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Best investing strategy for financial independence
Old 04-04-2014, 04:58 AM   #1
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Best investing strategy for financial independence

I have been researching financial independence and investing for a few months now and Iím a bit overwhelmed with all of the information out there. I have been looking at blogs like Dividend mantra, Dividend monk, Mr Money Mustache and these sites have introduced me to investing strategies like dividend growth investing and index investing. I would just like to know out of these or if there are any others that are the best for achieving financial independence within 10 years, I have read that dividend growth investing is too slow if you donít have a large sum of money to invest but Iím not sure if thatís true or not. Also it seems like the people who run these blogs are only focusing on how much only they spend and aiming for an income goal based on that, but for someone like me who wants to start a family I wonít be able to have my investments just pay my expenses. So I mean really Iím looking for the best investing strategy that will be able to pay me enough annual income to support me and my future family within 10 years. Iím 19 at the moment and looking to reach financial independence by the age of 30 (under 30 would be great if I could achieve that) as I feel that 30 is the right time to start a family and I donít want to rely on a job to support them.

If anyone whoís aiming for financial independence or has already achieved it could shed some light on this I would really appreciate it.
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Old 04-04-2014, 05:57 AM   #2
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19, eh? You're getting an early start which is good.

First thing is to try and determine an annual budget for a future family 10 years down the road. ::: Very difficult to do without knowing who you're marrying, where you're living, size of your family, and what kind of lifestyle you'll be enjoying, etc. . . . God forbid any health issues. :::

So let's take a WAG (wild-ass guess) and say you'll need $100,000 per year gross. If you want to be conservative figure a 65 year retirement, but at a minimum consider a 50 year retirement. Aiming for a withdrawal rate of 2 to 3% may make it -- requiring a portfolio of anywhere from $3.3 to $5.0 million.

So in the next 11 years, what are your options for generating that kind of portfolio? The answer depends on how much excess cash flow over current expenses you can generate and how much risk you are willing to accept.

You could save 100K over the first five years and put it on 35 Black in Vegas with a 2.63% chance of turning it into $3.5 million and then invest it a bit more safely. But you've got a 97%+ chance of losing it all.

You could be a super salesman and earn $600K a year, saving most of it after taxes in a balanced portfolio and get there also by the time your 30.

What is your earning capacity? What kind of lifestyle are you looking for with your future family? Those are good things to start thinking about.
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Old 04-04-2014, 05:59 AM   #3
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It takes money to be financially independent. You are not going to get enough money by just investing. You will need to work one or more jobs that pays well in order to achieve financial independence in 10 years. If you save/invest say 80% of the gross income every year from those jobs, then you have a chance.

It will matter less what your investing strategies are, but I would recommend index funds following a so-called small-cap and value-tilted approach using index funds with the lowest possible fees (i.e. no fees). Probably the best site on the internet for investing info and hand-holding is Bogleheads Investing Advice and Info

Good luck with your jobs and work!
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Old 04-04-2014, 06:46 AM   #4
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In a ten-year period, a large part of your investment portfolio will be due to your earnings, and the savings rate you can sustain. Over longer periods, you will see a greater influence of inflation and return rate.
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Old 04-04-2014, 07:53 AM   #5
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In my opinion, there are three main factors that determine FI (assuming you are not fortunate enough to inherit wealth).

1. What you earn
2. How much you save
3. How your investments perform


Seems like our society is obsessed with item 1 and to a lesser degree, item 3, but not item 2. If you make $1 mil and spend $1.2 mil, you are in trouble. If you make $40k and spend $30k, you are much better.
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Old 04-04-2014, 08:15 AM   #6
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10 years is extremely aggressive and will be difficult/impossible to do unless you have a high paying job, cash out in stock options, make it big with your own small business, and/or live like a pauper. If you are 19 now, do you have a college degree? what is your profession (current or future)?

You should look at Midpack's post How to Retire at Any Age . As other's have mentioned, when you start with nothing the dominant factor is your savings rate. Return on investments won't play a big role until you have a sizable portfolio.

My work career spanned 2001-2014 (with about a year off in leave/time between jobs) if you exclude time in grad school. My first full time job started at about 80k/year and I had very strong raises (5-15%/year) plus my wife also worked. We saved aggressively and invested heavily in equities via index funds (total return approach). In some ways I got lucky to be fully employed during the 2009 recession and continued to shovel money into the market at bargain prices.

