If you have been poking around my blog, you’ve probably figured out that my ultimate goal is to help you reach some version of “financial independence” (or even just plain ol’ retirement).
What is 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, so you can recognize why you need to invest, 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” of those savings component can be a bit of a maze.
The problem is that most people are relying 100% 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. OK…Let’s dive in!
Your Retirement Destination (aka the time of your life when you are not wanting to go to work all 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 means you need to figure 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 next exercise, I’m going to go with the standard version: work til you’re 65, then stop working (mostly), and do whatever you feel like with your time (that your budget will allow).
A Quick Retirement Calculation
Calculating how much money you will need to retire on per year can be pretty easy actually.
Let’s say, for example, you are 25 years old now, and feel comfortable with the idea of living off of $6500/month (in today’s money value) during your retirement starting at age 65.
Now, take that $6500/month and factor a few more items into the equation: your potential social security income, any pension income you might have coming to you, any part time work you may be willing to do, and of course, taxes you will have to pay on your retirement income.
Let’s say after all that, the actual extra income you will need from your retirement fund (beyond SS, Pensions, etc), is down to $1650/Month (or $19,800/year)
Next, run that $19,800 through a compound interest calculator, factoring 3% annual inflation for 40 years, and you’ll see you need about 5,400/month (or $64,600/year) in future money value, to live your retirement life.
Finally, multiply that $64,600 by 25 (trust me on this formula for now), and you get about $1.615 million dollars. See? Easy. Amassing that should be no problemo…right!?!
Ok, ok, that was not necessarily all that simple. I admit it. That’s why I wrote this far more detailed article on the topic, so you can get some more clarity…
Your Perpetual Income Machine
This lovely $1.615 million would theoretically provide you with $64,600/year indefinitely, which would also adjust up for inflation during retirement, given a 7% annual return. It will even allow you to leave a bunch of money to your heirs! Sweet!
It’s kind of the “Cadillac” of retirement plans. (Notice I didn’t say Rolls Royce—it’s not a Rolls. The Rolls 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. Uhhhh…Citizen Kane!?!
Sidebar: I know that number sounds somewhat high—and it is—but don’t panic quite yet. For some perspective, it’s more like 494K 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.
How Do You Save That Much?
1. You can either save the entire 1.615 million from your work income alone, or…
2. 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. Aha!
Enter…Your Big Picture “Investing Vehicle”
Your “investing vehicle” is whatever you’re going to put your savings into, like a stock or a bond, or really any investment you choose to put your money into.
You want this money to make money for you…without having to work for it. Because you already have a job, right?
It comes in just a few basic categories.
Only a couple of these 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).
Now, 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, etc.
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 which investment options are best for you can be tough. 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 clients’ 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. I mean…).
But even at that, you still likely have to participate in this crazy wild west rodeo to reach your end goal. More on this topic here…
2) Personally Owned Real Estate
Besides public markets, 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).
Take a look at this article to learn more about the personally owned real estate game…
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
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 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. The S&P 500 Index being an example of this.
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 look at this S&P 500 returns calculator, you will see that reinvested dividends, it reports a CAGR of 9.69% .
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.
A 10% Expectation Is Actually Kinda High
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.
Bottom line for big picture investing: the best you can expect to do in the public markets on average is 10%—on the high side. However, since investing in “all stocks” is considered somewhat risky, managers often shoot for a more diversified portfolio delivering 7-8%.
Ferrari or Ford Taurus?
OK, so 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 entail 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 log into 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.
That’s the easiest way to go, no doubt. Plus, there are some other benefits of a financial advisor. Except, where does one find this magical, perfect, low fee, honest person? It’s not easy.
You should also read chapter 5 of this book by Tony Robbins and Peter Mallouk. It will help guide you in choosing the right kind of advisor. There are some trap doors when you get to this level.
All that said, 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!
Should You Do it Yourself?
Perhaps. 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 (exchange traded) index funds, and avoiding the advisor fees.
OR, you could invest in personally owned real estate.
Now in real estate, there are fewer options out there for people you can hire 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 probably invest in both the stock market AND real estate over the long run.
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 1.615 million by 65 (from our calculation exercise earlier).
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 1.615 million end goal. I used this calculator, and played with some savings amounts at the 8.5% interest over time.
You will need to start saving about 500/month at age 25 and do that until you are 65. Damn. That seems like a lot, doesn’t it? Just to be sure, I went back and ran it again, and…yeah it’s correct. Crap.
Did you EVER have $500 left at the end of the month when you were 25? Probably not, so you will just have to scale up your savings over time, as your income grows. More doable!
Again, I have more detailed info on how this could work in this article…
A Little More Sarcasm and Then…Some Hope
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 try to best that percentage by 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 $500/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 until your 65.
Now get out there, get a good paying job, make that $500/month deposit, have a few kids, try to have some fun, and we’ll see you at age 65 for Act 3: Retirement!
Ok, ok, seriously, I realize that generating a retirement nest egg of 1.615 million, by saving $500 per month from 25-65, whilst getting an average 8.5% return will take some work. It’s true.
And yes, you can adjust your targets, adjust the variables, and get them to be more in line with an achievable result. Life is long, a lot happens, and you can make many pivots.
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. Get your investment vehicle gased (or charged) up!
We are all very lucky the world offers options for every budget, in all necessary aspects of life. So we can figure out a way to navigate most situations.
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!
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