You are fed up, you don’t like the way the economy is going.  The value of your 401K is shrinking and your heart tells you not to follow the popular advice to invest for the long haul.  You have to work overtime to pay for last year’s Christmas; you don’t know where the funds for this year’s holidays are going to come from.  You’ve missed yet another ball game.  Sesame Street is baby-sitting your children and there is no end in sight.  Panic is everywhere as the unemployment rate rises and you wonder if you and your job will become another statistic.


Your friend comes to you with a business opportunity that has “just come across his desk” and he urges you to take a look.  You do because something has to change.  You are tired of feeling vulnerable and vulnerable is what you feel as daily you go to your mailbox, afraid of what you will find there.  You decide to  attend your first opportunity meeting.  You are learning about the industry of Network Marketing.  Everything you heard growing up about MLM or Network Marketing tells you to run for the exit, but the presenter says, “this is not your father’s MLM.”  You look and it isn’t.  You won’t have to deliver or inventory products, the company will direct-deposit the checks you earn to your account, the products are high quality, you won’t have to sell anything or hold “home parties” if you don’t want to, and you can get information to people and sign them up all over the internet.  The Network Marketing industry has caught the attention of best-selling authors and economists and they endorse it. You are told that you need just 4 things to be successful:  Belief in the industry, your company, the products and yourself.  You say check, check, check, check and you hand over the check and get started.


But there was one thing that they didn’t tell you that you need and it turns out to be the most important thing that you need for success.  That all-important thing will make or break you in the industry, it will determine your success or failure…it is your team. 


That is right, your team. 


It is your team that will determine whether or not your Network Marketing business will grow and at what pace.  It is your team that will determine the enthusiasm you and your prospects feel when they look at your opportunity.  It is your team that will help you through the hard times that will inevitably occur in your business.  It is your team that will propel you to success.  Some people find that they don’t have a team when they start their business.  They find that the group of people that they got started with are just as flat-footed as a duck and as unimaginative as a post.  It is the rare individual in that situation that will reach out crossline or downline and build a team and build success with their chosen Network Marketing company.  Most will quit not understanding how close they came to success and that all they lacked was one critical element.  You see, a team will provide the leverage that you need to build a long-term residual income. You cannot build a successful business alone.


What are the qualities you should look for in a Network Marketing team?


Does your team have a vision or mission?  All great organizations do, your team should be no different.  Once you find out what that vision is, does it resonate with you?


Does your team offer training?  What format is the training?  If your team only trains on Wednesday nights and Saturdays, will that fit for you?  Do you have to leave your home for training and business presentations? If so, does that fit for you? One of the things that you will have to do is edify your team’s training system to you new distributors; if you are not attending the live training, they won’t either.  You’ll get stuck having to create a training system that is more to your taste or watch your organization die and your income disappear for lack of one.


Is your team training purposeful or do the calls seem directionless?


Is your team enthusiastic?


Do your team members help each other with presentations to prospects?  Three way calls?  Will you have to do it all?


Is the culture of your team one that you can work within? Does everyone dress alike at business meetings? If so, are you comfortable with that?  Are women allowed to present at business meetings?  If not, are you comfortable with that?  If you are a professional, are there other professionals or other successful business owners on your team?  Are the people on your team similar in age to you?


Do your prospective team members have integrity?  This one is much easier to answer than you would imagine.  All you have to do is talk to people at the opportunity meeting about what is important to them and what their business has done for them. 


Do you like your team members?


Yes, team is the critical success element.  Without it your Network Marketing business is doomed to failure.  There is no way around that.  The importance of team is made all the more difficult because you may have been invited to look at an opportunity by a friend.  Did your friend join a good team?


The time is right for Network Marketing. Owning your own business is one of the few ways you can be in control of your financial future. 


You will be successful if you remember to evaluate the fifth element.

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First the Disclaimer: This is a thought-provoking article that draws upon real world examples, articles, books and websites that are readily available to the public. This article is not intended to offer investment advice. Any actions that you take in the market place should be the result of your own financial education and consultation with a licensed professional.

