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Better Investing
Donald Trump traveled an old-fashioned route to fortune.
As he explained when he announced his bid for the 2016 Republican nomination for president:
“I made it the old-fashioned way. It’s real estate. You know, it’s real estate.”
While Trump did have a big head start — his father, Fred, was a multimillionaire New York real estate developer — there’s no doubt The Donald has created a fortune of his own. But if he’d stopped working 30 years ago, he could have done much better.
All he had to do was shift away from real estate and park his money in the same place that you can: an unmanaged stock index fund.
The background
To compare Trump’s performance to that of an unmanaged index fund, we need to know two things: his beginning net worth and his current net worth.
There’s considerable debate about Trump’s net worth. It’s estimated at $4.1 billion in the latest “Forbes 400” list, which puts him in the No. 133 spot of the richest folks in America. However, in July, he issued a press release announcing his net worth at $10 billion.
Fine. Let’s give him the benefit of the doubt and assume his net worth is $10 billion.
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Now we need to establish his net worth at some point in the past.
Trump was on the Forbes 400 in 1982, when the magazine published its first annual list of America’s wealthiest denizens.
That year, Forbes said Trump’s fortune was “estimated at over $200 million,” but also acknowledged that Trump claimed it was “$500 million,” according to Timothy L. O’Brien’s book “TrumpNation: The Art of Being The Donald.”
Again, let’s give Trump the benefit of the doubt and assume he was worth $500 million in 1982.
The math
Imagine Trump had retired in 1982, sold his real estate holdings and invested his $500 million in the S&P 500 — that is, 500 stocks representing the American stock market.
From 1982 through the end of 2014, the S&P 500 index had an annualized return, including reinvested dividends, of 11.86 percent, according to MoneyChimp’s S&P 500 Compound Annual Growth Rate calculator.
Per this calculator, every dollar invested in January 1982 would have been worth $40 by December of 2014. That means Trump’s initial $500 million would have grown to $20 billion. That’s twice what Trump says he’s worth today.
You can beat The Donald
This comparison is notable for two reasons. First, it reveals that Trump may not always be as shrewd as he’d have you believe, especially considering he’s filed four corporate bankruptcies since 1982.
More relevant to your life, however, is that you can do what he didn’t: harness the twin tools of stocks and compound interest.
While few of us have the resources to invest in the stocks of 500 of America’s largest companies, nearly all of us have the ability to do so through mutual funds, like an S&P 500 index fund.
You probably have an S&P index fund, or something similar, in your 401(k) at work. They also can be found at nearly every investment firm, either as a mutual fund or an exchange traded fund, commonly known as an ETF.
If you decide to take on more risk and chase The Donald, you will need to make a couple of important decisions:
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Comments
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In 1982, other than my home at that time (it also had a small apartment that I rented out), I purchased 80 acres for my livestock. They were on a rented pasture at the time. But I also had decided that once I had the land paid for I would build my home on it and sell the “town” property.
The rest of my funds…..a minimum of 15% of income went into 403b mutual fund stocks and a regular IRA. And as I could afford it, at one time I was putting 30% in my 403b. Unfortunately I couldn’t afford to do that for very long and had to drop it back down. As soon as the Roths came out….I immediately put my mutual funds into that. I had no match on my 403b, so making that decision was a no brainer to me.
After doing a lot of studies regarding mutual funds, I made some wonderful investments at Vanguard and have never looked back. While I do have some other mutual fund investments, my small (usually) but steady….pay myself first plan, has paid off for me wonderfully over the years. I took Buffett’s advice, and dollar cost averaged my purchases and then didn’t touch them. I might add that my yearly investments never exceeded the maximum that was allowed at the time for IRA’s. Even when you add my 403b for the yearly total combined for both. It is truly amazing what at one time was 160 a month, each and every month will add up to over that many years, increasing and compounding. Of course, I also have paid off everything and have no debt what so ever…..
So considering what Trump started out with, I’d say percentage wise, I’m way ahead. -
Bankruptcy #5… Trump International Golf Club Puerto Rico just went belly up, (Coco Beach Golf & Country Club S.E., Rio Grande PR), leaving behind debts to the tune of 78M, including over 32M to the ailing Government Development Bank of Puerto Rico (Fomento).
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Great timing as all of Puerto Rico is going bankrupt. 4-5 deals out of over 300 – are you kidding me ?
Do you know what VC’s [ like myself ] look for out of every 5 deals ?
