If you have been poking around my blog, you’ve probably figured out that the ultimate goal of my services is to help you reach some version of “financial independence.” Here’s the basic definition: your assets generate an income at least equal to your essential expenses. If you want to reach financial independence, you’ve got to understand big picture investing. I’m going to break it down for you quickly, in simple terms, so you can recognize why you need to invest, and in what, in order to achieve financial freedom.
Most people hope to reach financial independence at the relatively standard retirement age of 65, or even earlier if desired and possible. It will all depend on how much you have and by what age.
Amassing a pool of money and assets from which you will eventually support yourself, requires you to work, save and invest those savings. This is where the knowledge of big picture investing will help you grow your stash of cash faster than just working and saving alone.
The working and saving part is pretty basic. I think most of you understand how that “works”—ha! But the “investing” those savings component can be a bit of a maze. The problem is that most people are 100% relying on this “investing” to perform EXTREMELY WELL in order to achieve their goal of financial independence—even if they don’t realize it. And unfortunately, it takes quite a bit of time and effort to learn how you might make this “extremely good performance” happen.
So, I’m going to try to save you the time and energy, by giving you the big picture investing lowdown. I’ve distilled all the essential info into a “short version”, and then I’ll offer a longer version for those who are still awake and serious about getting off the bench. OK…Let’s get on with THE (kinda) SHORT VERSION….
YOUR RETIREMENT DESTINATION (aka the time of your life when you are not wanting to go to work every day!)
First off, you have to decide how much money you will need to retire on per year. This is your ultimate destination (or end goal). Part of all this life planning is also figuring out what “retirement” means to you. Maybe it’s chillin’ in your beachfront home in Belize by the time you’re 50? But for the purpose of this exercise, I’m going to go with the standard version: work til you’re 65, then stop working, and do whatever you feel like with your time (that your budget will allow).
Calculating this amount can be fairly straightforward. Let’s say, for example, you are 23 years old now, and feel comfortable with the idea of living off of 60k/year (in today’s money value) during your retirement starting at age 65. Run that through a compound interest calculator, factoring (conservatively) 2% annual inflation for 42 years, and you now have 137,800/year (in the future’s money value) you will need annually. Now multiply that by 25 (trust me on this formula for now), and you get $3.445 million dollars. See? Easy. Amassing that should be no problemo…right!?!
This amount would theoretically provide you with 137,800/year indefinitely, that would also adjust up for inflation during retirement, given average market conditions. It will even allow you to leave a bunch of money to your heirs. It’s kind of the “Cadillac” of retirement plans. (Notice I didn’t say Ferrari—it’s not a Ferrari. The Ferrari would involve very fit young people in bikini’s, that you barely know, crowding around your massive pool, while you creepily watch them with binoculars from your mansion’s 2500sf master bedroom, a la Citizen Kane).
Sidebar: I know that number sounds somewhat insane—and it is—but don’t panic quite yet. For some perspective, that’s really only about 1.5 million in today’s money. Plus, there are quite a few variables that go into working out a detailed savings and retirement plan. Your stash of cash could actually be quite a bit less depending on your take on the above mentioned variables. But even the smaller numbers can be seemingly quite high. Soooo….you have to start preparing for this early! I know, lame.
Now, to complicate the matter a bit more (sorry), we also don’t know to what degree technology will be extending your life longer in 40 years. The longer you live the more you’ll need. The older you get the less you can potentially work.
HEY, but what about Social Security?
Well, I’m not factoring in social security at this point, because who knows where that will be in 40 years? But if you end up with a little SS income, you’ll have some extra party money at your disposal! Congrats!
Now, it’s time to dig into big picture investing. Here are your two choices. You can either save the entire 3.445 million from your work income alone, or if that’s not possible (which likely it’s not), you can try to grow whatever amount you can save, by employing an “Investing Vehicle” of some variety. Or perhaps just by wholesaling relatively small amounts of cocaine out of Central America (more on risk/reward in the long version).