This is the conclusion of my 3 part series that began with Home Ownership: The Biggest Financial Scam of the Twentieth Century and was followed up by parts one and two of The Stock Market: The Second Biggest Financial Scam of the Twentieth Century.

What is Cashflow? Cashflow simply put is the flow of money. Positive cashflow is the revenue or income that a person receives from a job, investment or business. The majority of people derive their cashflow from their jobs. To the extent that they come to derive cashflow from investments and or businesses is the extent to which they will become financially free when their working years are over. Negative cashflow is the revenue that a person loses due to an investment or business.

Most people are taught to invest for capital gains rather than positive cashflow. Investment success depends on appreciation of the underlying “asset” rather than income production. This is the basis for “investing” in a primary residence or the stock market for wealth creation. Yet, success of the capital gains investment strategy is by no means assured. No one can guaranty that an asset will appreciate in value, despite the tendency to quote historical gains as justification for an investment today. The current housing and market crises highlight the fallacy of depending on capital gains to create wealth. The housing crisis alone will destroy billions of dollars of personal wealth. From the October 25, 2007 Joint Economic Committee report:

The JEC report found that the subprime catastrophe is likely to accelerate the downward spiral of house prices. Based on state-level data, the report estimates that by 2009:
• 2 million foreclosures will occur by the time the riskiest subprime adjustable rate mortgages (ARMs) reset over the course of this year and next.
• Approximately $71 billion in housing wealth will be directly destroyed because each foreclosure reduces the value of a home.
• More than $32 billion dollars in housing wealth will be indirectly destroyed by the spillover effect of foreclosures, which reduce the value of neighboring properties.
• States will lose more than $917 million in property tax revenue as a result of the destruction of housing wealth caused by subprime foreclosures.
• The ten states with the greatest number of estimated foreclosures are California, Florida, Ohio, New York, Michigan, Texas, Illinois, Arizona and Pennsylvania. But there are several others that are close behind in the rankings.
• On top of the losses due to foreclosures, which this report examines, a 10 percent decline in housing prices would lead to a $2.3 trillion economic loss.

The power of positive cashflow is that it guarantees the value of an investment regardless of the markets. Imagine the difference between a real estate investor who bought a house expecting it to go up in value versus the investor who bought for cashflow. The capital gains investor bought at very high premiums in the market such that the rents received for his investment do not cover the expenses. Now the investor must find a buyer who paid more than he did in order to make a profit. If the market goes down that investor will find that he has no staying power and will likely sustain a substantial loss to liquidate the property and limit his on-going monthly losses. The fate of the cashflow investor is much more secure. The positive cashflow yielded by the property will continue regardless of market activity. Should the market go down, the cashflow will continue, giving the investor staying power and continued profits in a down market. More importantly, most if not all of the positive cashflow will be shielded from taxes by depreciation expenses on the property. In short, the cashflow, not the capital gains, on a property will usually be tax-free. Avoidance of unnecessary taxes is one of the best wealth acceleration strategies you can employ. To quote David Swenson from Unconventional Success, “Taxes impair wealth accumulation.”

Cashflow strategies can also be applied to the stock market.

The trouble with cashflow investing is that it requires having a financial education. Cashflow investing requires the ongoing thirst for financial knowledge specific to your chosen area of cashflow generation.

The capital gains strategy encourages financial ignorance. Tempting the would-be investor to treat their investment as a money-in-money out proposition. Actively seeking financial education is the only way that a cashflow investor will be successful. Yet the odds are against him. Not because financial education is difficult to attain, no. The odds are against him because the financial sales people any would-be investor will encounter are paid commissions based on their ability to sell products and the majority of those products are for capital gains rather than cashflow. I find one or two real estate deals per year that yield sufficient positive cashflow for me to consider the deal, yet I am often encouraged by brokers to ignore my criteria for cashflow and invest instead for capital gains.

The cashflow strategy requires that you learn to work with people to form a team and generate profits for all. A capital gains strategy has people so focused on maximum gain that they ultimately succumb to greed, fail to exit an investment at an appropriate time and experience financial loss.

