Don’t rely on trading for cashflow for monthly expenses. It has to be dividend, interest, rental etc
Most endup with -ve instead of +ve cashflow (Exceptions are always there but are you one)
Don’t rely on trading for cashflow for monthly expenses. It has to be dividend, interest, rental etc
As I have said earlier also, there are only four conditions (or a combination of these four) under which taking the plunge to be a full time investor will be a logically justified act (mere want, desire, interest, fascination etc. are just fads of bull markets in 90%+ of cases and they fail you big time during the bear market):
a) you are a trader par excellence - remember in trading maybe only 1-2% people make money - some like @The_Confused_Consult are in my opinion very good short term traders. If you are great long/short trader - you can make money irrespective of market situations - but then very very few according to me qualify here
b) you have already built significant wealth (by that I mean atleast in excess of few crores in today’s expensive and inflationary metro environment) through investing or inheritance or your career and hence are not bothered by say a 25% draw-down year at all - your wealth is sufficient that if you keep taking out some from it for your expenses it doesn’t bother you at all
c) your partner is working in a way all operational expenditures are covered - this also means that your partner’s pedigree and experience in job is such that he/she can always be in a decent paying job - cause in a recession your portfolio can go for a toss and your partner’s job will be uncertain. So ideally it should also be a job where the beta to markets and economy is low. For example - a doctor is excellent low correlation. But an equity sales is pathetically high correlation. Also, your marriage should be stable
d) you start a business in the buy side domain which first of all means that you are already sufficiently ahead in investing in terms of pedigree, experience, track record and knowledge. This means you should not have been asking these questions in the first place. This also means that you should certainly be atleast employed in the sell side if not in the buy side in the first place.
In my case, three of the points - B, C and D worked so I took the plunge. The more points match - the better is the risk/return matrix (cause shit happens all the time) for this decision.
PS - As a corollary of what I am saying, you certainly can’t take up F&O and derivatives etc. just because now you are a full time investor now. You should have done that atleast 5 years back and you should have already been great at that (if that was the plan) before taking a plunge.
PS 1 - Buffett qualified in points B and D.
I spend 5 years studying markets ( 2002- 2007 ) and started investing post Sept 2008 . Then for 7 years i invested 60% of my salary & bonus till my dividends exceeded my annual compensation from day job ( & total investment was > 100 X my annual expenses ) . I quit my job in 2015 and moved to full time investing . I have done F&O trading during early past of investment career 2008-2010 but realised it is zero sum game and takes away lot of time and induces too much stress
No Trading is not for every one . One can lose money very fast . I have lost money though small amount in early part of my career .
This discussion is going on for almost two years and it has thrown many valuable insight into psychology of investing, money management etc. But one aspect that has strangely escaped this whole thread is - if someone leaves his day job to take investing full time, is he going to be gainfully engaged?
Lets do a scenario analysis. Suppose one has a portfolio size of Rs. 5-15 crore, which depending on expense profile and lifestyle, mixed in debt and equity, I think is the minimum to sustain a family and still being able to grow the portfolio. In such a portfolio, if debt is 40% and equity component is 60%, that means an equity size of Rs. 3-9 crore with a portfolio size of 10-30 shares and with a tracking portfolio of may be 30 shares maximum. To manage such a portfolio, I think one hour per day with couple of extra hours in the weekend will be more than sufficient. If one is a value investor or even trend/swing trader, one will have to sit tight for months, years or even decades. Similarly, debt will be mostly a mix of FDs, Long term bond funds, NCDs and liquid funds which do not require day to day monitoring.
So the question is what will the investor do in his day job time for 4-6 hours a day, five days a week. Daily or hourly monitoring of the portfolio may lead to excessive portfolio churning which may ultimately reduce the total return.
So, IMHO, if one does not do extensive trading and does investment only, one does not need to leave his day job to focus on investing.So, if one is rich enough to leave his day job and start investing without worrying about salary or monthly income (which I am not ) the best option is to do something productive side by side like teaching, consultancy or farming. As much fun as moneymaking is, who wants to be remembered in his obituary as just a guy who doubled the money every two years and nothing else.
