Today I woke up and the sun was shinning with such an intensity that reminded of my purpose 1 Million € in less than five years. As you all know I have been writing about this topic since the start of this blog, I picked a number often cited by financial planners that seemed like a
nice, round target. I said getting there would require buying stocks and
mean accepting some risk, at a time when neither was very popular. I
tried to be realistic, but I hope it made $1 million seem not so out of reach
Those
not born in that 1977-to-1994 window aren't off the hook, either. For
the more seasoned out there, especially baby boomers who have postponed
saving for fast-approaching retirement, a similarly aggressive strategy
will be needed to make up for lost time.
Is
this doable? I think it is. But it will require more diligence,
dexterity and determination than was required in the go-go 1980s and
1990s, an era the entire financial advisory industry and its "buy and
hold" mentality remains fixated on. And it will require people to end
their long love affair with bonds, because those supposedly reliable
fixed-income assets look set to under perform for years to come.
First,
let me address the elephant in the room: skepticism that this is even
possible, and a creeping feeling that unless you're a Wall Street trader
or a hedge-fund jockey, the system is hopelessly stacked against you.
Because paralysis is not going to get anyone to1 Million.
At the moment the Stock Market is not an option
It's
easy to forget, with all the emphasis on CEO pay, banker bonuses,
insider trading, scandals, fraud and such, (read my previous post) but half of the stock
market's two-part mission is to help average people build wealth,
provide for their families and save for retirement.
(The other half of the stock market's mission is to funnel wealth to
entrepreneurs and fast-growing businesses. I'd argue it's failing here
as well -- witness the recent string of failed initial public offerings
and the accumulation of idle cash on the books of America's largest
companies -- but that's a story for another day.)
The stock market
is also the institution by which the social contract of
capitalism -- that while not all share in the spoils of growth equally,
all can participate in it -- is made manifest.
Yet, by just about
any measure you'd care to use, Wall Street has been failing the average
investor miserably for more than a decade. No wonder the Occupy Wall
Street movement generated so much heat before the chill of winter and
the holidays set in. This is a clear example to join stable markets for example the Finnish Stock Market, in which I feel extremely confident. The North American Stock Market seems to be on deep troubles according to The
Standard & Poor's 500 Index is trading at levels first reached in 1999 and has been drifting
sideways ever since, in a stomach-churning, dream-crushing trading
range.
Even accounting for dividends, the S&P 500 continues to flirt
with levels reached in the closing moments of the 20th century. But
over this same period, the U.S. economy has grown by 21%, or $2.3
trillion. Corporate profits have trebled to a record $1.5 trillion.
Average investors just haven't gotten their cut. Income inequality has returned to
Progressive Era
extremes seen before Presidents Woodrow Wilson and Theodore Roosevelt
reeled it in with stiff taxes and new social programs. Poverty is on the
rise. Wages have stalled. Labor force participation has fallen to
30-year lows. Food stamp usage is off the charts. And inflation has
devalued the power of the dollar by 34%.
Now, there are exceptions. Small- and mid-cap stocks have done well
despite suffering two round trips to late-1990s levels during the 2001
and 2007 recessions. So have bonds, which are putting the finishing
touches on a 30-year bull market. But these are nuances, and I don't
think they reflect the realities for typical retail investors engaging
in a buy-and-hold strategy focused on the largest, "safest" companies.
So
what are people to do? As I've suggested in the past, one of the few
ladders left with which to climb the social strata is to become a
business owner and participate in the growth of the economy.
Direct entrepreneurship is the best bet. But indirect investing in the
stock market remains my best alternative.
Moreover, for those angry
at the growing wealth of the top 1%, a majority of their riches are
tied to business equity. In short, they own stocks or similar assets. If
you can't beat them politically and through the tax code, join them.
If
none of that convinces you, keep in mind that with the Federal Reserve
pushing both short- and long-term interest rates toward zero, and into
negative territory after adjusting for inflation, there are few good
long-term alternatives for savers. Very few people can save $1 million from their paychecks before retirement if they're earning
only 1% or 2% interest.
Solid returns are our only hope or not
Let's run some numbers to
illustrate how retirements live and die based on investment returns.
Yes, saving, reducing debt and controlling expenses are important. But
they merely get you in the game. The big swings hinge on average annual
returns.