YOUR BIG PICTURE INVESTING VEHICLE
“Passive investing” (investing in a way that doesn’t require much additional work on your part—because you already have a job, right?) comes in just a few basic categories. Only a couple of those are available to the average person (meaning a person that doesn’t have a high net worth and the financial and social access to other private investments). I’m guessing that you fall into this category, so therefore you can invest in the following two broad categories (and you will likely want to invest in some of both).
1) Public Financial “Markets”
The public markets are basically the entire financial industry. All the terms you hear thrown around at the office, by your friends or on the news—stocks, bonds, commodities, index funds, ETFs, mutual funds, options, derivatives, mortgage backed securities, REITs—these are all product offerings that the “financial industry” makes available to the public to invest in (for a sizable fee of course).
Figuring out what (of this pile if sh!t) is the best way to go can seem friggin’ impossible. Especially when the creator of the products themselves (the financial industry) are trying to stack the deck in their favor at all times.
For instance, did you know that in America BY LAW investment brokers do not have to put their client’s best interests first over their own money making greed? What?! It’s true (unless they are registered as a fiduciary, but only about 10% are). But even at that, you still likely have to participate in this crazy wild west rodeo to reach your end goal.
2) Personally Owned Real Estate
Personally owned real estate is your other option. It will come in the form of your residence and/or real estate you own and rent to others.
Now, with real estate you are more on your own than in public markets…sort of. There is obviously an entire industry devoted to the buying and selling of real estate, but you don’t have (as many) “investment services” offering to guide you through investing in real estate (except kinda in the case of REITs. Again..more on that in the long version).
Sidebar 2: if you have read “Rich Dad, Poor Dad” you might be thinking, “But Robert Kiyosaki said that my ‘owned residence’ is my largest expense, not my largest asset.” Well, I have to vehemently disagree with him. In my opinion, an owned residence is one of the easiest, full(er) proof, tax avoiding, financial-piggy-backing-est type of investment you can likely ever make. The benefits to owning your residence are tremendous, both financially and emotionally. I agree with much of what he wrote in his book, but not that. Maybe someday I’ll meet Robert and we can discuss it!
WHAT’S YOUR VEHICLE MAKE AND MODEL?
So now you have to decide in which vehicle model to invest this hard earned money of yours. I’m not going to lie—it’s tough to choose. The public markets are much easier to invest in. You can get in and out with the click of a button, through a free account, paying $5 per trade. But how do you know what stocks you should buy? Real estate always sounds like a good idea, but it will definitely take more of your time and could also go sideways. Hmmm…that is all true.
When you design your big picture investing vehicle, we should first look at what is our hopeful performance. Basically, how much money can we hope to make from our investments each year? If we know this, we know what we are designing this vehicle to achieve.
The Best You Can Hope For
With the short version in mind, I’m going to cut to the chase here. The majority of the financial industry is attempting to sell you one thing in return for their fees: returns that “beat the market” (after they have taken their fees). That’s the hook they use to sell you to their product (aka their mutual fund, ETF, REIT, investment approach, etc). In reality though, it’s rare that they consistently beat the market year after year.
So, what does that mean?
What is “The Market”?
The term “the market” is usually referring to the average return of the collection of publicly traded companies (aka “stocks”) available in the US (some use the world), over the last 100+ years. When you hear, “We produce market beating returns!”, this is the benchmark they are “beating.” So ideally, you’d like to beat the average, right?!
What is the Average Market Return?
I’ve read varying reports on what this average return figure is, but it generally seems to be reported at about a 10% annual compound return. (It’s important to note that this performance includes the receiving and reinvesting of dividends along the way, in addition to capturing stock price improvements. This chart from Macrotrends shows the S&P price growth from $19 in April 1928 to $2933 in April 2019. If you run that through a calculator you only get 5.69% CAGR). Other asset classes like bonds, commodities, REITs, cash, and all the other stuff I mentioned earlier on average, over similar periods of time, have not performed as lucratively.
