Want to Become a Billionaire? Invest in Your Own Business, Not Your 401(K). Many investors haven't kept up with inflation over the last 20 years. Have you?

By Pamela Yellen

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Entrepreneurs are, by nature, risk-takers, so investing in the stock market may be appealing, a side hustle that just might make you rich. After all, a few top investors have become billionaires playing the Wall Street casino, so why not you?

Related: Millennials Scared of the Stock Market Risk Being Broke When It's Time to Retire

But I have to burst your bubble here because, for starters, you probably are not Warren Buffett. And even the Oracle of Omaha, one of the most successful investors of all time, has been sounding alarms about the perils of the market.

In a recent annual letter to shareholders, the Berkshire Hathaway CEO said that market losses of 50 percent or more would not only be possible but inevitable in the future. He said investors can expect losses similar to those that have buffeted (sorry, could not help the pun) Berkshire Hathaway's own stock during its 53-year history.

Those losses? Some of the worst ranged between 37.1 percent and 59.1 percent.

Noted Buffett: "...Our shares (and others') will experience declines resembling those [previous declines]. No one can tell you when this will happen. The light can at any time go from green to red without turning yellow."

Scary stuff, but the financial talking heads tell us regular folks not to worry. Just sit tight and ride out the roller coaster, they say, because, in the long term, the stock market is still your best choice for significant growth. Only ... they are wrong.

The truth about investor returns

According to the DALBAR 2019 report, many stock market investors have not even kept up with inflation over the last 20 years.

DALBAR is a leading independent and unbiased investment performance rating firm. Its most recent Quantitative Analysis of Investor Behavior report covered the 20-year period ending December 31, 2018. According to the study, the typical investor in equity mutual funds has gotten only a 3.88 percent annual return over the last 20 years. As bad as that sounds, the truth is even worse when you consider that these are "nominal returns."

Nominal return means the rate of return on an investment without adjusting for inflation. But inflation for the past 20 years averaged 2.17 percent a year! So, let's do the math:

3.88 percent average annual return - - a 2.17 percent average annual inflation = a 1.71 percent real average annual return

Related: The Basics of Self-Directed Retirement Accounts

The study took into account the average fees and expenses investors pay in these accounts. But it did not account for the taxes that become due for those who put their savings into a tax-deferred account like a 401(k), 403(b) or IRA. Expect taxes to eat up at least 25 to 33 percent of those savings, according to the Center for Retirement Research at Boston College.

Other investors fared even worse than equity mutual fund investors did. For instance, the average investor in asset allocation mutual funds (which spread your money among a variety of classes) earned only 1.87 percent per year over the last two decades. Because inflation averaged 2.17 percent a year, these investors actually ended up losing 0.30 percent every year for 20 years.

And the biggest losers of all? Those were the investors in fixed-income funds. They only managed to eke out a 0.22 percent average annual return, significantly trailing inflation. "The results consistently show that the average investor earns less -- in many cases, much less -- than mutual fund reports would suggest," the DALBAR report stated.

Unfortunately, most investors don't have a clue what return they've really gotten in their retirement accounts over time. People consistently overestimate their returns by a large margin.

Most pre-retirees have an enormous retirement savings shortfall

Here's the stark reality: The typical household nearing retirement has an average of only $135,000 in its combined retirement accounts, which will provide only a $600 per month income, an analysis of the Federal Reserve Survey of Consumer Finances shows. The survey also found that most households have little or nothing outside of the money in their retirement and investment accounts. And that puts their entire life's savings at risk in a market crash.

That's the sad truth for most Americans, but it doesn't have to be that way for entrepreneurs. We may be risk-takers, but when it comes to investing our hard-earned money, we want to be informed risk takers.

Related: Why Saving for Retirement Is a Waste of Time and Money

We can't control markets. But we can control our own business. And we can make sure we have a "Plan B" for our own retirement.

So, invest in your business, and in growing real wealth that won't evaporate in a market crash. You can do better than barely keeping up with, or falling behind, inflation. Are you ready to do that?

Pamela Yellen

Financial security expert

Pamela Yellen is a financial security expert, a two-time NY Times best-selling author and President of Bank On Yourself. Pamela's latest book is "Rescue Your Retirement: Five Wealth-Killing Traps of 401(k)s, IRAs and Roth Plans – and How to Avoid Them."

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