You want a million dollars because you believe it will give you financial independence. You have nothing so it seems an impossible goal.
Not necessarily.
It can be done but it takes consistency, time and some inertia. Yes, you read the last part right.
It is very important, once you have a monthly or weekly investment system, to stay with it through good times and bad, especially the latter. Yet many people just aren’t “lazy” enough. They are hyperactive investors. They are keyed into tactical thinking—an individual battle—and forget the strategic, the war, the long term that can make or break a plan.
Take a friend of mine. Let’s call him Bob. He is a very smart fellow who worked for one of the big investment houses. He had trouble controlling his emotions a few years ago. He was investing on a regular basis and doing quite well some eight years ago. Then 2008 came along. The market dropped some 40 percent. The world seemed to be coming to an end. And, because his portfolio also contained some risky investments, Bob told me he lost 50 percent or so.
“I will never invest in the stock market again,” he told me toward the end of 2008 as the market crashed and he pulled out.
My wife and I were, at the time, in the midst of a systematic program of investing in funds. We used mostly low-cost index funds, nothing fancy. We invested in a monthly plan. We had the money automatically invested on a regular basis and didn’t over think.
That’s good. I don’t want my medulla working overtime, otherwise our investments might blow up. We had been doing it for close to 20 years by 2008. We started at $100 a month and gradually raised it over the years as we made more. By 2008 we had increased it to some 1,000 a month. We were also maxing out our 401(k)s at work as well as our IRAs. All of this was done with the idea of achieving financial independence.
How did we do?
Over the long term, fine. But, like the rest of the world, we felt like fools in 2008. We lost about 25 percent. I was ready to panic and follow my friend Bob to the exits.
But then I remembered that we had been through crises like this before—-never as bad as 2008—and our investments had come back. So, once again, my inertia took over. Indeed, as markets were diving, we continued our regular monthly fund buying. Actually, we increased it slightly. We got more fund shares at a discount because the market tanked in 2008.
What happened?
The next year, 2009, was an outstanding year. Markets were up some 30 percent. Those who didn’t panic, those who hung on to their investments—and maybe bought more assuming they were basically good funds or stocks—were rewarded. Inertia, a fancy word for being lazy, paid off. Ultimately, we would continue our investment program for close to a quarter century. Today, we are slowly dis-investing—-I have a small part of our investments paid to us every quarter. At this rate, our investments should carry us for the rest of our lives. We’re in our 60s.
Taking the long term view, investing on a systematic and regular basis, usually pays off. Jumping in and out of the market—-trying to pick a spot where you think markets have hit lows or high, trying to time the market—is a tricky and expensive business. Most of the investment immortals say market timing is a fool’s errand.
That’s because you’re driving up transaction costs. Every time you go in and out, you pay for trades. All those costs add up. This is also true with actively managed funds, funds that are constantly getting in and out of stocks. They run up big brokerage costs. Then, in outrageously high expense ratios, they pass the bills to the investors—-people like you and me.
Actually, my wife and I generally stick to passively managed, low cost, index funds. This is in part because no one would mistake me for Diamond Jim Brady. My nickname in Spanish is “El Mas Tacano de Todos.” The stingiest of them all.
If you don’t waste money on stupid things—such as helping to pay for a new boat for a portfolio manager who has almost no stake in your fund and is merely a high-paid employee—you’ll almost always have money for the important things in life. (As I write this, my wife is in the next room practicing the flute, preparing for her lesson with an incredibly talented but well-paid music teacher. That’s something we never could have afforded 15 years ago).
You can do the same, whether it is music or going to Espana (When you visit Madrid. Be sure to head for the old section of the city and get lots of chocolate con churros. It’s the greatest thing. And I never thought that I would live to enjoy them. Viva Espana! And Viva inertia!).
You can achieve financial independence if you’re systematic and lazy enough. Let’s say you put away $500 a month for 35 years. And I know many of you are saying Gregorio has had too much vino. But you don’t have to start with $500 a month immediately.
Start with $200 a month or even $100 as my wife, the ever comely Suzanne “Zanne” Hall, and I did some 25 years ago. But make a commitment to increase it every time you get a raise or you find an extra income (Your husband or your wife gave up smoking. There’s an extra $100 or $200 a month).
Let’s say you average $500 invested a month over 35 years at seven percent a year. You end up with some $905,000 before taxes. However, at nine percent, which is a more typical long-term return, you end up with almost $1.5 million. By the way, for people who are really lazy, and invest for five additional years, the numbers are some $1.32 million and $2.3 million.
Too long a period?
Try $500 a month for 25 years earning 9 percent. You end up with some $564,000. Add some retirement assets to that—-maybe a 401(k) or an IRA—and you’ll be set.
Just do it.
