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This amount of Stocks will make you rich

7/20/2020

The sweet spot for many stock market investors is knowing where to put their money to make it grow consistently over time. When you are new to investing it can be difficult to know how put your hard earned cash to good use. This post explores 4 methods everyday investors can use to know how much stocks, bonds and commodities to hold.

Where you choose to put your money within the stock market can make a BIG difference to how your much and fast your money grows. Inspite of the risk, the stock market remains a viable option to increase your wealth, beat inflation and get better interest rates than what your bank. So, the question is how should you spend your money in the stock market?

Keep reading to find out:

How you can use your age to choose stocks
The traditional model of investing
The 4 seasons rule
The Dragon portfolio that stands after 90+ years

First, some quick definitions.
Methods/strategies: can be a rule or way of doing things to achieve a goal. For example, a high risk strategy will be focused on growing money very fast and could choose to put investments in riskly companies. A low risk strategy is focused on protecting money from loss and an investor can choose bonds
Portfolio: think of it as a folder that holds, a certain amount of stocks, bonds and commodities (gold, oil, coffee, silver)
An asset: is a thing of value that grows e.g. pension, real estate, art, gold etc.
Inflation: the price of things you buy go up. So you'll need more money to get the same amount of the thing you buy or you get less of the thing you want with the same amount of money

How much Stocks should you own forever?

1. 100 Age rule

Your Age minus 100 is how much you should put into stocks. The premise of this approach is that is the younger you are, the more risk you can take. So, if you are 25 years old, you should have 75% in stocks and 25% in bonds. As you get older, you will want to take less risk with your money so you will move towards having more bonds (which are seen as less risky and provide lower returns) and less stocks (relatively seen as more risky because share prices can go up and down frequently).

Some investors are taking this rule one step further and making it 110 or 120 minus age to take more risk. For women, who live longer on average, this could be an approach to make sure their investments last throughout their lifetime.

As with every rule of thumb, this rule does not factor your individual circumstance or preferences.

2. The Traditional 60/40 rule

This is the traditional method of investing. The idea is to have 60% in stocks and 40% in government or corporate bonds. This method allows you to take some risk but also allows you to get regular income when the economy goes down. As your stocks and bonds rise or fall in value, experts suggests to maintain this ratio at least once a year by selling and buying the respective bonds or stocks.

This rule has performed well over the past decades but following the 2008 financial crisis experts are asking - how will it perform over the coming decades?

3. The All Weather

I came across this rule when reading Tony Robbins' Book Master the Money Game. Tony reached out to Ray Dalio of Bridgewater Associates to answer this question: how should investors spend their money in the stock market?

One thing that stood out to me in the book is the notion risk. Ray explained that an investor with the 60/40 portfolio above is exposed to 3 times more risk (the potential for significant loss of money) which comes from owning stocks as they are more risky. Bonds which have a 40% allocation, contribute about 5% risk to the overall portfolio.

In response to the reality of the size of these risks, Ray created the All Weather portfolio. He also identified 4 financial seasons that impact prices. These prices change depending on the growth or decline of the economy and inflation (when the prices of things you buy go up). The All weather portfolio allocates an equal amount of risk (25%) to these four seasons. Investors can create the All Weather Portfolio using the strategy shown below.

4. The Dragon Portfolio

I learnt of this rule while watching this video on how to build a portfolio that is strong enough to withstand a recession. Artemis Capital Management carried out research over the past 90+ years to find out which strategy made the most money for investors. They concluded that investors should "Find assets that can perform when stocks and bonds collapse, and boldly own them regardless of short term performance". How can we do that?

Author Chris Cole, gives the following example:
Take assets (a thing of value that grows) X, Y and Z

X and Y - Grow in value when the economy is hot and booming. It also falls when the economy is in decline
Z - Falls or stays neutral when the economy is hot and grows when the economy is cold

According to the author Chris Cole, the optimal mix for an investor is roughly 20% of X + Z or Y + Z. You can buy more of each asset when it becomes cheaper during an economic decline and grow your money long term. This strategy is summarised in The Dragon Portfolio. The author found that over 90 years, the Dragon Portfolio generated a 14.4% return with lower risk.

