InvestorsFriend Inc. Newsletter
May 27, 2007
Don't hope to get Rich,
instead, Plan to get Rich!
In life we all have many hopes,
wishes, dreams, goals and plans. These tend to range along a continuum from
wispy passing thoughts that may never be acted on, to reasonably firm goals
which you are basically committed to, all the way to absolutely concrete
plans that you are totally committed to that absolutely will happen
with 99.999% certainty.
For example, if you have a plan to
paint your bedroom next Saturday and you have already bought the paint, you
are experienced at painting, you have everything you need, you have
set aside the time, and you are committed to doing it, then it's a pretty
sure bet that you will paint that room. And if for some reason it does not
happen on the planned day, it is very likely to happen soon afterward.
On the other hand if you have a wish
to travel to Europe within the next few years but you don't have the money
and are not sure if you have the time, and are not sure which part of
Europe, then I would not bet money that the trip will happen within the next
five years - if ever.
The point is that if you want to reach
a goal you need more than a goal and a wish, you need a plan.
Almost all investors hope to get
richer. But most don't really have a plan to get rich
But some people have solid plans to
get rich through investing.
Consider Warren Buffett, the world's
second richest person. I have read a lot about Buffett and how he got to be so
rich. I am absolutely convinced that as a young man he did not merely hope
to get rich. He knew he was going to get rich because he had a plan
that he knew would work. In 1952, at age 22 he got married and told his
bride he was going to be rich ( per Fortune Magazine interview published
July 10, 2006). In fact he may have known he was destined to be rich by about age 10.
At age 14 he told friends that if was not a millionaire by the time he was
30, he would jump off a tall building! He had extreme confidence that he
would become rich.
He knew that even as a kid he could
make money in a variety of ways including: buying 6 packs of Coke for 25
cents and then selling the Coke for 5 cents each, retrieving and selling lost
golf balls, delivering newspapers (on five routes at once - with four
different dailies). He knew that he could save most of his money. He saw
that stocks go up in price over the years. He knew intimately the power of
compounding returns. He came to know that he had the skills to make high
returns in stocks. He also knew that he could go to college and then make
a reasonable income. With this knowledge and his absolute commitment to make
money, save money and invest money at higher-than-average returns, it became
a matter of mathematical
certainty that he would grow wealthy. As long as the earth circled the Sun
enough times and as long as Buffett remained healthy it was a certainty that
he would grow very wealthy by following his simple plan.
It may not be
well known that he planned from those early days for much of his wealth to
go to charity. Buffett and his wife set up a foundation for this purpose in
the 1960's. Only in 2006 did he finally fund that foundation in any
significant way. But the plan to give to charity was always there. And he
would not likely have set up that plan so early unless he knew he
would become very wealthy. That is the kind of confidence that he had in his
plan to become rich.
Imagine then if you had your own
concrete plan to become rich. Imagine that the plan was in place and you
were totally committed to working that plan. At that point the only thing
that would stand between you and your desired state of wealth would be the
passage of sufficient time.
There are, few if any, reliable ways to make
instant wealth. But if we have a plan to become wealthy that pretty much eliminates all the
obstacles and requires only the passage of time, that would be a fantastic
position to be in.
In fact, some of you may be in that
position. All around us are people who are very reliably building their
wealth. They are doing it in a wide variety of businesses and investments.
For many middle-class working people, the most suitable
plan to become wealthy may be a variation of the same plan that Buffett
Unfortunately this plan, if one is
starting from a base of zero, requires, in most cases, probably 30 years or
more before significant wealth is amassed . Still, for anyone with at least
30 years of life expectancy left, those 30 years are going to go by anyhow
and being wealthy in 30 years beats never being wealthy.
If you have already accumulated a
material amount of savings and if you have enough years left then following
a plan like Buffett's to accumulate something in the order of $3 to $10
million is quite possible. This is further explained below.
The Magic of Compound Returns
It's well known that compound interest
or compound returns allows money to grow to huge amounts if given enough
time. Given enough time even a small amount of money will eventually become
huge, even at a small return. To get there faster we need to start with a
larger amount or make a higher return.
