How I plan on retiring by the age of 30
My investment strategy and how I plan on retiring young (lifetothemax #36)
A few disclaimers: In this edition of the #lifetothemax newsletter, I discuss my investment strategy. This should not be taken as financial advice. Furthermore, a few of the authors I mention are pretty conservative. They are, after all, famous for writing business / investing books, which is why they are interesting to read. However, I do not stand by everything they stand for, nor do I take everything they write in their books at face value. I invite you to come to your own conclusions regarding what they have written and their advice.
Last year I read 30 minutes every day, which allowed me to read 23 books. Among those books, I wanted to make sure I read some that would help with my financial literacy. The first book I picked up in January 2020 was “Rich Dad Poor Dad” by Robert Kiyosaki, a world-renowned business book that I had heard a lot about online. I then read the sequel to this book, “Cashflow Quadrants,” as well as “The Little Book of Common Sense Investing” by John C Bogle (the founder of the Vanguard Group) and “The 4-hour work week” by Tim Ferris. These books have given me a good idea of how to structure my life financially. I have also come to a pretty simple investment strategy that hopefully will allow me to retire by the age of 30 (or at least ASAP). So that’s what this newsletter is about.
Before I get into it, what do I mean by “retirement”? Although I might be lazy in some instances, I’ve always been able to dedicate lots of time and effort to projects that I am very passionate about. I don’t think I ever want to stop working altogether — as long as that work is exciting. So that’s what “retirement” means to me: only having to work on exciting things. If I don’t want to work, I don’t have to. I can be way more selective about what I spend my time doing. Nothing is holding me back, and I never have to pick one job over another solely based on pay, only based on which one I’m more excited about.
So enough introduction, what is the investment strategy?
To answer this question, we first have to answer: how does one get “wealthy”? Here, I refer to Kiyosaki’s definition of “wealth”: how long one can maintain their current lifestyle after losing job security. The longer you can, the wealthier you are. It’s not about having more in the bank: if your employer pays you $10,000/month but your expenses are $10,000/month, you’re still only one month away from being broke. In crude terms, the way to get wealthy boils down to two things: 1. make more money, 2. use that money to make more money. In other words, increase your income or your number of income sources, and then invest that income in ways that will return more than you invested.
So let’s take those two ideas and break them down.
1. Make more money.
I’m very fortunate that within a year of graduating college, I worked a great job as a consultant while building an app on the side with friends that we were able to sell to another company (you can read more about this here). I want to do more of this as much as I can — work on projects with friends that we can eventually develop into full-fledged businesses. I also want to create new sources of income. By building small, low-maintenance projects (apps, websites, etc.) that are run entirely by me, I could potentially create new avenues for positive cash flow.
A friend and past collaborator, Ben Issenmann, recently built an excellent example of this. Throughout the pandemic, he’s been working on a creative design platform called supercreative.design, on which he builds various tools for creatives and freelancers. The first tool I remember seeing was his Notion Pack, a simple-to-use pack of templates for the Notion app. These allow freelancers to easily create various contracts or documents that they might use in their everyday work lives. The exciting thing here is how he took a finite amount of time to build a product that he can theoretically sell infinitely many times with a disproportionately low amount of effort. With a bit of updating/marketing work, he’s found quite a bit of success with this product alone, and he can then focus the rest of his time on building new projects that can also grow exponentially on their own.
This same idea was discussed in length in one of my recent reads, “The 4 hour work week” by Tim Ferris. This was one of my favorite and most enlightening books of 2021. (Quick side note: would you be interested in reading a newsletter titled “My top 5 favorite books of 2021”? Please like the related comment in the comment section if so.) In this book, Ferris discusses how to reduce your workload at work and eventually migrate your efforts to creating products like Ben’s (extra points if the product is a subscription!) All this is to say that I want to spend some of my “creative” time this year (as I announced in my goals at the beginning of the year, I am reserving one day each week to be creative) to build side projects like these.