There is a lot that can be done; play a sport, hit the gym, travel, spend time with family, play video games etc
Nothing translates beyond the grave. Nothing matters once you are dead. One life to live - might as well have some fun while it lasts, without worrying about what people will think after you are dead
Full time for next two decades? One would get bored in a year.
A person is both a living being and confluence of ideas, some of which deserve to live longer than his body.
Not really. Been doing it for a lot more than a year. Definitely not bored! The only time in life that I was bored was when I had to work to meet my expenses.
I respect your opinion but unfortunately do not share your beliefs.
I haven’t reached the stage of financial independence yet. But, have been following this thread with great interest. To me it’s astounding how Internet strangers benevolently share their insights. It truly is fascinating. There’s no dearth of useful advice on this thread.
But, in my humble opinion, there can’t be a one size fits all answer. Reason may suggest that it’s imprudent to become a full time investor. On the other hand, our impulses may encourage us to retire. We are beings of impulses as much as we are of reason.
At the end of the day, it all boils down to what each one us thinks is best for oneself.
If we continue with our jobs we’ll be remorseful of not trying full time investing.
If we become full time investors we’ll regret not continuing with our jobs.
We’ll have to introspect and decide what we value most in life. Different people, different thought processes.
In such cases, I don’t think there’s a right or a wrong decision.
We’re, each one of us, such unique creations, that none but ourselves know what’s best.
Lovely thoughts! This is one of my favorite threads!
IMHO, Work and workplace(Boss, stress, travelling etc.) is a fun/passion for very few people. Most of the people work only because they have to earn their living. If there is enough money to earn decent living for the lifetime, very few of us would want to continue to work. Honestly I am one of those and have no regrets about it. Passion for equity investing and compulsion to work in undesired profession(due to reasons mentioned above) generally gives rise to the thought of being a full time investor.
As Peter Lynch has said similar like - Invest the money which you don’t need. From the advice I have read on this very thread, I am required to first get adequate amount which can sustain my living (e.g. 3 Crores at min. so that interest amount from it can keep monthly expenses) & adequate pension arrangement(e.g. another 1.5 crore worth corpus in PF/NPS which will provide another additional income post retirement age)
After attaining the above mentioned pre-requisite, one needs to get adequate capital for equity investing. Because after these pre-requisite, you would not care much even if deeper corrections such as on-going in small/mid caps occur.
I personally agree with @peepin2me in thinking Gym, Travel, Hobbies can provide you fulfilling experience of life. Besides, helping needy in some way can provide additional meaning to it.
I am quite naive and relatively new to VP. My thoughts might need corrections.
I think you are spot on portfolio size for Avg Middle class professional ( the other way to look @ is, it should 100 X your annual expenses ie your expenses are 1 lacs a month ie 12 lacs annually - Your investable surplus should be 12 crores before quitting your job ) .
Now how much time is required to manage this portfolio. If you decide manage your portfolio then you are competing with professionals who have many edges , so you need to develop your own investment code & edges . This requires lot of hardwork , reading industry journals & annual reports, documenting experiences , meeting managements and then again rework on your investment code. This is time consuming exercise .
If one does not enjoy the above Investing can be boring activity.
Additionally most of people who quit jobs for full time investing , they made do to also invest in Health and Relationships . Often while @ work we ignore our health ( irregular eating and sleep ) and family .
You need to have your reason to shift careers - Full time investing is a career choice with its pros and cons .
IMHO, 100 times annual expenses is too high and out of reach for most salaried professionals depending on salary alone. I have seen in the above posts that 30X annual expenses is a sweet spot which I agree. If you want to be more conservative better to have 10X annual expenses more in a house and debt instruments just to diversify risk and not depend too much on equity returns.