In terms of investing, I recommend you download Bernstein's ebook focused on millennials and read it several times. Then read the books he recommends. It's free and you can find it in the following thread:

Bogleheads ‚ÄĘ View topic - New E-book for Millennials
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Old 04-04-2014, 09:29 AM   #7
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Start a successful tech company and sell to Google or Facebook, or start the next Google, Amazon, Apple or Facebook yourself!

Otherwise there is no "best way", no silver bullet - but it doesn't stop anyone from looking for one. Sells lots of mostly useless books, magazines, and employs a lot of financial advisers (some great, many not).

Like others have already said, the more you make, the less you spend, and the greater your returns on savings & investments - the sooner you'll reach FI. There are an unlimited number of decent probability approaches to get there. The best way is only certain in hindsight.

Somehow I doubt the folks who've achieved financial independence by age 30 did so by casually asking a bunch of strangers to share the 'best way to achieve financial independence within 10 years.' If it was that easy, everyone would be FI at 30...
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Old 04-04-2014, 09:53 AM   #8
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30 is way too early to be FI with a family in my opinion unless you're either very lucky or want to go the ERE route. But unless your future family is ok with living in a hole in the ground I don't think that's a very viable option. The example many people like to look at is MrMoneyMustache but even he didn't "retire" until the mid 30's and the technicality of his retirement is full of debate.

I think the overall mentality I've seen here is more of set up a plan and stick with it. If you can figure out how to save and what you can save then you can tweak the plan as you go. Fully fund a Roth IRA, max tax advantage accounts, and plug any holes in your finances. These things take time and that's just how it is.
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Old 04-04-2014, 10:04 AM   #9
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10 years is a mighty lofty goal. But if you save and invest all you can and then some you'll be way ahead of the game, even if your not FI. Then of course, you don't want to squander those young years by not living a full life.
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Old 04-04-2014, 10:24 AM   #10
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As others have said, a 10 year time frame is a pretty lofty goal outside of the lottery, inheritance, or starting the next big company.

That said, do not underestimate the importance of starting early. It is the early years of saving that will make all the difference.

I would moan as we maxed out our 403bs and IRAs during all the down years including '02-'03 and '08-'09. I would get frustrated at the "lost decade". Little did I realize I was buying everything on sale. Starting my 403b when I was 19 and maxing it out at age 23 on was the best thing I ever did, and is starting to look a lot brighter now at age 40.

Now if I had just learned about asset allocation and index funds a lot earlier. You might want to start by reading John Bogle's book: The Little Book of Common Sense Investing.
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Old 04-04-2014, 12:31 PM   #11
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Start with "total return" investing, using index funds. That's appropriate for you at this point. Total return's goal is to maximize your net worth, whether the gains come from dividends or price gains. Pure dividend investing is an option better left to the years when you are depending on your portfolio for income, if you prefer.

As you become a more informed investor you can branch off into other specific strategies or become more of an active investor.
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Old 04-05-2014, 06:58 AM   #12
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Hi Mrjim,
Besides the basic math, here are some tips on--

How To Get Rich

1) Make a lot of money
a. Get well educated AND learn a trade/job skills/a profession that pays well. It is much easier to have a high net worth when you have a high income
b. Don’t stop learning when you leave formal schooling
c. Work hard
d. Be willing to take reasonable risks
e. Consider being an owner rather than an employee

2) Don’t spend a lot of money
a. Start saving early. Remember that every dollar you save in your twenties and thirties is 8 times as valuable as one saved in your fifties
b. Don’t be all hat and no cattle
c. Rent your lifestyle (Don’t buy a boat, a time-share, a second house, a plane etc) Keep your fixed expenses low so when hard times come you can cut your lifestyle back rapidly
d. Realize that buying a house or cars that are too expensive for you will likely keep you from getting rich. The big things matter most
e. Be prudently frugal and selectively extravagant. Be sure that you are spending your money on the things you value most
f. If you can’t afford to pay cash for it, you can’t afford it. The only exception is a house (because it will generally appreciate at just over the rate of inflation), where the rule is if you can’t afford to put 20% down and use a 15 year fixed mortgage you can’t afford it
g. Marry well, marry once, marry someone who shares the same thoughts, or with whom you can work out an acceptable compromise beforehand, on “The Big Four” (Money, Religion, Kids, and Sex) and STAY MARRIED
h. Credit cards aren’t for credit; if you have paid interest at a higher rate than 3% or paid a late or over-the-limit fee more than once you shouldn’t use a credit card