2. Use your money to make more money (in other words, invest).
Early in college, I started investing gift money into buying stocks on Robinhood. (For total transparency, my Robinhood had about $1500 by the time I graduated college.) I would buy primarily blue-chip stocks (Apple, Tesla) and some random smaller companies I believe in (like Beyond Meat). There were occasional days when I made crazy returns. The day after I had bought two shares of Beyond Meat for about $160, McDonald’s announced they would start testing a vegan version of Big Mac’s using Beyond Meat as the patty. The stock practically doubled in value immediately, and I sold at around $300 for a handsome profit. Not bad!
But just as often as I won, I also lost. When trading stocks, I set myself a rule: never sell at a loss. So when BYND went up a ton, I sold. However, when I purchased AMZN at the highest it would be for a year and a half and then refused to sell, I wasn’t doing great. All that to say that stocks are volatile. You can’t rely on stocks to make a consistent profit, and more often than not, you will be losing money. So how can one save and make more money for their future?
I used to believe that the most reliable way to make money with no risk was a Savings Account. After all, you will consistently make 0.05% (or whatever your bank offers) whether the markets go up or down, in rain or sunshine (as long as the bank doesn’t go under). Unfortunately, when you factor in inflation (which in regular times sits around 2% per year but is currently looking closer to 8%), then the only thing your savings account is consistently doing is losing money (0.05 - 2 = -1.95% on average). A Savings Account is not a very good investment option.
On the other hand, an excellent investment, and one Robert Kiyosaki is a huge proponent of, is real estate. With the right property in the right market, you can invest minimal money upfront in the form of a mortgage downpayment. Then by renting out your property, you can theoretically cover your monthly mortgage and expenses and create a decent dependable income source. However, I don’t like this model because you are making money off of a necessity and charging rent from someone who theoretically both needs housing and can’t afford to buy for themselves, which doesn’t sit right with me. When you get into the world of full-on real estate investors, who own tens, hundreds, or even thousands of homes, their investments increase housing prices by increasing demand, making it even more likely that their tenants can’t afford to buy a home. If I am going to invest my money, I would rather it not be at the expense of another person.
So what options are there if I don’t want to trade stocks, keep my money in a bank account, or buy real estate? Here’s where my friend John C Bogle comes in, with his killer new (not actually that new) tool called the index fund. An index fund “is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index” (thanks Investopedia for the definition). For example, an S&P 500 index fund would track the companies that make up the S&P 500, and if they go up in value as a whole, then the index fund does as well (and vice versa). Using such index funds, one can essentially invest in broad parts of various markets, allowing one to diversify and capture significant shifts in market values without exposing oneself to the ebbs and flows of individual companies. John C Bogle, who is often described as “the father of index investing,” describes in great detail in his “Little Book of Common Sense Investing” how buying an index fund that tracks the S&P 500 or even the US market as a whole is and has been the best way to make money consistently. By definition, such an index fund follows the market. So if the market is up one year, the index fund goes up as well, but both will also go down together. The key is that the market's average return, including inflation, has been 7% per year over the last few decades, and hence so has the return of these index funds. Over the same period, only a tiny percentage of actively managed funds have consistently beaten this, notwithstanding the many fees that such actively managed funds cost to investors (For example, if a fund’s fees are 2% per year, then the fund would have to outperform the market by 2% to be worth buying over an index fund. Bogle shows that very few actively traded funds can do this consistently.)
The beauty of this 7% return over large periods of time is seen through the power of compounding. After ten years at this rate, an initial investment will be multiplied by 107%^10 = 196%, or in other words, practically double. Over 40 years, an initial investment of $100 will be worth practically $1500. Clearly, if one starts early enough, even a relatively small investment can turn into a nice chunk of money. Anyway, I won’t go into more detail about index funds (to be fair, that’s the extent of what I understand), but they’re pretty cool.