It takes 18 years . So if you start your working life @ 22 years you can declare yourself financial independent by 40 years .
- Salary Gr @ 10% ( actually for lot of professionals who invest in themselves the Gr is > 20% )
- Initial expenses is 60% of annual salary and Gr @ 5%
- Investment in Mutual fund with compounded Gr of 20% ( Indian mutual funds have been gr @ rate of 23% - 25% in last 20 years ) Saving.pdf (21.1 KB)
if you start by parking your savings in fixed income securities, the possibility of become financially independent in 20 years’ time is almost impossible. You should start in MFs are directly in equities (if you have the necessary bandwidth) right from your first pay cheque. You should have a few months’ salary for unforeseen expenses. Also after a few years’ service there will be provident fund and gratuity as well.
people are talking of a portfolio equal to 100 times annual expenses assuming that dividend yield on equity is around 1 per cent. Even if the portfolio is just 40-50 times annual expenses, one can manage by selling a small percentage of their holdings every year.
Either you have already made 100x in market (in which case you probably fall under 0.1 percent of exceptional investors) or you do not have much idea about the power of compounding.
If you think a mutual fund can easily give 20%, all one needs to do is invest 1x at 20 and retire at 45. No need to do any further savings.
Also why would you want to stop at 100x? If you work another 5 years till 45, your 100x will become 250x. By your formula, everyone working till 65 and investing in MUtual fund will become a dollar billionaire. I wish it was that easy.
The problem is the real world has besides bull, bear, recession, depression and black swans. So a compounded 20% is not that easy over a number of years. I am also pretty sure no mutual fund has given a compounded 23% to 25% over the last 20 years like you mentioned. So realistically very good investors can target 15 plus percentage. Now from this, you need to subtract inflation, let’s say conservatively at 7% and taxes at 2%. So what you are looking at is post inflation and taxes a return of 6% to 10% if the return is 20% in exceptional years.
Now update your formula to 6% from investment return and tell me how feasible it is to get 100x from your salary.
Here is the one of the funds with more than 20% returns for more than 20 years.
I do not know how to read the returns but I think they just manage multiple funds with an average tenure of 10 years and longest tenure of 15 years which means they do not have a fund running for 20 years.
Imagine you declare yourself financial independent ( & quit job ) in 2007 or 2000 as your portfolio is 40 x of annual expenses and market crashes by 50% . The portfolio value is now 20X of annual expenses . Now in this case since dividends does not cover your annual expenses you sell 2.5% of portfolio to cover expenses at wrong time of market . Imagine you are just 35 years – that is criminal to lose your portfolio net worth and lose its potential to compound for say next 30 - 40 years …
Plus this will get one into poverty mindset . You will try to save / earn pennies & lose pounds as you will be scared to take big bets in markets …
As Ben Graham had said without MOS of 30% to 50% don’t take up any calls including quitting your job
Pl read my earlier post on my journey to financial independence .
The key element is Saving ratio . Not many have discipline to have high saving ratio.
Second on Investment return from mutual funds , Most mutual funds have given returns closer to 20% in last 25 odd years . I am enclosing sample list of large cap funds for you , the small cap has earned even higher returns Open-ended - All Equity - Return SinceLaunch - Top 10 - Fund Report Card - Value Research Online.pdf (138.1 KB)
Why stop at 100 X … Well if your purpose is to lead fulfilling life you have larger purpose than earning money and hence I quit my job to do want I wanted to do and improve ROTR ( return on time and relationship )
Rest is your call . Best of luck
Theoretically, this calculation is fine. Practically there are several things that will change it dramatically.
- Expenses of a bachelor to expenses as a family don’t grow at flat rate. They multiply. Plus lifestyle inflation is more like 10-12% than 5-6%. This includes buying better cars, better vacations, bigger house etc.
- We should assume 15% returns for MF. Past 20 years will not be repeated in next 20.
With focus the financial independence can be achieved. But I would say 90% people lack the focus and consistency needed.