Now, a pretty wise investor named Warren Buffet famously said at some point (and I’m paraphrasing here) that the average investor is always best served by just investing in the market itself. When you factor in fees, taxes, average performance over time and overall ‘deck stacking’, the market itself beats Wall Street money managers over 90% of the time. The other 10% are probably not available to the average investor.
Let’s just go ahead and assume that if Warren Buffet says it, it’s probably true. Plus, honestly, I don’t have the time to verify this piece of critical info, so I have no choice but to believe it. So now you’re asking, “How do I invest in the market itself?” (Yup…long version).
It’s funny…this short/long version thing is starting to parallel that awesome early 90’s film The Cutting Edge. Every time the hockey player falls using his new figure skates, his sassy counterpart snarkily says, “TOE PICK!” I’m that annoying partner in the cute skirt. “LONG VERSION!” hahah. Please tell me you’ve seen this movie. Ok back to the story…
So, for big picture investing, 10% annual compound growth is what you are shooting for. Great. Easy! Not really. Sadly, that’s actually pretty high performance and really only represents historic performance of stocks alone.
To cut to the chase again, most respectable advisement firms will tell you they shoot for a 7% return for your money AFTER THEY DEDUCT YOUR FEES, which are usually 1%. (And let’s be honest, that means they’ll feel pretty f’ing great about themselves if they get 5-6%).
The reason for this lower return expectation is that it’s generally safer to spread your money out over a variety of asset classes. (The main asset classes are usually considered to be stocks, bonds, commodities, cash, and real estate.) This is less risky, but less risk generally offers less reward (more on this in—you guessed it—the long version).
Now the reason we hope to at least get 7% (besides the obvious that it’s better that -100% to +6.9999%) is related to something I quickly mentioned above. The formula we used to calculate your nest egg (your desired annual retirement income x 25 = nest egg), requires a hopeful 7% return to perform over time (again, long version—just trust me for now, dammit!).
Bottom line for big picture investing, the very best you can expect to do in the public markets on average is 10%—on the VERY high side—if you were to be invested for 100+ years in strictly stocks. Since that’s not possible, the goal of a diversified portfolio, over a shorter time frame, would be 7%.
Ferrari or Ford Taurus?
OK, our performance goals have been established: we want a 7-10% compound annual growth rate, in whichever way we decide to invest. Done. Now we want to know, is our investing vehicle a real estate packed Lambo or a hedge fund loaded Ferrari? Well…it’s probably more like a Ford Taurus with a spoiler on the back.
What I mean is that for people going the public markets route, it’s probably going to be conservative style investments with a little flash (a little extra risk) here and there.
Now for me, real estate investment has been my main mode of transport, and it has achieved significantly higher returns that advanced me toward my retirement goals much more quickly.
Through a combination of residential and commercial “buy & hold” investments, inclusive of my residences, I’ve achieved an average return of 18.75% per year with real estate. Much better than the average public markets returns!
SO WHO’S DRIVING THIS SEXY SEDAN?
For big picture investing, there are essentially two ways you can commandeer this investing vehicle: drive it yourself, or pay someone to drive it for you. By far, the easiest way to do it is the latter. But is it the best way?
Should You Use a Financial Advisor?
If we’re talking about stocks, all you have to do is find someone who is very honest, knows very well what they are doing, and takes 1% of your portfolio value on a quarterly basis. You just keep sending that account money every month until you retire, at which point you’ll start withdrawing the funds slowly. You’ll login to your account a couple times a year and confirm you’re getting that 7-10% return, and then send that financial advisor a couple tickets to your favorite Cirque Du Soleil show around the holidays, to say thanks. Simple. (I’m partial to “O”…or “Zoomanity” if I’m looking to get lucky).
That’s the easiest way to go, no doubt—except, where does one find this magical, perfect, low fee, honest person? It’s not easy.
Quality personalized investment advisors won’t be lining up to take the 1% of your funds, unless you have 50-100K to give them. I know man, the system is rigged in many ways. We’ll figure something out though—don’t stress yet.
Should You Do it Yourself?