A review of the power of compound returns
can be very enlightening and motivating. It is truly amazing what is
possible given a savings program, enough time and a high enough return.
The math makes it very clear that it
is possible for middle class wage earners to eventually amass wealth in
the range of $3 to $10 million!
Imagine your goal is to reach $3
million. With $3 million most people would feel that they were financially
independent. Most people could live comfortably on the income from $3
million indefinitely with no further need for employment income or reliance
on any other form of income.
Let's look at the mathematics of what
kind of return it would take and how long it would take to grow an existing
pool of money to $3 million. For simplicity, this assumes no additional
money is saved, we just have an initial lump sum invested.
The return figures discussed here are
all after-tax or assume a tax-sheltered savings plan. The return figures
are also average annual returns. We would expect significant volatility
around these figures and certainly negative returns in some years.
Annual Return Needed to Grow initial investment to $3 million in "X"
The table shows that if you are starting with $10,000 and
not planning to add any more money, then it is going to take a very long
time to reach $3 million. It would take 40 years even if you can earn 15.3%.
That's okay if you are 20 years old but if you are say 40 and do not already
have at least $50,000 invested then you will have to embark on an
accelerated savings strategy or perhaps borrow against your house in order
to jump start this plan.
If you already have $100,000
invested then you could reach $3 million in 30 years by earning 12.0% per year.
If you already have $250,000 invested then you can reach $3 million in 20
years by earning 13.2% or in 30 years by earning 8.6% annually. And if you
already have $500,000 then you can reach $3 million in 20 years by earning
Now let's set our goal at a higher
and very motivating level. Imagine if you could grow your investments to $10
million! With $10 million you could live a true millionaire life style with
multiple homes and spending much of the year traveling. You could donate
charity and generally live the good life. Most of us would love to get into
that position, even if only in our old age. So, let's look at how long it
might take and what kind of return is needed to turn an existing pot of
money into $10 million.
Annual Return Needed to Grow initial investment to $10 million in "X"
The results show that $100,000 will
grow to $10 million in 30 years if a return of 16.6% per year can be
attained (a difficult return level to make, but not outside the realm of
reason). Even at 9.6% the $100,000 will grow to $10 million but it will take
A current nest-egg of $500,000 will
grow to $10 million in 30 years at a return level of 10.5%. I believe that
there actually quite a few thousand Canadians who have retirement savings in
the range of $500,000 and who are still in their 40's or younger. If these people
have other sources of income and if they can leave this $500,000 grow for
about 30 years and if they choose an aggressive but intelligent investing
style then these people can be reasonably confident of growing their
wealth to at least $5 million, and quite possibly $10 million.
To invest your way to $3 to $10
million or more you should do (or should have done) the following three things:
- Start investing early in life
- Save annually as much as
reasonably possible (most important the early years, eventually becomes
- Choose strategies with higher
expected returns say 12 to 15% (most important in later years, this is not
important in the early years when the investment pool is small).
Note that these return strategies will
be aggressive. They will likely involve very significant volatility and
certainly some years with negative returns. This plan will not be for the
faint of heart.
In many cases it will not have been
possible to start particularly early, and/or it is too late for that to
happen. In that case it may be possible to "catch-up" by saving more
aggressively when you do start investing and perhaps being more aggressive
in seeking higher returns.
Think about your own situation and
that of your family. How can you use compound returns to your advantage?
What level of wealth do you think you might be able to reach? You can email
me your thoughts at
Could an RESP launch a youngster on the
early road to major wealth?
A Canadian Registered Education
Savings Plan is designed to provide money to pay for a college education.