Even in today’s economy cash in the bank is not a source of solace as savers are seeing their returns destroyed by interest-rate-cutting policies of the Federal Reserve. People who depended on interest from savings to provide retirement income are seeing their incomes dissipate as the Federal Reserve sacrifices their incomes to bail out Wall Street, Banks and the derivatives markets.

The actions of the Fed and the behavior of Banks and Wall Street have proven that it is cashflow, not cash that is king.

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First the Disclaimer: This is a thought-provoking article that draws upon real world examples, articles, books and websites that are readily available to the public. This article is not intended to offer investment advice. Any actions that you take in the market place should be the result of your own financial education and consultation with a licensed professional. Financial calculations were accomplished using the savings goal calculator found at unless otherwise indicated.

When I entered the work force, I was offered a retirement plan, actually I was offered two. My employer was transitioning out of defined benefit plans, i.e. pensions and opting into defined contribution plans, i.e. 401ks. Because I was hired during the transition I was given a choice. I could not see working for any employer for 20 years and since the pension as I understood it was all or none, I opted for the 401K. Little did I know, I became part of a phenomenon initiated by the Federal Government in 1974 when it enacted the Employee Retirement Income Security Act (ERISA).

ERISA was created in the wake of the failure of the Studebaker Corporation in 1963. When Studebaker failed it left a pension that was so badly funded it could not provide benefits for all of its employees. ERISA did two things: 1) It provided regulation of any existing and future pension plans; 2) It provided government insurance of those pension plans in the form of the Pension Benefit Guaranty Corporation. ERISA also did something else, it virtually guaranteed a shift away from corporate-sponsored pensions and toward employee-sponsored savings plans. The 401K, intended to be a tax-advantaged benefit to corporate executives, has become the major savings vehicle for retirement for the average worker in America.

Let’s look at that statement. The 401K, intended to be a portable, tax-advantaged benefit to corporate executives, people whose income is generally north of six figures, has become the major savings vehicle for the average American worker, people whose median income is $46,326. ( This figure for median income comes from the US Census and the General Accounting Office.)

Assume the average retiree will need cash assets of one million dollars. One million dollars invested at 5% will earn an income of $50,000 per year without having to draw down the principle. This goal of one million dollars assumes the $300,000 to $500,000 dollars retirees will have to have set aside to cover health care costs. (CNNMonday February 19, 2008 “Most Americans Unprepared for Retirement”) Even if a worker earning the median income only desires to live on sixty percent of his or her working income, he would still have to save $555,912 invested at 5% to earn an income of $27,796. Add in the amount needed for health care and the goal is still one million dollars. The Savings goal calculator at shows that even if a worker earning the median income managed to save $10,000 per year or 21.6% of his gross income, it would take 100 years to reach the estimated million-dollar target needed for a comfortable retirement. In other words this retiree will die of old age while trying to save for retirement. Using bonds or a “high-yield” savings account with an annual percentage yield of 3.6% will put the average American worker within reach in 77 years 11 months almost beyond the average American’s lifespan. He would still die of old age while trying to save for retirement. Add a 50% employer match and the goal is reached in 34 years and 3 months. Well within the estimated forty year working life of the American worker. But an employer match of 50% is virtually unheard of. A true 50% match of 50 cents per employee dollar invested does not exist. The 401Khelpcenter reviews the common matching plans available to people who save through their 401Ks.

Because amassing the funds necessary for a comfortable retirement is virtually impossible through savings alone, employees must seek vehicles capable of higher returns in order to reach their retirement goals.

