After 2 years of thought process, I have decided to take on full time investing from 2018. For me, I consider my salary as an opportunity cost. So my criteria was to see if I can beat mutual funds by getting at least 120% of my current salary over a period of 3 years. Added to that, I wanted to make sure I have enough cash for expenses for next 3 to 5 years. This cash is over and above the investment I plan to make in equities. I also added a corpus for medical expenses.
I did some calculation of my returns for the past 10 years to see if I met mutual fund returns. I ignored investment during my school and college days and considered only last 10 years which included substantial portion of my salary. I was also invested in mutual funds for the last 10 years and they were no more than 18% cagr. However my portfolio in equities grew by around 26% . This is rear view mirror and may not happen in the future. However for sake of calculation, the 8% alpha is more than 120% of annual take home salary.
On top of all these aspects, I can spend time on what I like. I donāt need to be awake at 3 am to attend a meeting with a US client and donāt need to wake up by 8am and rush to office. I can now pursue PhD in finance which was my speciality in MBA and I thoroughly enjoyed it. I can take care of my health and get 8 hours of sound sleep!
I will know in 10 years if I took the right decision.
2 Years i believe is enough time to have arrived at the decision .
Infact i believe many are in the boat as yours because of good returns in the recent rally and positive momentum.
This is definitely a double edged sword and i would like your feed back on the below queries for the benfit of many here
1.What is your plan to manage the expenses after your initial corpus of 3-5 years runs out?Is it via returns generated by your investment corpus after 3-5 years or via a secondary job(like teaching which you can do after your PHD)/
2.What are the major risk factors you can think of right now(From finace and personal perspectives)
3.You might have baselined the alpha you can create between your mutual fund investments and direct equity exceeding your salary.Have you considered this difference only over your personal experience alone or based on any other data also?
4.How do you plan to structure your days as eventhough many of us hate our day jobs,it kind of gives a kind of order to the day and absence of it might be a bit of shock.
Just a suggestion from my side, it may be better to take this decision 1-2 year into the bear phase. During bull markets, there is lot of optimism and a decision taken in these times may not hold the test of time.
Yes, totally agree Dheeraj. Bull market optimism clouds ones decision taking ability. Moreover, the CAGR returns earned during the bull phase gets averaged down or watered down in the bear phase, but if you are only starting in the bear phase, then it is going to be a very tough ride. A different mindset will be needed to survive, because in bear market every mistake is punished.
Let alone leaving the current job, in stock market bear phase, you may need an additional job; one for the family and yourself and another to fund stock market losses (lessons)
That was exactly my point. If someone wants to be a full time investor, in such times would need to have enough resources to survive for 3-5 years at a minimum, have an emergency reserve and a substantial investment corpus. Moreover, he would require extreme amounts of patience, self determination, persistence, family support. Stock investing is not for the faint hearted.
30x annual expense in financial assets (debt plus equity) plus owned home is a decent number to become full time investor.
If you are able to beat inflation by 3.3% on an average every year, your corpus will work till infinity. If the nominal value of corpus is up by inflation + 3.3% every year, and you withdraw 3.3% per year (3.3% = annual expense), you will be left with corpus+ inflation returns every year.
However, the assumption of beating inflation by 3.3% every year on an average is an important assumption to be fulfilled!
If you can beat inflation by 4% and are sure of that, then even 25X will work!
I am expecting 1% as dividend and that will take care of 50% of my expenses. I will need to take out 3% from my returns every year during bull market. If I encounter a bear period of 3 years, I can manage with the 3 year reserve. I donāt expect a bear period beyond 3 to 5 years. If I face such a scenario, I can get a job back.
Biggest risk is an extended bear market. Looking at past, I am okay with up to 5 years.
It is only my personal experience and I have seen only 1 bear market. Again that is the risk. If something like the US depression happens, I might be at risk. Today it seems far fetched.
I am sure I will get used to it . For 5 years I have been used to working from home. I have couple of hobbies which I do even today and will keep myself occupied with those. I run few websites and could spend more time tweaking them.
