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 followed.
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” years
| Years | $ 10,000 | $ 50,000 | $ 100,000 | $ 250,000 | $ 500,000 | $1,000,000 |
| 10 | 76.9% | 50.6% | 40.5% | 28.2% | 19.6% | 11.6% |
| 20 | 33.0% | 22.7% | 18.5% | 13.2% | 9.4% | 5.6 |
| 30 | 20.9% | 14.6% | 12.0% | 8.6% | 6.2% | 3.7% |
| 40 | 15.3% | 10.8% | 8.9% | 6.4% | 4.6% | 2.8% |
| 50 | 12.1% | 8.5% | 7.0% | 5.1% | 3.6% | 2.2% |
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 9.4%.
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 liberally to 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” years
| Years | $ 10,000 | $ 50,000 | $ 100,000 | $ 250,000 | $ 500,000 | $1,000,000 |
| 10 | 99.5% | 69.9% | 58.5% | 44.6% | 34.9% | 25.9% |
| 20 | 41.3% | 30.3% | 25.9% | 20.3% | 16.2% | 12.2% |
| 30 | 25.9% | 19.3% | 16.6% | 13.1% | 10.5% | 8.0% |
| 40 | 18.9% | 14.2% | 12.2% | 9.7% | 7.8% | 5.9% |
| 50 | 14.8% | 11.2% | 9.6% | 7.7% | 6.2% | 4.7% |
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 50 years.
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 unnecessary)
- 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 shawn@investorsfriend.com.
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 $120,000.
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 happen.
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.
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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.
END
Shawn Allen, President
InvestorsFriend Inc.
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