You are clueless….
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After 4 bankruptcies, ALL of Trump’s money is actually somebody else’s. Just because you legally get rid of debt doesn’t mean you deserve what you have.
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Please say that again!!!! It’s all someone else’s money– our money.
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Out of all the deals he has done ? You have NO concept of business – none, zip, zero !
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One thing this article doesn’t account for is taxes. I am sure Trump has been paying at least some taxes on sale transactions along the way. If you take the S & P example the difference between 500M and 20B would be taxed at the long term capital gains rate upon the sale which would not make the difference anywhere near 10B.
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http://ecofrugality.blogspot.com/
The comparison is still valid. Minimizing the amount you pay in taxes should be part of any investment strategy – and the Donald, by choosing to invest heavily in real estate, is doing a lousy job of it.
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You completely missed the point of my post. Whatever taxes Trump did or did not pay have already been paid and thus his net worth reflects that. My point is that the author of this article doesn’t take into account the taxes one would have to pay by investing in the S&P Index fund upon the sale of those holdings over the same period of time given the gains the fund has seen. Its not an opinion or a “strategy” it’s simply a fact that was not accounted for in this piece. Good luck on your financial “strategy”…sounds like your a real wiz!
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Long term capital gains taxes max out at 15%. So assuming Trump paid 15% on the full $20 billion, which comes to $3 billion, he’s be left with $17 billion.
After taxes, Trump would still have 70% or $7 billion more than he claims to currently be worth.
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Thank you for supporting my point! It would be $20B-$500M=$19.5B in LT gains at the 15% so the author should have accounted for taxes in the S&P portion of the article.
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Good point. Nor does the author take into account the cost of housing, food and other living expense for himself and his family. This whole hypothetical scenario is based on 100% of all Trump’s money being dumped into the S&P500 and left untouched- not to mention Trump owning a crystal ball which would tell him how well the S&P 500 would perform over the next 30 plus years! Hindsight is always 20/20!
Today, instead of owning stock (which would need to be liquidated to be spent) Trump currently owns a large portfolio of extremely valuable real estate (skyscrapers, hotels, casinos) all over the world that produce a cash flow of $400 million PER YEAR. Overall, I’d say he outperformed the S&P 500 and then some.
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I thought the same thing, that he would have had to live off of some of it, and that would depend on his lifestyle, quite likely spending at least half of what he made, but they also gave him all the benefits of the doubt in terms of the calculations. Also, time is money, so his money would’ve been passively working for him, rather than him having to actively do real estate deals.
What it definitely shows is that even someone as knowledgeable about real estate has he is couldn’t actually beat the overall market, so most people definitely shouldn’t be trying.
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http://ecofrugality.blogspot.com/
And some folks want to hand the federal budget over to this guy?
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Sorry, but the budget is a function of Congress. The President of the United States proposes a budget, every year, but Congress can tell him to “go pound sand.,” if they don’t like it.
The Main Stream Media and the Democrats like to blame President Reagan for the increase in the National Debt during his administration and then strut and crow about how President Clinton left us with a (fantasy) balanced budget which George W. Bush destroyed just a few years later. That is just so much crap it isn’t worthy of arguing one way or another.
It should be evident, by now, that doubling of the National Debt under Barack Obama could only be accomplished by collusion between Republicans and Democrats in Congress. Anyone who doesn’t understand that isn’t worth talking to.
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he starts the Art of the deal saying he doesn’t do it for the money, but does it to do it. He likes building things and being in charge of a giant organization that employs tens of thousands, and he knows it’s easy to make money on the stock market, but he doesn’t respect the people who did that, because they did nothing to build the United States
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It means if Trump had the genius of timing the market getting in at the bottom. In 1982 the market was at the SAME LEVEL it was in 1966. ZERO RETURN. Same if you started in 1929, it would be 1950 before you broke even. BROKE EVEN, not even a gain.
He could have made far more money safely by buying 30 year treasuries paying 16+ in 1982, in 2012 he would have a completely safe 16% compounded return. Who do you know did that?
Timing is everything.
What if you started in 2000? 2008? -
Let’s all cry over Trump’s diminished fortunes which are probably million times greater than the author of this nonsense.
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I’m sure he will blame Mexicans or Muslims or monetary policy for his failure to maximize his opportunities. If only there had been a wall….
Thank you for all of the advice and news you share; it is priceless!
I post so many of your things on Facebook. Please keep up the great work.
Harmony