on equity - of course taking into account the credit leverage effect. However, there is considerable evidence to the contrary, namely only moderate returns for owner-occupiers and small landlords (for returns on owner-occupied properties see our blog posts “The return on investments in real estate“ from October 2018 and “Are rental properties attractive investments?“ from October 2019).
In order for an investment in real estate to be economically interesting ex ante, it needs a volume of around five residential units or more. But you can no longer manage them as a part-time job, especially when new construction or renovation work is involved. Such actors are then in the first place Entrepreneurwho “coincidentally” work in the real estate industry. Those of them who really became rich did so primarily because of their entrepreneurial nature and only secondarily because of the real estate aspect. This is perhaps harder to recognize at the moment (2020) than usual because over the past eleven years there has been a historic exceptional constellation for residential real estate in the DACH countries: sharply rising prices in the residential real estate asset class in combination with significantly falling interest rates. This rare development will not repeat itself in the next eleven or 20 years. Real estate valuations in the DACH countries are now far too high for that, while nominal interest rates can actually only rise in the long term.
In this context, it should be remembered that real estate prices fall every few years: in Germany, for example. B. from 1981 to 2009 by a cumulative 30%, in Austria from 1993 to 2004 by 26%, in Switzerland from 1990 to 2000 by 24% (all figures adjusted for inflation). If transaction costs for buying and selling and the credit leverage effect for debt-financed properties were taken into account, these declines in relation to equity would be even greater.
Entrepreneurial activity is the only reasonably realistic way to become rich on your own, but unfortunately it comes with some unpleasant circumstances. Anyone who wants to take this path to possible wealth has to accept these: above-average hard work, stress and uncertainty over many years, less free time, more responsibility for others and a higher risk of personal insolvency than when working as an employee.
Keyword risk: After five years, between 50% and 99% of all new companies (startups) have failed - depending on the statistics and depending on the definition of “failure” (Schultze 2019, Kotashev 2020). Not to mention that you first have to have an idea for a business venture.
Conclusion
Households that have no pension provision other than statutory pension insurance will probably have to reduce their usual standard of living after retirement if they are born in 1960 or later.
As a normal, employed employee household, you have to make private pension provision through at least one of two ways: saving in capital market investments or through the loan-financed purchase of a property you use yourself. The smartest way to save through capital market investments is through low-cost, broadly diversified ETFs combined with buy-and-hold.
If you do it right, you are more likely to achieve a higher final net worth through stock ETFs than through the real estate route, because the stock asset class is more profitable in the long term than the residential real estate asset class.
If you really want to become rich on your own, you probably have no other realistic option than becoming an entrepreneur. However, the path to wealth – as opposed to just “getting rich” or “secure your retirement savings” – requires, with few exceptions, a willingness to work harder and take more risks.
Books, Internet publications and courses that promise employees with part-time stock market investments or real estate investments rich are investment pornography. If you take this seriously, you can feel like those who trusted Markus Frick.
Endnotes
[1] This number and all subsequent ones are adjusted for inflation - that is, we are talking about the purchasing power that 250,000 euros have today, not the purchasing power that 250,000 euros will have in 30 years, which is expected to have shrunk by around half. Anyone who makes long-term asset calculations with return figures that are not adjusted for inflation is making dubious calculations, as is anyone who does not deduct taxes and additional costs.
[2] You can read it, for example, from the academic authors Zitelmann 2017, Stanley/Stanley Fallaw 2018, Zitelmann 2020a/2020b, Lauterbach 2020 and deMarco 2021. Incidentally, the comparatively small percentage of senior executives among the multiple wealth millionaires predominantly did not become rich through their salary payments, but through a particularly strong increase in the value of employee shares or stock options - which naturally only happens in a few companies which in some ways is more entrepreneurial activity than employee activity.
literature
— Bernstein, William (2009): “The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between”; Wiley; 201 pages
— Bierbach, Philipp (2018): “Salary biography 2018: The development of income over the course of your working life”; Internet reference: https://cdn.personalmarkt.de/cms/Gehaltsbiografie-2018.pdf
— Bundesbank (without author) (2019): “Assets and finances of private households in Germany: Results of the 2017 wealth survey”; In: Deutsche Bundesbank – Monthly Reports, April 2019, p. 13 ff.
— DeMarco, M.J. (2021) “The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime”; Viperion Publishing; 2021; 334 pages
— Dennis, Felix (2007): “How to Get Rich – The Distilled Wisdom of one of Britain’s Wealthiest Self-made Entrepreneurs”; Ebury Press; 2007; 352 pages
— Kommer, Gerd (2021): “Buy or rent – how to make the right decision for yourself”; Campus Verlag, August 18, 2021, 285 pages
— Housel Morgan (2020): The Psychology of Money. Timeless Lessons on Wealth, Greed and Happiness"; Harriman House; 2020, 242 pages
— Kiyosaki, Robert (2017): “Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!” Plata Publishing; 2017; 336 pages
— Kotashev, Kyril (2020): “Startup Failure Rate: Ultimate Report + Infographic 2020”; Internet reference: https://www.failory.com/blog/startup-failure-rate
— Lauterbach, Wolfgang (2020): “Wealth researcher explains how to get rich in Germany”; In: Der Spiegel Online; Interview with Jens Radü; July 7, 2020
— Schultze, Axel (2019): “What percentage of start-ups fail?” Internet reference: https://www.quora.com/What-percentage-of-start-ups-fail
— Thomas Stanley/Sarah Stanley Fallaw (2018): “The Next Millionaire Next Door: Enduring Strategies for Building Wealth”; Lyons Press; 2018; 272 pages
— Zitelmann, Rainer (2017): “Psychology of the super-rich. The hidden knowledge of the wealth elite”; financial book publisher; 2017; 432 pages
— Zitelmann, Rainer (2020a): “Most Rich People Build Their Wealth As Entrepreneurs, Not With Stocks”; Forbes Magazine Online; June 22, 2020; Internet reference: https://www.forbes.com/sites/rainerzitelmann/2020/06/22/most-rich-people-build-their-wealth-as-entrepreneurs-not-with-stocks/
— Zitelmann, Rainer (2020b): “You want to become rich, then take responsibility for your finances”; Financial portal Finance100.de; October 23, 2020; Internet reference: https://www.finanzen100.de/finanznachrichten/boerse/sie-wollen-reich- Werden-dann-ueberkommen-sie-verponsung-fuer-ihre-finanzen_H900101048_12569067/