The maximum amount that can be contributed is $42,000 (for example say $2000
per year for 21 years). The government would then contribute another $8,400
as Grant money ($400 per year or 20% of the $2000). In this scenario the
$50,400 ends up being invested for an average of 10 years. At a 10% return
this will grow to about $150,000 after 21 years. At 8% it grows to about
Therefore it is quite reasonable to
expect that if an RESP is started soon after the birth of a child, and
funded at $2000 per year, this can grow to $100,000 or more by the time the
child is in university. This can be used to fund university studies and
would be a fantastic gift for any youngster. They could come out of university
with no student loans. That could then allow them to start an investment
program much sooner than those who face the burden of high student loans.
But I have been thinking of a more
aggressive and exciting scenario. What if the child managed to pay for their
university education through a combination of living "at home",
scholarships, part-time work summer jobs, or through distance learning
programs? In this scenario it might be possible to get the RESP money out,
pay taxes on the gains and end up with say $75,000 in an investment account.
This would be a HUGE head start to an investment program. The $75,000 could
grow to $5 million in 40 years if the return averaged 11.1% per year (after
tax). And that would be on top of additional savings.
The point is that with enough time and
with returns in the 10 to 15% range it is very possible to become wealthy in
a reliable fashion. But it only happens if people can manage to get into a
position where such compound returns can be put to work. Perhaps a clever use of
the RESP is one such strategy to consider for those with young children.
The Higher Canadian Dollar
The Canadian dollar is at a 30-year
high and is now worth 92.5 cents U.S. This is a huge recovery given
that the dollar sat around 68 cents for some years and even plunged to being
worth only about 63 U.S. cents at one point.
This high dollar will have many
impacts, some positive , some negative. Here are my thoughts on what might
Those Canadian manufacturers who face
most costs in Canadian dollars and where most or a significant part of their
revenues are from the U.S. will suffer very badly. Those auto manufacturers
in Canada that have a lot of labor or component costs from this Country
could be crushed. This could cause a recession in Ontario. Even our Canadian
oil and natural gas producers are suffering from this. Perhaps it could even
lead to a slow-down in Alberta.
Canadian businesses that have costs in
U.S. dollars and revenue in Canadian dollars will do well. Canadian Tire
should do well as many of its products are imported. Dealers of cars made
outside of Canada should do well. Dealers of Canadian made cars will suffer.
The tourism industry in this Country
will suffer greatly. The high dollar combined with a requirement for
Americans to have a passport to fly into Canada and a perception that a
passport may be required to travel to Canada even by car could be a crushing
blow to this industry.
Canadians will travel more to the U.S.
and other parts of the world (again hurting the Canadian tourism industry).
Older Canadians will even move to other Countries in higher numbers as their
savings will go a lot farther abroad than was recently the case.
Canadians will begin to invest a
higher percentage of their money in foreign Countries as foreign stocks now
seem more affordable.
Our stock markets have done very well
as the dollar climbed. But I suspect we will now have reached the point
where this high dollar will start to slow our economy, hurt profits and hurt
the stock market.
It's not necessarily easy to find
returns that average 12 or 15% or more. But these returns are probably needed if you
wish to gain truly significant wealth in the markets in less than about 40
years. This will not happen using the typical balanced mutual fund
recommended by most financial advisors. In fact those type of funds will
likely return a long-term average of under 7%. With a return of under 7% it
will very difficult for any middle class wage earner to ever grow a
portfolio into say the $3 million range. For that goal to happen, higher
returns are likely needed.
Since I began this Web Site seven
years ago, I have personally achieved an average annual return of 17.4%.
(And this includes the early 2000s when markets were crashing down). This return has put me into a position where I can have a strong expectation
of achieving a portfolio of $3 million or more within 15 years, even if I
never save another dime. Our Strong Buys have done even better at an average
of 26.6% per year. I can't promise that InvestorsFriend will continue to
achieve high-than average returns. But given our track record, I do like our
chances of doing so.
You can tag-along with our future
returns if you wish. If you are looking for stocks to invest in then
why not subscribe now? (Assuming you have not
already done so, which a great many of you have) The cost is just
$15 per month or $120 per year. If our Stock Picks can help you on the road
to really growing your wealth then of course the subscription cost will have
been an exceptional investment.
Shawn Allen, President
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