Doing a PhD will be demanding. That might happen at a later date once I push my portfolio to a very safe ballpark.
Ok, hereās my take. Equity investing as I would think is just a means to long term wealth creation. Now, long term wealth creation in my opinion is a 2-step process as outlined :
Step 1 : Generate sustainable cash flows over a long period of time. This can be via a job, self-employment or via owning/running a business.
Step 2 : Deploy the cash ( generated from Step 1 ) efficiently into appropriate assets ( of course equity ).
Step 1 brings in the money and Step 2 generates wealth. Without money, there cannot be any wealth.
Going through this thread, the essence seems to be figuring out means to come out of a full-time job. Now, a full-time job is essentially contributing to Step 1 so not wanting to continue in a full-time job would mean switching over to alternatives within the realm of Step 1. Viable alternatives are either self-employment or entrepreneurship.
Most people on this thread are instead talking about bypassing Step 1 and only focusing on Step 2. Technically, thats not possible and definitely not sustainable. Unless you are absolutely sure that Step 1 is done and dusted for good. This should mean that regardless of what happens in Step 2, you have all your bases covered for the long term.
Sandeep, very well said. Most important is the step 1, for if it is not there, there can not be step 2. The only caveat is that, once you have generated enough wealth, you may no longer need step 1.
I agree. However, step 1 (mentioned in your post) is necessary only until you are able to build an investible surplus large enough for the returns from investments to take care of your expenses for the rest of your life. In fact, for some people, step 1 can totally be skipped (think, wealthy parents who can gift their child a large corpus).
In my case the numbers work out as follows
My expenses are 15 lakhs a year and I assume it will increase every year based on inflation. Assuming an average inflation of 6% and the ability to generate an average return of 10%, I would need an investible surplus of 3.75 crores to reach the point where I can retire and live off the returns from my equity investments. Now, instead of 10%, if my portfolio is able to generate an average returns of 11% (assuming the same inflation of 6%), I would need a corpus of 3 crores (instead of 3.75 crores).
Having invested in equities for more than 15 years now, I believe achieving a real return of 5% is NOT difficult. However, if there is a black swan event (world war 3, great depression etc), the above calculations could become meaningless which is why it would be a good idea to own a house, have no debt and build a war chest of 2 times your annual expenses (invested in liquid funds or FDs), before considering quiting your job.
I hope you are considering not only annual expenses, but also one off such as buying house hold goods, car, unplanned medical expenses, kids college and marriage etc.
This is a good point. I considered the total amount spent from my bank account for the past 6 years, calculated the present value and took the average. Hence, it includes the cost of one time purchase of goods, car, insurance payments (life and health) and kids school fees. It, however, does not include kids college and marriage expenses, which, out of oversight, I seem to have missed out (thanks for the heads up).
It is also important to know what strategy of investment are you going to employ. Meaning, if one is looking at the last 15 years as a point of reference, then it is likely that given the current world economics, law of averages is at work.
Only recently, a friend proved to me that last 15 years have given 23% CAGR returns for just doing SIP in a reputed Mutual Fund. Why in the world would you do anything else in the name of getting rich?
I was in disbelief. I am of the view that life is not as simple as it is made out to be. So, I set out to wholly understand his research. I noticed that my friend was enticed by the bull run from year 2000 till 2017. However, market was present and active even before that, then why did he start at 2000? If he took into consideration the previous 11 years of continuous lull, then an investor would have made just about same as PPF?
I put forward my point of view and he has not responded to me yet. It has been five days.
Therefore, you must formulate a investment strategy and employ it real time. Let the positive result show in the bank account. Donāt just jump in my friend, the waters are murky and no one knows what lies beneath.
@peepin2me please also consider in your calculations the amount of additional return you need to make above mutual funds, if you were still working and drawing a salary. Iām considering this purely from a financial point of view. There could be other reasons for someone to quit a job and take on investing full time.
