$1 Million in 5 Years

Blogging is a great way for me to set goals and have motivation to stick to them. Sort of like keeping a journal, but a public one. (Kind of scary sometimes).

I already share our monthly Investment Assets which document the growth (or decline) of our investments from month to month. In the coming months, I will be sharing a lot more about my personal investment strategy as well.

I live by goal setting and this blog is all about achieving those goals and making better financial decisions.

Our big goals:  Achieve a net worth of $1 million in less than 5 years and a $2 million net worth before I turn 40.

The First $1 Million

A million bucks is a nice round number and a major indicator of net worth progress. Don't get me wrong, it's definitely not enough to retire on at a young age. But I believe it is an important net worth goal for us because it's a psychological hurdle and halfway to our target net worth limit.

If we let our investments grow untouched, we should be able to double our portfolio with no new contributions in approximately 12 years. That's assuming a 6% compounded annual return.

As a psychological safety net, I believe we could cut our expenses to the bone and live off the proceeds from a $1 million portfolio for a few years without hurting our long-term financial picture.

By the rules of Moose Math, $1 million will generate a reliable annual income of $35,000 to $40,000 for life. This includes adjustments for cost of living increases all with a probability of success that is greater than 90%.

The $2 Million Limit

My wife and I are determined to give more to this world than what we take from it. As I get older and more mature in my thinking, I increasingly want to move towards a life where we give back by focusing on volunteering, work with people who are less fortunate than us, and try to make a real difference in the lives of others. I think personal satisfaction does not come from selfishness, but from sharing. This is inline with our personal and religious views.

We believe it is important not to accumulate wealth endlessly beyond our reasonable needs. Even with a moderate uptick in lifestyle, I can't see us spending more than $80,000 a year ever. Moose Math says a $2 million portfolio will reliably generate $70,000 to $80,000 a year for life—that's enough for us. We'll have plenty of personal freedom and a great lifestyle!

There's really no reason, aside from selfishness or hoarding, to pursue a personal net worth greater than a few million dollars (adjusted for inflation). Once we hit $2,000,000, excess income can be used to benefit others who matter to us.

We have no desire to get filthy rich. If we continue to both work full-time while maintaining current spending and savings rates, by the time we reach age 65 our net worth would easily be $20 million. We can't think of a responsible way to spend $750,000 per year on ourselves.

How We Are Going to Do It

Achieving a net worth of $1 million within 5 years won't be easy. But it's also not impossible. Here are the steps we will need to take to get there:

  1. Stay out of debt. This is the most important factor. Debt payments can easily suck up hundreds, if not thousands of dollars each month. By not having any consumer debt we can instead direct money to investing without impacting our lifestyle. With interest costs certain to go up in the future, this is more important than ever.
  2. Continue working good jobs. Both of our current jobs pay reasonably well, just putting us in the top third of household income in our province. Two full-time incomes naturally helps. Income is important, although it gets less important as our net worth grows and return on investment has a bigger impact on our net worth than new contributions.
  3. Continue renting. We made a fantastic move last year to sell our over-sized house (for basically no profit after costs) and begin renting. This was a tough decision as we were both raised in families who firmly believe in home ownership. However, after running the numbers we believe the odds are well in our favour: renting will make us better off financially than owning. So far, the investment return on our former home equity is enough to pay for years of rent!
  4. Optimize our housing. Renting gives us great flexibility to move at low cost. Sometime later this year we are going to downsize again. Our goal is to live in approximately 1000 sq.ft. of space with 2 bedrooms. While still larger than our personal needs, it allows some space for guests. Our all-in housing costs are currently around $1,900 a month. Hopefully we can get that down to around $1,600 - $1,700.
  5. Cut vehicle expenses. Aside from housing, vehicles are the next largest expense. Fortunately we don't have payments on our vehicles, but we do own two vehicles including a gas-guzzling truck (leftover from my construction days). We would like to get down to one fuel efficient vehicle. Hopefully we can find a place to live that will allow me to bike to work.
  6. Optimize for taxes. Taxes are real expenses that limit saving ability. We keep our income taxes low by using RRSPs, pensions, and finding other deductions wherever possible. We reduce sales tax expenses by purchasing used items we need from Craigslist and Kijiji wherever possible. We buy staple groceries, don't smoke, rarely buy liquor, and try to minimize driving as much as practical. If the circumstances are right, we may consider an investment loan to further reduce tax expenses.
  7. Move to minimalism. The older we get, the more we are realizing the value of streamlining our lives. This means having less stuff. The main focus of minimalist living is ensuring everything you have serves a genuine valuable purpose. So far we've done a great job of shrinking our closets, selling/giving away some furniture, simplifying our investments, and tossing/giving away knick-knacks and similar crap. I think we can still do better, shrink down our lives, and reduce our footprint even more. This saves us money, reduces stress, and reduces our impact on the environment.
  8. Reduce portfolio drawdowns. It's reasonable to believe we will see a major stock market correction sometime in the next few years. I use a trend investment strategy with stop orders to limit exposure to market crashes. While this can cost me in whipsaw trades and reduced return in up markets, it should protect our portfolio from big drawdowns.

By following this guideline, we should be able to bump up our savings rate without a negative impact on our lifestyle.

I believe in the importance of balance in decision making; we are not going to eat dried ramen and hot dogs to get rich, but we're also not going to regularly buy $10 drinks at a bar when a $2 drink at home or a friend's place is just as satisfying.

Are you setting goals for your finances? What are you doing to get there?

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.

Should You Manage Your Own Portfolio

Every Canadian with basic computer skills and moderate financial literacy should theoretically be able to manage their own investments. The key to designing an effective investment portfolio relies on proper identification of your risk profile and personal situation.

But should you take this on this huge responsibility yourself?