In steps the Stock Market, promising higher returns than stodgy old bonds, and money market accounts; hence, the stock market became the destination of choice for retirement savings and Wall Street responded by increasing the offerings to retail consumers through Mutual Funds. Before the year 2000 it was not uncommon to hear that the S&P returned 16% over the previous 10 years. Looking at the returns of one of the best known indexed mutual funds, the Vanguard 500, returns since its 1976 inception are 11.75%, impressive until you look at the 1 year return, -2.41%, the 5 year return, 11.89% and the 10 year return 5.06%. These are average returns not real returns. As an example let’s look at the growth of 1 dollar in the mythical High Fly Fund. High Fly posts a 50% gain in one year and your dollar grows to $1.50. The next year it posts a 25% loss, now your investment is worth $1.125. The average return for High Fly reported by the mutual company is 12.5%, but that is not your actual return. Your actual return or compound annual growth rate (CAGR) is in the neighborhood of 6% per year worse if you factor in inflation.

Is 6% acceptable given the risk that investors take on by investing in the stock market? David F. Swenson, CIO of the Yale Endowment explains investor risk in his book, Unconventional Success, when he states: “Because equity owners get paid after corporations satisfy all other claimants, equity ownership represents a residual interest. As such stockholders occupy a riskier position than, say, corporate lenders who enjoy a superior position in a company’s capital structure.” He goes on to say “the 5.0 percentage point difference between stock and bond returns represents the historical risk premium, defined as the return to equity holders for accepting risk above the level inherent in bond investments.” Mr. Swenson’s comments and calculations of the risk premium were based on a compound annual return of 10.4% in the stock market compared with 5% bond yields. 10.4%-5% equals a risk premium of 5.4%. Unfortunately I have yet to find a calculation of CAGR (compound annual growth rate) that matches Mr. Swenson’s. I found many examples of average returns that match the 10.4% average growth rate but not the CAGR. The reason that this is important is that all other savings vehicles are quoted by the CAGR. Your savings accounts, bonds and money market account are all quoted by the CAGR or its equivalent, the annual percentage yield (APY). In order to determine where to allocate your funds, you must compare apples to apples not apples to oranges. As you might guess the CAGR for the stock market is lower.

A quick look at the CAGR calculator for the stock market on shows the average return from January 1, 1975 to December 31, 2007 to be 9.71%. You only realized that return if you were invested in the market the entire time. What if you began investing in 1980? The numbers look about the same. If you started in 1985 your returns look a little better. By 1990 the CAGR drops to 8.21%. If you started in 1995 your CAGR jumps to 9.32%. If you began investing in 2000 your CAGR drops to minus 0.06%! If you eliminate the results of the past 7 years from the S&P performance and track performance from January 1, 1975 to December 31, 1999 the CAGR was 13.03%. When the stock market is good it is great, when it is bad, it is pretty darn miserable. For the record, there has been only one 9 year period from January 1, 1950 to December 31, 2007 in which the average return for the S&P was 16.14% and the CAGR was 15.32%: the period from January 1, 1990 thru December 31, 1999.

It should be clear from these numbers that your returns are dependent not only on how long you are invested in the markets but when you started investing. In fact the stodgy old bond investor has outperformed the stock investor over the past 7 years.

The 1990’s investor will have a very different view of market performance than the 2000’s investor.

Mr. Swenson’s book is a must read for anyone investing in mutual funds, he makes a compelling case, explaining why actively managed mutual funds are generally a money losing proposition for investors and why a balanced portfolio based on six solid asset classes constitutes the winning combination for investors.

How can I call the stock market the second biggest financial scam of the twentieth century if I am quoting numbers that are on the face of it pretty good? For four reasons: 1) because the true CAGR going back to 1950 is much lower 7.47%. It will take the average American worker 25 years and one month saving $10,000 per year to accumulate one million dollars in wealth as long as the market achieves CAGR of 9.71% and in 29 years 2 months if forced to accept the longer term returns of the market. These numbers leave very little margin for error for the average American worker. Retirement projections for the most part are based on returns that have existed at only one point in the stock market’s history since 1950; 2) because the same laws that facilitate the transfer of individual investor money into the stock market also mandate its withdrawal at a specific time which is tantamount to what all financial pundits have called a money losing strategy, Market Timing. In other words the laws governing tax-deferred savings mandate that withdrawals begin at age 70 and a half at the latest forcing retirees to time the market to determine their exit; 3) the time horizon for capturing meaningful gains from the market is long indeed, at least 30 years. To quote Mr. Swenson, “Returns of bonds and cash may exceed returns of stocks for years on end. For example from the market peak in October 1929, it took stock investors fully twenty-one years and three months to match returns generated by bond investors.”

