This is the third episode in my investment journey series.
In first 2 episodes, I shared where my investment journey started and how it progressed in the first 5 years.
In this episode, we will see the rest of the journey.
Hi. I am Vijay Mohan. You are watching Investment Insights.
When it comes to asset allocation, like I mentioned before, we were 100% on stocks.
Before we look into the reason for that, lets start with this basic question. Why do we have to asset allocation?
If we have all our investments in one single asset, it is fine as long as that asset appreciates in value.
But what if it gets stuck without appreciating for a long period?
Till 2009, Real Estate was doing great in India. That made all to invest in Real Estate.
But it has not appreciated much in last 10 years.
Did we know that this would happen in 2009? No. If we have known this, we would not have invested only in real estate.
The reason I am using Real Estate as an example here is because, you can relate to that easily.
Same is true for all other assets like gold, stocks and bonds. No one can predict which asset is going to do well in the future.
Many say, “Told you so…” after the fact. But before it happens? We might need a witch for that.
What can we do then? We should be investing in multiple assets depending on our comfort.
Investing everything in one single asset is a not a smart thing to do. We saw that in our “Asset Allocation” video in this channel.
“Well then, why did you invest everything in one single asset - stocks?” you might ask.
Because we knew the involved risk. The whole portfolio can go down by 50% in few months.
We all know, last year, the stock market went down close to 40% in single month.
But when something like that happens, we had the courage and enough backups to handle that.
Both of us are working. We do not need this invested money for at least another 10 years.
We believed, even if the market goes down, eventually it will come up in long term.
Check out this chat. This is S&P 500’s return in the past 100 years.
What do we see here? 3/4 of the data points are in positive area. This is the reason for our confidence.
We cannot predict the future based on historical data. But we can use it as a rough guideline.
Even though stocks are the asset that has maximum return potential, the reason we invest in other assets is because, when the stock market goes down, other assets gives us a cushion to handle that drop.
Lets say that we have 60% stocks and 40% in other assets like gold/real estate/bonds.
If the stock market goes down by 50%, the whole portfolio would have gone down by only 30 - 35%.
But instead, if we had everything in stocks, the portfolio would have gone down by 50%.
Because we did not need the cushion provided by other assets, we took the maximum risk and invested everything in stocks.
We did that, because we had the luxury to do that. Not everyone can do that.
Because, how many can handle a drop of 50% in their portfolio?
Many say that they can. But they don’t realize the seriousness of it until it happens. We will lose our sleep.
That is why, it is very important to understand your risk profile before taking stocks exposure.
Do not put everything is stocks because someone in YouTube said so. That will lead to disaster.
This is personal finance. Make your investments depending on your personality and comfort.
By the end of 2014, our networth has grown to 14X. In this year as well, we did not invest anything new in the market other than in our retirement accounts.
But we started paying off our house loan with annual savings.
The word hated by my wife the most is “Debt”. Our mortgage loan interest was only at 2.75%.
The right financial decision would have been to use the extra savings to invest in any other assets that can appreciate more than 2.75%.
Though our mind knows that, our heart did not agree to that. Our focus was on paying off this debt aggressively.
“Not everything needs to be perfectly planned in our life. Something can be compromised for our psychological happiness…
“There is nothing wrong with that” - we said to ourselves when paying off the house loan aggressively.
I heard about FIRE for the first time in 2015. Till then, I did not know about this FIRE movement.
If you do not know what FIRE is, it means - Financial Independence, Retire Early.
That is, retiring early after attaining financial independence.
Like we saw in “Financial Freedom” video, normally if we have saved 25 times our annual expenses, we are ready for FIRE.
It works well in US. But for India, that formula needs some changes. I will cover that in a separate episode.
When I came to know about this FIRE, “This is what we have been doing already… but we are doing it for building wealth…”
“It has a side benefit of retiring early too? Cool… I can plan for retiring early after my kids go to college…” is what I thought then.
By the end of 2015, our networth grew to 16X.
After this year, we did not make much changes to our portfolio at all. It just grew all by itself like it is running on cruise control.
By end of 2016, our networth grew to 19X. By the end of 2017, it was at 22X.
For the first time, our networth went down in 2018 - to 20X.
That year, we also paid off our home loan. Exactly 5 years. The only good debt that we had till then - house loan - we paid it off and came to “0” debt.
After this, all our annual savings went straight into our investment account.
Since 2019, we started seeing the power of compounding in our networth. By the end of that year, our networth went up to 28X.
There is no need to mention about 2020. You all know how the stock market went up.
Like rising tides lift everything on it, our networth went up to 42X as well. Now our networth is at 45X.
Till now, when we bought our home in 2013 is the last upgrade in our life style.
For last 8 years, there is no change in our life style. We are maintaining the exact same life style.
At this stage, we had 2 options. Just like everyone else, we could have bought and moved into a newer bigger home.
If we do that, our annual expenses would have gone up by 50%. If the expenses go up by 50%, our networth would have come down to 30X from 45X.
You can see how big of an impact a life style upgrade has on our networth.
With 30X networth, I will not be able to take the risk of leaving my job comfortably.
I definitely need to work to maintain that upgraded life style.
Second choice is, be content with the current home and leave the corporate job for exploring other opportunities.
You all know which choice I chose. This is a personal choice.
No one can say that this is the best choice. This freedom is more important for me than moving into a bigger home.
So I chose this. You might prefer a bigger home. That is your choice.
Till now, the growth rate of our networth is at 27%. A good chunk of it came from our 50% annual savings.
Now that I have left my job, we are not going to have that extra 50% savings.
My wife is still working. One person salary is good enough to run our family.
That means, there is no reason to take the money out of this 45X nest egg.
If I let it grow without touching, how would it grow in the future? Till now, the growth rate of our investments is 20%.
If our networth grows at this rate in the future, 45X will become 100X in 4.5 years.
I am not expecting that 20% growth, but 10% growth. That will make our networth grow to 100X in 8.5 years.
If the market falls 50%, and if it stays there for 10 years, though the chance of it happening is less, the chance is still there.
It is still OK for us. Because, we are not dependent on this investments for our expenses.
We can afford to take this risk. Of these 3 scenarios, my expectation of 10% growth has the higher chances of occurring.
I am an optimist. I will be ready for the worst, but expect positive outcomes.
For that 10% growth rate, if our networth can become 100X in 8.5 years, my wife could give up her job as well.
But she is not the kind who retires from job that easily. But thats something for future.
Did you notice one thing? The 10% average growth of 45X is 4.5X.
Not all years are going to be like this. But on average we can expect this growth.
4.5 times of our annual expenses are coming just from our investments.
“Do not work for money. Make the money work for you” - this is what it is.
So in our family, my wife still working is first safety net. The growth from our investment is second safety net.
If nothing goes as per our plan, the option of me working as a consultant is our third safety net.
Worst case - 25X here becomes 75X in India. we could always go back to India for retirement.
We have many options. That gave me the confidence to quit the corporate life.
Now you know where I got the confidence from to quit the corporate life.
The reason I am saying this in detail is because, when I said that I am leaving my corporate life, many said that they have the same plan as well.
Very good plan. But before quitting, please make sure that you have thought through all the back up plans just in case if the early retirement does not work out.
Once you know that you have enough back up plans, then you can decide on quitting the rat race. Good Luck!
“OK. You have done MBA Finance. You got good Finance knowledge as well. So you were able to do this…
“But for someone who is starting just now, is it even possible to do this?” - I will answer that question in next episode. Thank You.