3) Make your money work as hard as you do
a. Read at least one good basic personal finance book, one good investing book, and one good behavioral finance book. Consider Personal Finance for Dummies, The Boglehead’s Guide to Investing, and Why Smart People Make Big Money Mistakes and How to Avoid Them.
b. Get the market return; use fixed asset-allocation, index mutual fund investing as your default strategy
c. Minimize taxes. Know the basics of the tax code, max out tax-advantaged savings accounts, and use them to your advantage
d. Keep investing expenses low
e. Understand basic financial calculations and lingo. Understand compound interest, the time value of money, financial risk, and the expected rate of return of various financial assets. Know how to use the excel functions-FV, XIRR, PMT, PPMT etc
f. Simplify your financial life. Put bills on automatic payment and investments on automatic withdrawal. Minimize the number of accounts you hold and the number of investments you have as much as possible
g. Understand why your savings rate matters a lot when you’re young and very little as your approach retirement. Understand why your investment return matters little when you’re young, more as you approach retirement, and a great deal during your first decade after retirement. Understand the concept of a safe withdrawal rate
h. See the end from the beginning. If you fail to plan you plan to fail. Have a written investment plan you can refer to when contemplating portfolio changes.

4) Don’t lose your money
a. Insure well against catastrophe-Life, Disability, Health, Liability, Property but self-insure whenever possible using a safe, liquid emergency fund (High benefits/limits but high deductibles/ waiting periods). Self-insure against medical expenses by maintaining a healthy lifestyle. After you retire, consider long-term care insurance to insure against having an extended period of dependence at the end of your life. Don’t mix insurance and investments. Cash-value (non-term) life insurance and variable annuities are generally products meant to be sold, not bought.
b. Get rich once, get rich slowly. Good investing is boring investing
c. Hire professionals to teach you, not just to “do it for you.” This includes accountants, estate attorneys, real estate professionals, and investment advisors. Be sure to bounce the advice you’ve received off someone with no conflict of interest in the transaction, realizing that no one cares about your financial success nearly as much as you do. If you are reasonably well-educated and interested, you can teach yourself to do your own taxes, sell your own house, and invest your own money.

Good luck!
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Old 04-05-2014, 07:02 AM   #13
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Originally Posted by David1961 View Post
In my opinion, there are three main factors that determine FI (assuming you are not fortunate enough to inherit wealth).

1. What you earn
2. How much you save
3. How your investments perform


Seems like our society is obsessed with item 1 and to a lesser degree, item 3, but not item 2. If you make $1 mil and spend $1.2 mil, you are in trouble. If you make $40k and spend $30k, you are much better.
+1 ! Bravo! In a nutshell there it is.
This simple, simple lesson should be taught in schools!
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Old 04-05-2014, 10:09 AM   #14
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Hey mrjim - I saw your similar post on reddit. I'm not going to answer your question, but I will tell you to give heed to advice here much more than on reddit. This community of very successful FIREees proved very helpful in putting me on the path to FIRE quite a long time ago, and they have only gotten more knowledgeable over the years. Good luck. (ten years is not enough time by the way, but I'm pretty sure everyone above me has already told you the same thing.)
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Old 04-06-2014, 11:32 AM   #15
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Thanks for all of your replies, sorry I should have gone into more detail. I’m looking to make around £18,000-£20,000 ($29,840-$33,156) a year in passive income; this will cover my expenses and leave me £1,000 a month to keep invest. Would this be possible within 10 years? I’m assuming if I have a family my wife will be working so if she makes around £18,000-£20,000 a year then we will have around £36,000-£40,000 ($59,680-$66,312) a year which I think will be sufficient to raise a family but I could be wrong. So really what I’m trying to ask is how realistic is it for someone to make £18,000-£20,000 a year in passive income within 10 years with something like growth stocks, dividend stocks and bonds if they are able to save around £1,000-£1,500 ($1,657-$2,486) a month .