Yes. This would be the preferable way to do it, IF you have the time and a thorough understanding of the system. Do the public markets investing yourself, utilizing some combination of index funds (and avoiding the advisor fee).
OR, you could invest in personally owned real estate. Now in real estate there are fewer options out there for people who can fully handle all the ins and outs of your investments. But there are a handful of possibilities you can investigate.
Here’s the most important big picture investing take away of this section: regardless of whether you choose to invest on your own or with an advisor, you should invest in BOTH the stock market and real estate over the long run. This is your best strategy to achieve your retirement goals. I’ll outline a basic strategy in the (son-of-a) long version, so don’t worry.
HEAD OUT ON THE HIGHWAY!
The last step to formulate this big picture investing plan is to figure out how much you need to be saving every month. This will insure you reach your end goal of 3.445 million by 65. (I know, this sounds stupidly unattainable.)
Calculating this is a tricky step because it’s a moving target. It all depends on when you start, how consistent you are with your savings, and what average return you actually get. All are highly variable. But let’s say, for illustrative purposes, you commit to a consistent monthly savings rate, and you get an average 8.5% return.
OK, now back to that 3.445 million end goal. I used this retirement calculator, and it shows the resulting monthly savings amount required. You will need to start saving 790/month at age 23 and do that until you are 65. Damn that seems like a lot, doesn’t it? Did you EVER have $790 left at the end of the month when you were 23? Just to be sure, I went back and ran it again, so…yeah it’s correct. Crap.
Alright, seriously, don’t worry. I promise we’ll work on it, and try to get that number down.
ONE MORE CYNICAL RANT…AND THEN A LITTLE HOPE
So when you strip away all the noise around investing, the types of investments, strategies, blog posts, books…all that…here is what the “financial industry” and “retirement” boils down to: work, save, invest savings, and hope to grow your savings by 7-10% annually in “the market,” or best that percentage investing the money yourself in the markets or in real estate. That’s the big picture of investing. (Seriously, read 100 books and make your own summary if you want. Then let’s get a beer.)
At this point, all that needs to happen is for everything to go as planned! You have to always put aside your 790/month to invest, and your advisor (or you) needs to get it right most of the time and get you that average 8.5% return every year. And assuming you live to 100, this all needs to happen as planned for…77 years.
There you go! You’re all set now. Retirement has been figured out. Now get out there, get a good paying job, make that 790/month deposit, have a few kids, try to have some fun, and we’ll see you at age 65 for Act 3: Retirement…aka your self-funded slow downhill slide to death!
Ok, ok, but seriously, I realize that generating a retirement nest egg of 3.445 million, by saving 790 per month from 23-65, whilst getting an average 8.5% return seems potentially impossible (and frankly it will be impossible for many people). But the truth is…that’s ok. What?!
Yes. We can work together to adjust your targets, adjust the variables, and get them to be more in line with an achievable result. And again, that’s why you need to invest in both the stock market AND real estate.
So don’t give up on that beachfront retirement dream in Belize yet!!!
What We’ve Learned About Big Picture Investing
In summary, NOW is the time to get off the bench and invest those savings so you can reach your ultimate retirement destination.
We are all very lucky the world offers options for every budget, in all necessary aspects of life, so most situations can be figured out. But it still holds true that every “version” of retirement requires thoughtful planning, diligent saving and GOOD BOOKKEEPING, to be achieved.
What you want to avoid MOST, is being trapped in a situation you are unhappy with in the end. Which is why you just put yourself ahead by understanding big picture investing. The earlier you start paying attention to your finances, establishing your end goals and realizing how money tracking, saving and investing can help you achieve your goals, the better off you will be. See, I CAN be positive!
8 Proven & Practical Ways to Catch-Up with Your Retirement Savings Contributions
A Robo Advisor Comparison for 2020. Can A.I. Get You to the Promised Land?!
Renting vs Owning: Why You Need to Own the Real Estate You Live In (of Which You Will Be the World’s Best Renter!)
Is Turnkey Real Estate Investing Worth Your Money? A “No-Gimmes” Accounting of 8 Properties in Multiple US Markets