Charles Farrell, an adviser with Denver’s Northstar Investment Advisors, used data from Morningstar’s Ibbotson and Associates to analyze 52 rolling 30-year periods, starting with 1926 to 1955 and ending with 1977 to 2006 “But here’s what’s interesting: The Majority of your wealth would almost always have come in the last 10 years. Mr. Farrell calculates that, on average, you would have notched 8% of your final wealth after the first decade and 32% after the second. In other words, 68% of the total sum accumulated was amassed in the last 10 years.” (Wall Street Journal, Jonathan Clements November 21, 2007); 4) because current marketing strategies by financial pundits, gurus and Wall Street treat stock market investing as a money in, money out proposition obscuring the true risks of investing and the true time horizon needed to accumulate wealth. In other words, the money needed for retirement must be invested for an extended period of time, roughly 30 years. It cannot be borrowed against. It cannot be used to buy a home, car, pay for college or a child’s wedding.
It can only be used for retirement 30 years hence. Any other needs must be paid for from an additional source other than retirement savings. Most people lack the financial education to understand this and blindly chase market returns hoping for a big score.

Fortunately there is a simple solution, but like most simple solutions this one requires work and financial education. I will introduce this simple solution in part 3 of this series.

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Robert Kiyosaki was the first and has been the only financial pundit to suggest that your home is not an asset. As they so often do, Kiyosaki’s statements fly in the face of prevailing financial wisdom.

David Bach, author of Automatic Millionaire, not only says that your home is an asset, he asserts that home ownership is the first wrung on the ladder of wealth creation in America. He encourages everyone to buy a home as soon as possible to begin building their wealth.

CNN Money does their Millionaire in the Making profiles and I am shocked to find that in almost all cases 50-75% of the wealth of the families profiled is locked in their home. Given that people have to have a place to live, this is a problem.

In science, we have a term, “true, true and unrelated.” Does one thing cause another or do they simply occur together in time and space? Does home ownership produce wealth or are wealth and home ownership produced by sound wealth-producing financial habits?

The Economist, tracking real estate over the past decade, has concluded that the economics no longer support home ownership.

I bought my first home in 1991. The housing market in the North East had not recovered. The savings and loan collapse of the mid 1980’s depressed home prices and brought the condo market to a halt. Multiunit condominium properties were vacant. Many of the properties were very cool, but they continued to sit vacant because banks had strict owner occupancy ratios for condominiums. Mortgage money was tight. First-time home buyer programs were coming on the market and the minimum down was ten percent. I was raised to think that a home was an asset, an investment. My mortgage broker sat me down and said, “it is best that you think of your house as a roof over your head, not as an investment.” That was incredible advice. Prices dropped another 10% after I moved into my home. After 3 years of living in my home and 2 years of renting it out, I sold it for what I paid for it. After closing costs and realtor fees, I received a check for 447 dollars, significantly less than the $14,000 dollars that my family gave me for closing costs and the down payment. I always intended to pay them back with the proceeds from the sale. All told the housing market was depressed in the North East for over 10 years.

Even in an appreciating market, home ownership is no bargain. And a home is not an asset.

Most people will try to argue the point, so we will look at some numbers in just a moment.

Let’s tackle the issue of equity as a component of wealth first. Let’s say you buy a $100,000 home and put money down. Let’s say that down payment is 20%. In real terms at the time of closing you have 20% equity in your home. If you had $20,000 dollars in your bank account, you had $20,000 in wealth. If you move that money to your home in the form of a down payment, you may have $20,000 in wealth as long as the market at least stays flat. For this illustration, we will say that is the case. You have $20,000 wealth stored in your home. Now what can you do with that?