Self-directed investing as never been easier. Online accounts, cheap portfolio ETFs, automated contributions, and plenty of free tools make investing very accessible. It also makes self-directed investing dangerous! With instant access and total control, it can be very tempting to let your emotions get in the way. A string of bad investment decisions, or even one large-impact decision, could derail your investment portfolio and set it back by years.

Understanding investment process, management, and risk while controlling emotions is crucial for self-directed investing success. Often times, a good financial adviser can benefit you simply by protecting you from your own dumb decisions.

Self-directed Investing Questionnaire

I often get questions from people asking whether or not they should invest without an adviser. I can never answer that question. All I can say is there are benefits to both. Self-directed is better for some because of cost savings. Adviser-led is better for others because they need that separation.

An honest evaluation of your risk and emotions is an important first step. It is pointless to build a portfolio and manage your own investments if you can't stick to your investment plan.

Here are some great questions to ask yourself before taking on self-directed investing:

  1. How long will it be before I plan to withdraw from my investments?
    1. Less than 5 years
    2. Between 5 and 15 years
    3. More than 15 years
  2. How long do I believe I should hold onto an investment after I make my purchase?
    1. Until it is clearly not doing as well as it should be
    2. Forever
    3. Every purchase has a pre-determined entry and exit price
  3. What is the appropriate action to take when the stock market drops more than 20%?
    1. Sell my stocks and move to cash/gold to avoid further losses in a bad market
    2. Don't make any trades at all and wait things out
    3. Sleep soundly, ignore the daily market action, and follow my strategy because it was all in the plan
  4. Is it reasonable to expect lower investment returns in exchange for more stability?
    1. I believe good investors can get great returns and stability by choosing the right investments
    2. I know less risky investments are not as lucrative over a long time period, but stability can be important
    3. My investment strategy has risks that are consistent with my risk tolerance
  5. Is it OK to change some of my investments based on a discussion with a knowledgeable friend?
    1. If my friend is successful I should seriously listen to what they say and make appropriate adjustments
    2. I believe I should stick to my investment plan and ignore "the noise"
    3. Every bit of knowledge should be thoroughly evaluated
  6. How often do I check my investment portfolio?
    1. I check my investments several times a week to make sure everything is on track
    2. I check my investments a few times a year
    3. I check my investments once or twice a month
  7. Do I get excited when I see my portfolio doing well?
    1. Yes, it's evidence my investment strategy is working
    2. Not really because I know market crashes come after stock market bubbles
    3. I focus on strategy and execution, not portfolio returns
  8. How long have I invested in stocks/bonds? Would I consider myself to be knowledgeable about investing?
    1. I'm just getting started and/or I don't know the difference between an ETF and an index
    2. I have been investing with an advisor for a while and/or I can explain the success rate of active managers compared to indexing
    3. I have long self-managed my investments with good returns and/or I understand the difference between a long put option and a naked short put

Scoring schedule: see bottom of article. Make sure you complete the questions honestly and mark down your answers before checking your score.

There are investors out there who simply should not manage their own investments. Don't be personally offended if you don't manage your own portfolio. Many Canadians are almost guaranteed to be better off using a good adviser than attempting investing on their own.

There are great financial advisers out there who charge a maximum 1% fee, invest their clients in low-cost portfolios, and provide very valuable service beyond just investing. An adviser can keep you on track with your saving, provide valuable tax and other financial advice, and make sure you are properly insured.

Investor behaviour is a huge influence on performance. Several comprehensive studies have found the average American investor in the last few decades would have achieved better results simply buying intermediate-term government bonds than managing their own diversified portfolio. A bad adviser sometimes made things even worse.

For investors who really want to self-manage but score on the lower end of this questionnaire, they should strongly consider a more conservative investment strategy. Write down their investment plan, limit the number of investments held, and take great care to stick to their plan. A simple Portfolio ETF is probably the best choice!

Investors who score high on this questionnaire should develop an investment strategy and write it down. They can move to more aggressive allocations and, if their assets are greater than $500,000, diversify over a few more asset classes. They could also consider more aggressive strategies like Trend Investing if they are very aggressive savers, have a good understanding of rules-based investing, and have long-investment timelines.

It is important to point out not all aggressive, or complex, investment strategies are good and they don't necessarily provide better returns. This advantage might be more dependent on the character and knowledge of the investor than the plan itself.

Personal Situation

Personal circumstances are the first important factor in portfolio development. If you are retired, or close to retirement, you should have a very different looking portfolio compared to someone who is decades away from retirement.

Taxes play the second factor and this is related to province and income level. High income people, or moderately high income people in high tax provinces, should invest with a careful eye to tax efficiency. This means use of swap-based ETF products, minimal trading to avoid tax triggers, and maximum use of capital loss opportunities.

Lower income people, or those with comparatively low marginal tax rates, can invest in income generating products without big tax costs.

Other personal considerations are longevity, spending flexibility, and the required income as a percentage of your portfolio when retired. People with shorter lifespans, considerable spending flexibility, or low withdrawal requirements can afford to invest more aggressively as they are not as susceptible to sequence risk.

Questionnaire Scoring Schedule

Add up the points for each italicized answer. Answer 1 = 1 point, Answer 2 = 2 points, Answer 3 = 3 points.

If you scored between 8-12, you should strongly consider investing with a good financial adviser. Despite their cost, you will almost certainly be better off with an adviser.

If you scored over 13, you might consider self-directed investing. Be careful, invest conservatively, and continue learning as much as you can to build confidence and avoid big mistakes.

If you scored over 19, you might be more suited to aggressive or complex self-directed investing strategies. Develop a plan and use your knowledge and comfort with investing to your advantage. Be careful not to fool yourself because of your knowledge.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.