Of course, there are many different index funds. I am not smart enough to explain why, but I know I want a mix of index funds that track stock and bond markets. From a returns perspective, stocks are expected to be more volatile, with potentially higher returns, whereas bonds grow slower but yield more consistent income (on average). For someone investing for the future, a higher proportion of stocks might be more beneficial, whereas someone looking to invest with the hope of consistent income sooner might want a higher proportion of bonds. In passing, Bogle mentions in his book a technique whereby someone’s portfolio should be made up of a percentage of bond index funds equal to their age. The idea is that the older you get, the more likely you are to need to rely on more consistent income from your investments. Bogle did not necessarily endorse this method, but I like its simplicity. Since I turned 24 a bit over a month ago, my portfolio comprises 24% bond index funds (specifically BND) and 76% stock index funds (specifically VOO).
The next question is, in what kind of account should I buy and own these funds? Not all accounts are created equal, with some that charge fees for every trade, or some in which you may or may not pay taxes on your future returns. Vanguard (and I know others do as well) offers a “Roth IRA” account. This type of account allows you to put in up to $6000 a year (more if you are closer to retirement), and if you wait to sell and cash out until after you retire, all of the returns you make are entirely tax-free. I’m not saying taxes should be avoided — I am proud to pay my taxes every year —, but a Roth IRA allows you to invest money you have already paid taxes on and benefit from not having to pay taxes on the returns from this investment. Compared to a traditional 401K, or even a simple investment account like a Robinhood, you would be able to benefit much more from an initial investment. I am also currently reading Tony Robbins’ “Money: Master the Game,” which seems like it will soon go into other types of accounts that may be even more interesting. I’ll discuss them in later newsletters if I think it’d be helpful.
Other than the more traditional investments, I also reserve a part of my portfolio for investing in some cryptocurrencies. As I have said in past newsletters, I am interested in some of the crypto space (although I still have some serious reservations about it). Therefore, I have invested in BTC, ETH, and ICP (the blockchain I built my recent project on), with crypto representing about 5-10% of my total portfolio. The more I learn about crypto, the more confused I am about whether or not I want to keep these investments long-term. It seems inevitable that crypto will become more mainstream as time goes by, but whether the current significant players (BTC and ETH being the two most valuable cryptocurrencies currently) will stay at the top or not is entirely speculative. Hence, I am keeping these as a small minority of my portfolio to minimize risk.
So there you go, that’s my investment strategy: <10% crypto, >90% index funds (with 24% BND and 76% VOO). This is, in my opinion, the best portfolio I can have at this point in my life. Hopefully, as I continue to work on side projects, increase my income sources, and invest this income into my investment portfolio, I will get to a point where I can entirely live off of my investments and then “retire.” We’ll see if that happens before I turn thirty…
This newsletter is different from what I usually write, but I still wanted to write it for a few reasons. First off, it does fit in relatively well with my whole “self-improvement” shtick. After all, part of self-improvement is about setting habits and preparing for your future, and isn’t investing regularly into relatively safe investments just a great example of that? Furthermore, reading something like this just a year ago would have been very helpful for me, so I thought I would pass on the knowledge to you, the reader. I am not encouraging you to follow my investment strategy, and I recommend that you come to your own conclusions by doing your own research (for example, by reading the books I mentioned), but at least reading the rationale behind my investments might be helpful. Lastly, I wanted to write this as a record of my mindset for the time being. Hopefully, I will look back on this in a few months or years with a wealth of new knowledge and be able to adapt my portfolio to be demonstrably better. At least I’ll know that this is the best I can do for the time being.
Thanks again for reading my newsletter. It means a ton, and I hope you enjoyed this edition. If you’re new around here, I’ll invite you to subscribe. I write a newsletter about once a week (although I occasionally take multi-month hiatuses) about my goals and habits or anything that I want to write about that week.
See you next week ❤️
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