All the years of frugal living will get you nowhere if you do not invest your money. Any money that you stash under the mattress or leave in a savings account, if given enough time, will approach a value of $0. If you don’t understand why this is a sure fire way to be poor then do some further reading on inflation and the time value of money. This answer on Investopedia summarises it well. I may also post about the effect and link it back here in the future ( I did write about it, and here is the link :D)
In my first post I wrote about a commitment to do whatever it takes to retire in 10 years. Blind motivation is not enough to be successful in life so now I would like to write about my strategy. I plan to invest all my money for the foreseeable future into the share market. I want to reach a target portfolio value of $1,000,000 (2017 AUD) which will provide me a ~4% dividend yield of $40,000 per year to begin with. Enough to live comfortably as far as I’m concerned, particularly in some of the cheaper parts of the world.
With my initial deposit of the money I have saved thus far and my frugal living plan to maximise my monthly investment contributions, here is how my savings and investment plan looks over the next 120 months.
I’ve assumed 1 modest pay rise in 5 years time (I’m actually due for a promotion and pay rise much sooner than that).
I have calculated the returns based on reinvesting all dividends.
I wasn’t satisfied with showing idealised returns. It looked too clean. So I decided that I should use historical data from the Australian All Ordinaries index and of Australian inflation. I plotted how my investment plan would look for someone who adopted my exact ’10 year savings and investment strategy at the start of every year from 1980-2007.
The graph below shows the Results superimposed upon the idealised case.
So if there is anything this graph shows, it is that the share market return can be very volatile.
~$ 1.49 million was the best result after 10 years (portfolio started in 1998).
~$787,000 was the worst result after 10 years (portfolio started 1999).
Out of all the 28 years that I studied starting this investment, in 18 of those ‘start years’ did the portfolio reach a value of $1,000,000 or more after 10 years of investment.
Well those odds don’t sound that great! However hold on just one more year and that changes to a very respectable 26 successful ‘start years’ out of 27*. With only 1 out of the 28 portfolios studied (the portfolio started in 2001) requiring 12 years to hit the $1,000,000 target.
The 2007 portfolio is still to reach 1 million dollars.
The graph also clearly shows peaks well above $1,000,000, however many of these soon suffered losses that brought them back in line with the average. This tells me that it is important to stay the course for 10 years. Any portfolio based on my current savings plan that reaches the target value before 10 years is probably overvalued. In that case a stock market correction will soon bring it back in line with long term expectations. Of course if I can find a way to increase my income to build wealth quicker, then that is a different story.
I am completely comfortable with these historical statistics. I think they highlight the need to be flexible with my savings and investments. I would love to drop tools and be done with it in exactly 10 years but life doesn’t always work that way. Depending on the returns of the market I could be waiting as long as 12 years, or something entirely different.
This is my current plan. My plan may change, I may decide to get exposure to international share markets. I may also decide to invest in real estate. I want to remain flexible to new opportunities and ensure I don’t get complacent or stubborn. This way I can find the best ways to get my money working for me.
There are bound to be some strong opinions about my investment plan, so let me know below in the comments.
Remember to keep shuffling.
Pat The Shuffler
*The total reduces from 28 to 27 because the 2007 portfolio does not have 11 years of data. I.e. the 11th year is 2017, and as of the end of 2016 it is under the target of $1000000.
And the legal stuff.
This post and my entire blog is about what I plan to do with my money. Nothing I have written here today or any day should be considered investment advice. I am not a professional and am not qualified to give any advice on investing or money whatsoever. If you try to copy anything I plan to do, you do so at your own risk.