TIP849: Average Returns Can Still Make You Wealthy w/…

PodcastWe Study BillionairesDavid FaganSep 27

Fagan emphasizes that saving, disciplined spending, tax planning, and getting money invested can matter as much as portfolio returns in building spendable wealth. He argues that idle cash, taxes, fees, and other forms of drag can erode compounding, while total net worth offers a broader measure of financial progress. Stig raises the roles of financial habits, personal experience, and investor behavior, including the risks of poor financial preparation and illiquid assets.

Personal Finance Investment Strategy Tax Planning

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Key Takeaways

Fagan argues that saving and disciplined spending come before investment strategy in building wealth, while Stig notes that understanding compounding or delayed gratification does not guarantee people will act on it. Stig frames accumulation around how much is invested, the returns earned, and how long compounding continues uninterrupted.

Fagan’s total-wealth framework evaluates decisions before, during, and after investing—including savings, debt, taxes, fees, and what remains—rather than treating portfolio returns as the whole scorecard. He says that over 15 to 20 years, net-worth growth can offer meaningful information about whether a person’s wealth is compounding in support of the life they want.

Fagan argues that taxes can materially reduce investment outcomes: he estimates tax drag alone can cost 1% to 3% of returns or more in higher-turnover portfolios, and says lower returns with less than 1% tax drag can outperform higher returns with greater tax drag. In his hypothetical Nova Scotia example, taxes on $150,000 of corporate fixed-income interest could total $170,000, leaving an after-tax money-weighted return near negative 0.5%.

Fagan argues that waiting in cash for a better entry point can sacrifice compounding because investors cannot reliably time market bottoms. In one client example, cash left uninvested in 2025 could have earned around 15% in a balanced index-fund strategy; he estimates that compounding one missed year at an assumed 8% over 40 years could amount to roughly $3 million.

ECONOMY

Saving Habits — Fagan argues that saving comes before investment returns and strategy when building wealth from near zero. He says a spending plan, paying off student loans, living below their means, and other disciplined choices helped him and his wife build financial independence over time.

“When you talk to people about creating financial independence from zero, savings is a first principle. We've talked about this…”—

Early Spending Lesson — Fagan recalls spending his entire net worth at age eight on a toy he played with for an afternoon before it stopped working. He presents the experience as a personal lesson in wasteful spending.

“I had blown my entire net worth as an eight year old on a toy that I played with for an afternoon.”—

Money Lessons At Home — Stig says many of his financially independent friends report that their parents did not explicitly teach them how to think about money.

“Now, today, many of the friends that I have are first generation financial independent, But whenever we talk about how they were raised, most of them say that they were…”—

MARKETS

Total-Wealth Returns — Fagan's total-wealth framework looks beyond portfolio returns to decisions made before investing, while money is invested, and about what remains afterward. It considers whether money was invested on time and how much survives taxes, fees, structure, and friction.

“And investing works the same way…”—

Real Estate Preference — Stig suggests a boomer's preference for real estate over equities may reflect personal experience: someone who lost 40%–50% in the 1973–74 stock-market crash and later saw a San Francisco home appreciate substantially might favor real estate.

“Might have lost, let's say, 40%, 50% in the stock market crash in 'seventy three, 'seventy four, and then they bought a home in say in San Francisco for like…”—

Delayed Investment Cost — Fagan says delays in making savings available for investment create compounding gaps that may not be recovered later. He gives the example of a client with about $4 million in an index-type portfolio and nearly $1.5 million sitting in a bank account while waiting for a better time to buy.

“And, you know, delays in availability, they create these silent gaps in compounding that just can never get recovered later.”—

Saving And Money Habits

Fagan traces his saving habits to a childhood purchase that taught him how painful waste felt, while both hosts consider how experience and upbringing shape financial behavior.

The Hot Wheels Lesson

Fagan recalls spending his entire childhood savings on a disappointing toy and says the experience helped shape a lasting preference for saving over wasteful spending.

Marshmallow Test Revisited

Brodersen challenges the simple lesson of the marshmallow test, arguing that children’s trust in promises and their personal experiences can make immediate choices rational.

Financial Independence By Habit

Fagan distinguishes luck from intention and discipline, describing how small, repeated financial and business choices compound into lasting wealth and independence.

Total Wealth Performance

Fagan frames wealth performance as the combined effect of getting money invested, earning returns, and retaining the proceeds after taxes, fees, and other friction.

Portfolio Returns And Life Goals

The hosts compare broader wealth outcomes with portfolio returns, emphasizing that savings, time, spending needs, and financial goals all shape the wealth people can use.

Income, Saving, And Financial Risk

Brodersen explains his preference for ongoing work and operating income, underspending earnings, and building investments early to reduce vulnerability to health or career shocks.

Availability And Missed Compounding

Fagan shows how cash left idle or delayed account setup can reduce actual wealth performance, even when a broker statement reports strong returns.

Business Sales And Investor Readiness

Fagan argues that people should learn to manage investments before a business sale, inheritance, or other major life event leaves them responsible for a large sum.

Market Timing And Participation

Using a business-sale story and market-timing examples, Fagan warns that uncertainty can keep investors in cash for years and that participation often matters more than perfect timing.

Investing That Fits You

The hosts say investors should connect financial choices to lived experience, risk tolerance, and personal goals, while Fagan recommends strategies people can stick with.

Net Worth As A Scorecard

Fagan presents net worth as an imperfect but practical measure of broad financial progress, capturing savings, spending, taxes, debt, businesses, and investments.

Financial Independence And Happiness

Fagan describes financial independence as a way to relieve pressure and help people become better versions of themselves, before turning to the costs of tax drag.

Tax Drag And Spendable Wealth

Fagan explains how taxes can meaningfully reduce compounding, especially in corporate accounts, and argues that tax-aware decisions help turn average returns into spendable wealth.