Thanks once again for your replies.
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Old 04-06-2014, 12:44 PM   #16
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Originally Posted by mrjim View Post
Thanks for all of your replies, sorry I should have gone into more detail. I’m looking to make around £18,000-£20,000 ($29,840-$33,156) a year in passive income; this will cover my expenses and leave me £1,000 a month to keep invest. Would this be possible within 10 years? I’m assuming if I have a family my wife will be working so if she makes around £18,000-£20,000 a year then we will have around £36,000-£40,000 ($59,680-$66,312) a year which I think will be sufficient to raise a family but I could be wrong. So really what I’m trying to ask is how realistic is it for someone to make £18,000-£20,000 a year in passive income within 10 years with something like growth stocks, dividend stocks and bonds if they are able to save around £1,000-£1,500 ($1,657-$2,486) a month .
$2500 a month = $30000 per year saved (that is the very top of your suggested savings rate).

Invested at a 10% return, you'd end up with ~$555,000, which if you have a 10% return you can make $55,000 per year passively, and this is before inflation takes its toll.

Good luck making a 10% return consistently and without tremendous risk to principle.

Realistically, your scenario isn't going to happen: a more realistic 6% return (before inflation) ends up with ~$450,000 and about $26,000 in income assuming you never draw down principle.

These are very crude calculations, and do not include taxes, investment fees, inflation, and assume you never touch any principle and probably ignore a lot of other realities.

IMO, you need to have a very high savings rate to make this happen, and there is no way I would be comfortable calling myself Financially Independent based on half a million dollars at age 30. I would call that an excellent start.

Of course, your expenses really matter, but your standard of living is most likely going to change over the course of the next 10 years to where $30k/year isn't going to cut it, either. Some people get by on $30k/year, but many of them own their homes outright and live very spartan lifestyles. All of this is just my opinion...
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Old 04-06-2014, 01:35 PM   #17
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Old 04-06-2014, 07:55 PM   #18
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Old 04-06-2014, 08:03 PM   #19
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Originally Posted by mrjim View Post
Thanks for all of your replies, sorry I should have gone into more detail. Iím looking to make around £18,000-£20,000 ($29,840-$33,156) a year in passive income; this will cover my expenses and leave me £1,000 a month to keep invest. Would this be possible within 10 years? Iím assuming if I have a family my wife will be working so if she makes around £18,000-£20,000 a year then we will have around £36,000-£40,000 ($59,680-$66,312) a year which I think will be sufficient to raise a family but I could be wrong. So really what Iím trying to ask is how realistic is it for someone to make £18,000-£20,000 a year in passive income within 10 years with something like growth stocks, dividend stocks and bonds if they are able to save around £1,000-£1,500 ($1,657-$2,486) a month .

Thanks once again for your replies.
I think it is totally unrealistic to expect to save 67-100% of your income, which is what you would need to do to save £1,000 to £1,500 a month if you are earning £18,000-£20,000 a year. You'll need to pay taxes, rent, food, fun, etc. If there are two earners then you would need to be saving 1/3 to 1/2 of your income which is difficult at you income level.

Think of it this way - let's say that you're investments provide 3% passive income (interest and dividends) - in order to generate £20,000 a year of income you need to have £667,000. If you save £1,500/month in 10 years you would save £180,000. If your savings consistently earned 6% a year, then with investment growth your £180,000 saved would be worth £246,000 at the end of 10 years.

So the sad reality is that given your income it is hugely difficult to be FI by age 30. Sorry for the bad news, but just trying to keep it real.

But, if you regularly save and invest over a 30 year career you can become FI. That £1,500 a month saved over 30 years at 6% would accumulate to over £1,500,000.

My advice is that you focus now on getting training and entering a profession that will provide you with a good and stable income, live below your means, save and invest regularly and the rest will take care of itself.

Also, you may want to play around with Quicken Lifetime Planner, which can do projections of your retirement savings growing and then declining once you retire (it is in $ but just pretend they are £).
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Old 04-06-2014, 08:04 PM   #20
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As Auntie used to say - it is just as easy to love a rich girl as a poor girl.

Unfortunately, I failed to take her wise advice.
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