Retirement-saving
success can be boiled down to a three-way formula: You can work longer,
save more of what you make or earn more on your current investments.
Asset allocation -- owning stocks, bonds or something else -- is the
most critical part of that equation.
Let's work a quick example:
Take a 30-year-old earning $35,000 a year who has no assets and wants to
retire at age 65. If our example invests in corporate bonds offering a
yield of 4.5% right now, that investor would need to save 41% of his or
her income to reach $1 million at retirement -- a nonstarter for most.
The percentage would be higher for an older investor or for someone
trying to do it using bank savings accounts paying minimal interest.
But
thankfully, we are in the midst of one of those rare moments when
"safe" assets such as bonds are the "risky" ones -- in the sense they
have become overbought, offer yields that don't compensate for inflation
and risk, and have limited potential for gains.
At the same time,
stocks are coming off of their worst run since the 1930s. In the years
that followed the 1930s low, the S&P 500's 10-year total return
peaked at nearly 600% in 1959. Meanwhile, bonds were ravaged after the
Federal Reserve used negative interest rates (as we have now) to help
the government cut its World War II debts by transferring wealth, by
stealth, from savers to the Treasury.
Stock market investors, on
the other hand, enjoyed an average annual return of 19.4% over the
period. For the sake of illustration, that 19.4% return means a
30-year-old investor could save just 1% of his or her income and still
have $1 million by age 65.
Obviously, this number represents the peak 10-year return; over the long term, don't bet on it.
What
should you expect? Well, the S&P 500's average annual return on a
total-return basis since 1800 is around 9%. For safety's sake, I'd dial
that down to 7% or 8% when doing your retirement math.
The numbers
aren't necessarily pleasant to look at. At 8%, that same 30-year-old
worker would have to save 19.3% of his or her income every year to hit
$1 million by 65. With a 7% return, the worker would have to save 24% of
income; a 9% return would mean saving 15.4%.
I didn't say it was easy. I said it was possible. Particularly if you
consider that you'll probably have more than one job and multiple sources of income, and get a few raises over the years. But the
bottom line is that your best chance -- maybe even your only chance --
to earn these returns is in stocks and stock funds, and the diversity of ideas that you can find by reading this blog, lately I got into a new system which leaves aside all the stock market and focuses mainly on loans with a 10% to 15% return in the short run, it is so simple that the idea is booming and something great is coming out of it.
Investors, especially those who still believe in buy-and-hold or who
lack the time to actively trade, will still need healthy amounts of
diligence and care as the financial world moves ever closer toward one
of the two following outcomes:
- The
stock market remains range-bound for another decade or more in a repeat
of the 20-year stagnation of the 1960s through the 1980s, mimicking
Japan's recent malaise.
- Bonds end their multi decade rise on a
combination of higher inflation, a workable solution to the global
sovereign debt problems and corporate leveraging, providing the raw fuel
needed for another secular, long-term bull market in world stocks.
The
second, of course, makes that $1 million look much more possible.
The first makes it very tough, requiring a much more active approach to
investing. In any market, some stocks do go up -- but in a range bound
market, finding them is hard work that really pays off.
This binary outlook goes a long way toward explaining why Wall Street
has been so jumpy since last spring as the spectrum of possible
outcomes for mid 2012 and beyond has narrowed into what seems like a
black-or-white choice. All types of assets -- from currencies to
commodities to stocks across the sector groups and even Treasury bonds
-- are rising and falling together as computers trigger buy and sell
orders in microseconds based on the latest headlines and rumors.
No
wonder that, according to Merrill Lynch calculations, more than 80% of
hedge funds have returns that are over 70% correlated with the S&P
500's volatility measure, the
CBOE Market Volatility Index.
In other words, hotshot traders who are supposed to be able to make
money in any market are instead bobbing up and down along with everyone
else.
I want to share with you all the latest info graphic for Americans on how to save some taxes at the end of this page and I also want to thank Michael Weinberg founder and CEO of "Wizpert" for adding me to Wizpert, a fast growing community of experts, where users seek advice on
an array of topics, including personal finance.
One last final idea...we all need to stop consuming 100 percent of the time and add some value
to society by producing something, impact and effect millions= make
millions. Let´s keep moving.