Examples of X - Stocks, Bonds (also called Fixed Income), Real Estate
Examples of Y - Physical Gold, commodity trend (monitoring the prices of raw goods like oil, natural gas, coffee, silver, mining, metals), Long Volatility (think of this like a long term insurance that pays off when crisis hits)

What you basically need to know

Pick a portfolio of assets that grows your money in the long term when the economy is good or bad/ hot or cold
Allocate your money according to risk and not only amount
Focus on generating high and stable returns with low risk

Gold is a comodity type that protects against inflation, political risk, war and currency devaluation. If you want to invest in gold, learn more about Exchange Traded Commodities (ETC).

Commodities grow when there is extreme inflation and when stocks and bonds are lower. You can invest in a commodities ETF or invest in the companies that specialise in commodities.

Stocks do well when the economy is booming and prices are high. Companies are able to make more money and this feeds into their stock price. This also increases real estate prices. Read more on how to invest in Stocks and Real Estate

Bonds do well when interest rates are low and their prices fall when interest rates are high. Bonds are also referred to as Fixed income assets. Read more on Bonds.

These 2 questions will guide your next steps?

:There you have it, I only profiled 4 strategies in this post but there are so many more like David Swensen who devised his own strategy to grow Yale's University endowment from $1.8 billion to $30 billion!

Following my research, I went to look under the hood of one of my pensions and found that it was 100% in equities with no commodities or gold. I am now assessing what to do next.

Things you can do next:

1. How much stocks, bonds, commodities do you own? Check:

Your company Pension
Stocks & Shares ISA or LISA

2. Do you need to make any changes?

Rebalance your portfolio (sell or buy) to match the strategy that fits your needs
If you cannot find where how your money is allocated because it is managed by a provider, contact them to get more information

Share your views, Which rule do you find interesting?

The Age Rule
60/40
All Weather
Dragon Portfolio

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Save this to Stop Working FOREVER

7/20/2020

Achieving financial independence is a major goal that many of us have. It is owning the chance to save enough money to maintain a desired lifestyle, stop working forever and doing what you please with your time. If you think you need millions saved to achieve this goal, I have found that this is not necessary the case. You can reach this goal much earlier than you might imagine.

What you need
How much do you spend per month?
What lifestyle do you have today
What lifestyle do you want when you retire

Start achieving financial independence today

Let's start by making some assumptions

Let's take the following example:

My total expenses per month is 1250
My annual expense make up (1250 *12) = 15,000
Most of my savings are in stocks and bonds and the average annual return is 7%.
On my savings, I estimate that taxes and inflation ( the price of things you buy go up) will cost me around 3% per year
Therefore, during my retirement (defined as when I want to stop working), I expect my savings to pay me 4% (7% minus 3%) each year to cover my expenses full.
If I take out 4% yearly, then my savings will remain untouched as I'll continue to spend only the income generated via interest payments (for bonds) and income (from stocks)

This is the amount you need to save to stop working

Taking the figures above, your financial independence number is (15,000 * 20) = 300,000

So you need to save 300,000 which pays 4% per year (after taxes and inflation). 4% is 15,000 which means your expenses are fully covered. If you want to cover accommodate other expenses or luxuries like travel, you can multiply the annual expense by 25.

I've seen other articles that suggest multiplying your annual expense with a figure between 20 to 30. Multiplying by 20 means you expect your savings to pay you 5% annually, if you multiply by 25, you assume a 4% return.

It is important to note that returns will vary with changes in the economy. When the economy is up, you can expect higher return and pay yourself more. With a bad economy, you reduce your spending. You'll also notice that the rule assumes you are invested mostly in the stock market, read more about this here.

How many years are you away from retirement? 6 years?
You can also use this calculator to find out.

My financial independence number is too high - what can I do?
Before completing this post, I calculated the financial independence number for a friend. This was the first time she'd ever calculated this figure. Once she saw this, she found her number to be achievable and started to think about how to reduce her expenses and particularly her debts to achieve freedom faster.

What can you do:

Use the wealthsquats smart budgeter to calculate your Financial Independence number (see below)
Reduce your expenses where you can
Pay off your debts to release more funds for savings
Choose a smaller return (3% instead of maybe 4% or 5%). Make sure this amount covers your expenses so you still have peace of mind
Increase your income