*For illustration purposes only, and like every other method of wealth creation, is subject to tax and inflation. Simply stated (and assuming a decent job), 20% savings smartly invested at a 10% interest rate will get you to the $10MM mark.
My recommendation: 60% stocks 20% bonds 20% real estate. Bonds & real estate provide necessary diversification, limited downside risk and a continuous stream of dividends. For example, I know that my two-family real estate investments (purchased at a discount, fixed up & rented out) will yield a stable 12% year after year and will probably outperform the stock market.
Some may believe 10% to be an unreasonable rate of return, but 10% is the average return over the entire history of the US stock market – a market that has weathered world war, depression, and hyperinflation. There is no reason to expect otherwise over a long-term 40-year period (for reference, the most recent 40-year period 1973-2013 yielded 11.43%). Although I may just be lucky, here are four examples of my own personal investments that have more than doubled the S&P-500 benchmark over the past five years (ticker SPY 5% over 5-years).
Some insight into how I chose these investments:
RSP Rydex Equal Weight S&P 500 (7% five-year return): the neglected issue with traditional S&P index funds is that large companies like Apple & Exxon take up 8% of the fund. With an equal 0.2% weight given to each of the 500 companies, you’ll get true diversification & outperformance.
HSCSX Homestead Small Company Stock (13%): I inherently favor small companies and this contrarian fund concentrates on out of favor firms ready to turn around.
FNMIX Fidelity New Markets Income (11% with a 4% yield): as international stocks often don’t outperform those from the USA, I focus my international exposure on high-yielding dollar-denominated emerging market bonds.
FBIOX Fidelity Select Biotechnology (19%): I often invest in sectors I believe to be promising. Billions of overpopulation? Fat Westerners prone to diabetes? Possible bird flu pandemic? Genetic sequencing & new drug therapies? This fund is my #1 performer but possibly overvalued now.
The single most important thing is to invest in yourself. Be financially literate and learn new skills such as the Excel modeling and asset allocation strategies detailed herein. Be the very best at whatever you do. Continuous education & aggressive professional diligence. (And by education, I don’t mean going $150,000 into debt for an art history degree. Let me be one of few to emphasize that the education industry is quickly turning into a fool’s scam and unless you’re attending a top-20 school, skip it – you’re better off working or going to a decent state subsidized college where you’ll get the same education at 1/4 the price.)
Now assuming you ain’t no scrub – you’re investing in yourself, saving 20% of your professional income, working hard, and learning to be an astute investor, I now revise my Excel and entitle it – “How to Make $20 Million Dollars”:
* Want an extra $5,000,000? Save 25% instead of 20%!
Finally, DON’T LOSE MONEY. Wealthy investors understand this concept better than most which is why you sometimes see sharp overcorrections in the market from options & algorithms that automatically trigger a “sell” – they would rather liquidate in advance of a truly scary situation than risk losing a large percentage of their capital:
1) Market crash & asset bubbles, roughly every 10 years: If an asset class inflated by credit does not generate enough cash to service the debt, divest. Even I had good enough sense to recognize the pig that was the housing bubble and liquidated every single stock investment a year before that crash. I constantly listen to CNBC and Bloomberg when driving (it annoys my girlfriend, she loves the Kesha).
2) Dumb ass investments – wanna build a restaurant to “entertain your friends?” Did you hide your money in Cyprus or some equally bad socialist European nation? As soon as you made some money, did you buy a yacht or Porsche to show others you’ve “made it?”
3) A bad marriage or catastrophic illness – divorce or bad partnerships will wipe out half your net worth. Doing such a thing twice will decimate even a $10 million fortune. Choose wisely, and stay healthy. Don’t race trains and avoid all AIDS situations.
I’m really tempted to model another Excel illustrating how riding market bubbles (bitcoin, anyone?), a fun night in Bangkok and a 50% shave from a bad divorce will affect your net worth. But in this scenario, AIDS will strike you down before I reach line 65… so my advice, which took me 90 minutes to formulate, would be wasted. Anyways, I hope I have been of assistance – thank you for listening and please comment!