Posted August 04, 2022
By Zach Scheidt
A Tale of Two Millionaires
I want to introduce you to two personal friends of mine.
Both are extremely successful businessmen…
Both are multi-millionaires…
Both started this year with a mountain of cash to invest…
But these two friends have taken very different paths with their investments.
One has been extremely successful, while the other made a giant mistake. And that mistake cost him millions of dollars!
Both of these men are real people that I enjoy spending time with. However, I've changed their names to respect their privacy.
But the lessons from these two millionaires were just too important for me to pass up.
So today, I want to share the tale of my two millionaire friends with you.
Two Paths, Two Results
Meet Brad and Mike.
Brad spent the last five years building a shipping and storage business. At the end of last year, he sold that business for tens of millions of dollars.
I was excited when he called me to share the good news.
Similar to Brad, Matt spent the last decade building his own real estate business. And midway through 2021, Matt sold his business for an even bigger lump sum.
Matt's business has helped many other families build their wealth. So it's fitting that his hard work paid off in spades.
After he sold the business, Matt and I had several conversations about investing his wealth.
I'm not registered as an investment advisor. But as personal friends, Matt and I have always enjoyed chatting about markets and investment strategies.
Since the market was a bit pricey at the time — especially the popular and speculative tech stocks — Matt decided to take his time putting the money to work.
His strategy was to "dollar-cost average," or put a small portion of his money to work each month.
That way if the market pulled back, he could buy more shares with each month's contribution.
Brad took a completely different approach with his wealth.
Instead of putting the money to work steadily, Brad plowed millions of dollars into four different tech-heavy mutual funds.
From what Brad told me, he invested all of his money during the first week of January as the overall market was rolling over.
As you can imagine, Brad and Matt have had very different reactions to the current bear market.
Diversify Your Timing When Investing New Capital
I wanted to bring up Matt and Brad's investment decisions because there's an important takeaway for retirees.
New retirees will often start with a lump sum to invest.
This may come as a payout from their former employer. Or maybe once they retire, they decide to manage their investments themselves.
Frankly, I love this decision! But I don't want anyone to make the same mistake that Brad did.
Whenever you make big decisions with a significant amount of your money, it's important to make gradual shifts in your allocation.
And I love the idea of balancing your timing as well as balancing your investments in different areas of the market.
Dollar-cost averaging has allowed Matt to actually get excited about the bear market. Because the lower stocks trade, the more value he's getting for the money he invests.
And sure, he would have missed out if the market had moved sharply higher at the beginning of the year.
But since he put some of his money to work at the beginning, he would still have started growing his profits in a bull market.
This approach — putting a small amount of money to work each week or each month — is a smart way to sidestep the risk of investing at the top only to watch your investments fall.
Now in Brad's defense, he still has a significant amount of income set to come from the business he sold. So the market pullback isn't going to hurt him too badly.
But the lesson of dollar-cost averaging (or steadily putting your retirement funds to work) is an important one for retirees who are ready to put new money to work in the market.
Tomorrow, I'll share a second lesson from this tale of two millionaires.
It relates directly to the new Paradigm that we're embracing here at Rich Retirement Letter.
So make sure you don't miss tomorrow's alert!