On financial sovereignty and investment partnerships…

We’re talking rugged independence this week – thus far with an eye on reclaiming digital sovereignty. Today let’s add money and finance to the picture.

As we discussed last month, most of us have been encouraged to go about personal finance the same way.

We’re told to save for retirement by funneling our money into qualified retirement accounts. Then we can choose our investments from a range of various kinds of funds.

Modern retirement planning has its roots in the Employee Retirement Income Security Act (ERISA) of 1974. That legislation created the Individual Retirement Account (IRA). Then supplemental legislation created the 401(k) and the SEP IRA for self-employed individuals in 1978.

This thrust millions of people into the stock market for the very first time. And seeing this for the opportunity it was, Wall Street built an entire industry around herding money into cookie-cutter investment funds. Retirement, Inc. was born.

Fast forward to today and there are over 15,000 different investment funds out there to choose from. And every single one of these funds comes with its own fee structure. These fees ensure that the fund managers get paid no matter how their investments perform.

The problem is, this approach is riddled with weaknesses. And it requires us to give up nearly all control over our money. In several ways…

For starters, we have no say in what investments go into the funds we buy. Fund managers are free to buy and sell whatever they want, when they want.

This is the case regardless of whether we’re talking about a mutual fund, index fund, or an exchange-traded fund (ETF). If the fund is actively managed, the fund managers have free reign.

That leads to a perverse incentive where the fund manager may be tempted to make investment moves for optics, rather than for performance. By that I mean they may decide to buy or sell certain stocks because it makes them look good to their bosses or their marketing people.

But the bigger issue is with the nature of qualified retirement accounts. To illustrate, I’d like to make a hypothetical proposition to you…

How about we enter into an investment partnership together?

Your job is to provide 100% of the money that we’re going to invest. My job is to make all the decisions around what we invest in.

Per our contract, you must leave your money with me for a fixed period of time – no matter what. This time period will depend on how old you are when we enter into our agreement. It could be as high as 30 years or more.

But don’t worry – I’m going to do my best to make your money grow. All you have to do is pay me a small fee every year for my efforts. I do require that you pay me this fee regardless of my investment performance.

At the same time, I also require that you take all the risk. I cannot be held liable if my investments lose money for you.

That said, if you change your mind and want to get your money back before our agreed-upon time period is up, I will require that you pay me a penalty. You will have to pay me 10% of the money in your account. Then I will give you the other 90% back.

Oh, and one more thing…

Per our deal, I will require that you start making minimum withdrawals from the investment account once you reach a certain age. If you don’t do this, I will assess a 50% penalty on the money you were supposed to take out.

And just so you know, I reserve the right to change these rules later without your input or consent. I don’t have plans to change anything right now though…

So what do you say? Are you in? Do we have a deal?

I imagine if I were to propose such a partnership to you, you would tell me to kick rocks instantly. You might not even let me get through the entire proposal… because it’s so grossly one-sided.

Well guess what? What I described is how qualified retirement accounts works.

When you contribute to a 401(k) or an Individual Retirement Account (IRA), you’re making the exact deal outlined above. Yet so many people enter into this arrangement and think nothing of it.

If we want to be in control of our money – if we want financial sovereignty… I can’t think of a worse approach. Tomorrow we’ll talk about a better way.

-Joe Withrow

P.S. To get a jump on building financial sovereignty, check out our Finance for Freedom Masterclass. You can find it at: https://financeforfreedomcourse.com/mastermind