Everyone tells you the S&P 500 is the safest, smartest place to invest. It sounds comforting: low fees, broad exposure, set it and forget it. I used to believe it, too. I was a traditional financial advisor, then an indexing evangelist, and I even traded the S&P 500 itself. But if your goal is to become work optional, the S&P 500 can quietly slow you down especially after a long bull run and a top-heavy market.
Today I’ll unpack the hidden risks I see in “just buy the index,” and what I’m doing instead to create dependable cash flow that can replace earned income faster.
The Diversification Myth
Yes, the S&P 500 holds ~500 companies. No, that does not mean you’re truly diversified.
The index is cap-weighted the bigger the company, the more influence it has on your returns. In practice, a handful of mega-caps can dominate your outcome. When one or two names surge (or stumble), they can drag the whole “market” with them. That’s concentration risk with a friendlier label.
True diversification spans asset classes not just a basket of highly correlated U.S. large-cap stocks. Owning 500 slices of the same public-equity pie is still one asset class.
Why Long Bull Runs Create Lower Future Returns
Markets move in cycles. Long, euphoric runs tend to pull future returns forward. The next decade often looks dull by comparison. That’s not doomsday; it’s math. When people extrapolate the most recent 10–15 years indefinitely, they set themselves up for disappointment and they build retirement plans on sand.
Even if you “average” an attractive number over 30 years, sequence of returns risk can crush you if bad years hit early in retirement. That’s why the traditional advice quietly leans on the 3–4% withdrawal rule: it admits the income stream is fragile.
The Fee Debate That Misses the Bigger Point
I recently reacted to a spirited Dave Ramsey call where a listener argued for index funds over actively managed mutual funds because of fees and underperformance. I agree with one thing: most people won’t do the homework to select and monitor active funds wisely, and many fee-heavy funds lag the index.
But notice how real wealth is typically created:
- Dave didn’t become wealthy by maxing an index. He built a wildly profitable business and bought a lot of real estate.
- Warren Buffett doesn’t index his fortune. He runs Berkshire Hathaway, an actively managed holding company, and he stockpiles cash when markets look frothy.
Their actions matter more than their sound bites.
The 20k/30-Year Thought Experiment
Let’s run a simple illustration I walk through on the show.
- Contribute $20,000/year for 30 years.
- Earn a generous 9% (optimistic for a long forward period).
- End value: roughly $3M before taxes.
Now retirement reality:
- Conventional wisdom says withdraw ~3% to reduce the odds of running out (sequence risk).
- That’s $90,000/year before taxes.
- After inflation and taxes, your lifestyle may look far leaner than the headline number suggests.
Contrast that with a cash-flow-first approach: invest for durable income so you’re spending your yield, not cannibalizing principal. A similar capital base producing consistent cash yields can deliver more usable, dependable income earlier.
Why I Favor Cash-Flowing, Real Assets
I don’t invest for someday. I invest for streams of cash that show up this year.
Here’s what I prioritize:
- Income-Producing Real EstateAssets with real tenants and real leases. I look for conservative underwriting, clear value-add, and operators who protect downside first.
- Private Credit & Collateralized NotesSenior-secured or well-structured loans with defined cash yields. I’m not chasing sizzle; I want contractual payments and strong covenants.
- Operator-Led Small Business & Friendly PEProfitable companies with proven P&Ls, sticky customers, and owner-operators who stay on. I’d rather magnify what already works than speculate on what might.
- Strategic LiquidityDry powder isn’t laziness it’s optionality. When cycles turn, opportunities don’t send a calendar invite.
This is how family offices and first-generation multimillionaires I mentor actually build and protect wealth. They don’t depend on a single public index to do all the lifting.
“But Isn’t Indexing Safer?”
Safer than what? Picking expensive, underperforming funds blindly? Yes.
Safer than owning cash-flowing assets you understand, with real downside protection? Not automatically.
Risk is the chance you won’t meet your goal on time. If your goal is to be work optional sooner, then a strategy that produces reliable cash flow beats a strategy that hopes for price appreciation and tolerates long dry spells.
What To Do Next
- Measure what matters: Stop asking, “What did the market do?” Start asking, “What did my cash flow do?”
- Audit your concentration: If most of your net worth swings with a handful of mega-caps, you’re not diversified.
- Rebuild your plan around income: Model how many cash-flowing units you need to replace your monthly expenses.
- Move deliberately, not recklessly: You don’t have to dump everything tomorrow. Reallocate on a cadence, with criteria, toward assets you actually understand.