If you borrow against your home, you erode your equity and your wealth.
If you sell your home and get your $20,000 back, then what? You have to live somewhere and living somewhere costs money. The equity in your home is essentially dead. You cannot do anything with it. Sell your house and you reinvest that money into a new home, borrow against your equity and you lose it.

In short, the equity in your home, once in your home, will remain there. Useless to you in real terms, but that equity will do something that is quite dangerous. It will cause you to feel wealthy, wealthier in fact than you are and spend money, money that you, in reality don’t have.

It might be helpful if I defined an asset here. Kiyosaki calls an asset anything that retains or appreciates in value that pays you. For Kiyosaki a house does not fit that definition. I define an asset as anything that retains or appreciates in value that I can sell and dance around my house throwing the proceeds of the sale in the air and have a jolly good time. Can’t do that with a house because, once again, I need someplace to live.

Someone might say that they want to downsize. Sell their home, pick up something smaller and bank the rest of the profits.

The numbers don’t support it. One of the columnists for the WSJ wrote that he doubted that he had made much money on his home although it was valued at half a million dollars. He had lived in his home for 10 years and paid just under $300,000 dollars for it. When he factored in taxes, insurance and maintenance, he figured that he broke even. Broke even!

What that means is that he actually spent the $200,000 on his home in other ways and the sale of the home would just result in returning that money to him. Two hundred thousand dollars equity and wealth gone when you actually look at the numbers. So much for great profits! So much for down sizing.

The example on my home is just as concerning. My example is what happens when you refinance or draw equity out. For the amount of time that I have actually lived in my home I have made $82,800 dollars in payments. These payments went primarily to interest so let’s deduct the top tax rate. For tax rates lower than the maximum the numbers don’t look any better, in fact ,the top tax rate is the best-case scenario, so we’ll use that. Deduct $27,324 and get $55,476. Taxes and insurance paid amount to $20,460.
Now the total paid is $55,476 + $20,460 = $75,936. Maintenance, landscaping, updates, repairs total $29,779. Add the two, $75,936 + $29,779 and get $105,714. I refinanced the house in order to take money out and buy my first investment property. Add in the mortgage balance and the total owed, paid and put into the house is $188, 715.

Now this is a critical concept. Improvements on a home don’t necessarily increase the value of that home. Every neighborhood has a trading range. The trading range for an area is based on location, size of the homes in that area and amenities. Homes will trade at the high end or low end of a neighborhood based on those factors. Let’s say my home sold for $170, 000. Based on the difference between the mortgage and the sale price, the financial gurus would say that I have $87,000 dollars of wealth. Because you have seen the numbers you know better. In fact I lost $18,715 dollars. When I take into account the money I borrowed out to buy my first investment property, I broke even. I am assuming that I sell my home myself. Using a realtor would increase my losses by 6% of the sale price.

How can I call home ownership the greatest financial scam of the 20th century? I call it a scam when you buy something (a house) expecting it to lead to something (wealth) when that purchase can in no way produce that result. I call it a scam when the brokers who sell you the house know it won’t.

Sound financial habits will lead to wealth but home ownership in and of itself will not. Home ownership can in fact lead to poverty as people struggle to make payments and find that they are unable to maintain their homes. Sell and they risk owing more than the home is worth. Stay and their standard of living is reduced to pay for the house. Sounds like a winning formula for wealth to me.

While 20% of the homes in this most recent real estate bubble went to investors who were speculating in the markets, 80% of the homes went to people who believed that home ownership, not sound financial habits, were the first wrung on the ladder to wealth creation. They just believed what the gurus, the realtor, the mortgage broker and the banker told them. In a consumer society where everything is reduced to the lowest common denominator, they believed that a home could be purchased for little more than a moderately-priced flat screen TV and that down payments were a nuisance. They did not understand that as a worse case scenario, down payments are actually insurance against downside fluctuations in the housing market. Many people are finding that they don’t have wealth at all. What they have, instead, is a financial nightmare.

Perhaps moving forward into the 21st century, we will decide that sound financial habits and financial education are the first steps on the road to wealth. Maybe we will decide that wealth is created through work and due diligence and not by betting on the financial product of the day.

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