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■ Investment tips for footballers and the like (petty) bourgeoisie
You know what it's like: you made a million dollars in your youth kicking or otherwise abusing balls. Do you blow your fortune here and now in fast cars? Soon your bones won't take it anymore and no money will be coming in from this line of business. Or you are a software author that suspects that the cash cow program will not last forever
. Is it possible to retire early
and live off the amassed fortune — and avoid the dreadful spectre of working as a supermarket checkout cashier in your old age?
Once upon a time, being a millionaire was all the rage. Nowadays, you are just 999 million short of a billion. Nothing to write home about. Even if you set yourself a conservative spending budget of 50K a year (forget helicopters, yachts or silicon valley), you only have lolly for 20 years. And then there's the money wasting effect of inflation — meaning you can forget about storing the cash under the mattress. Keeping savings in a bank account, even a term deposit will hardly beat the inflation (if you are lucky and the bank doesn't go down in a bail-in and call you an inadvertent investor).
It all takes simple arithmetic. You set an annual expense target and see how much you need to grow your savings so as to live off the investment. Of course 1M is peanuts so you must consider investment to stretch it as far as possible. In the end you will end up penniless, but unless you want to build a pyramid or other mausoleum, you don't care — in the long term we are all dead <g> (apologies to the offspring). So you can see if you just match the inflation, it takes 20 years of spending 50K a year to burn the million. If you manage to beat inflation by 2%, you stretch to 26 years. The mathematical formula for the savings as a function of time is simply:
x(t+1) = (1+growth)*x(t) - spending +
Where is this 2% growth coming from? There are claims that historically (meaning actually as opposed to hypothetically), investing in stocks long term, returns 10% on average each year (there are similar results for the UK stock market index). There are ups and downs, but if you wait long enough, it grows. Personally I have never seen that kind of return so I am a bit doubtful about the assumptions in these claims. Also the trick is to buy the stock market index as a whole, individual company stocks are far riskier. It is easy to do this nowadays using index trackers and ETFs.
If you could actually get a 10% return on the million, and assuming 3% average inflation, hence net growth of 7% then you would get 70K to live each year and keep the capital indefinitely, a true bourgeois!
A friend recently said people waste their lives working in jobs they hate buying things they don't need to impress people they don't like — the materialist trap. The correct plan is to let the money work for you while you pursue things that really make you happy. A yacht is nice but you can get similar thrills on the cheap on a windsurf. Here is what I consider the bourgeois manifesto:
- Minimum hassle. You could spend your day considering financial results and picking "winner" companies' stock, then buy and sell frantically to maximize the return. Unless you are addicted to betting, look the other way. We need money to live, not the other way round. Frequent share dealing also leaks profits in fees of all sorts. The idea is to buy and forget.
- Avoid professional brokers. A security that just follows (tracks) the market automatically using an algorithm, is all you need. If there was such a thing as a "market beating broker" to hire (most of them are little better than picking stocks randomly out of a hat), the extra return would be offset by increased fees and commissions.
- Spread the risk. Markets go uphill in the long term but every now and then take a major hit. Don't put all the eggs in one basket. Buy into a variety of market indexes and sectors (e.g. gold and property trackers); they won't go down all at the same time. Weather short term losses. The market as a whole is not a company that can go bankrupt.
- Invest in property too. Buying flats to rent is not as hassle-free as index trackers (dodgy tenants, unexpected repairs etc), but it is a good hedge. You get an annual income and the value of the property increases to beat inflation. As long as the population increases demand for properties will go up. It is a sure bet.
- Don't buy (your own) house. (Apologies to WAGs), but all my life I've resisted buying a house for myself to live in. Nice houses in nice areas are not good investment. Better pay rent and invest the capital in houses you wouldn't want to live in — that have better return. And you are flexible to take your hat and move somewhere else whenever you come across a dodgy neighbour!
- Round trip costs. When considering investments, there are many significant costs to consider: buying in (e.g. property stamp duties), annual fees (custodies and other stock portfolio management fees, tax on dividends), and not least exit costs (capital gains taxes, inheritance taxes). No point buying something profitable only to realize that it is heavily taxed when you need to cash in.
- Do it yourself investment. This sounds contradictory to the "hassle free" maxim, but banks are notorious and non-transparent, hiding fees where you least expect them. Whatever you do through a bank is 10 times more expensive than what you can do online. I am considering saxo bank for a trading platform. They are rather expensive but are open to people living in not-quite-first-rate countries. If you live in USA or the UK you are spoilt for choice (Fidelity, Selftrade and others); for European based trading platforms see this comparison tool
- Mind the exponential growth. You may remember the story with the cheeky mathematician who robbed a chinese emperor of his fortune asking for "only" as much rice grain as would fit on a chess board: one grain on the first square, 2 on the 2nd, again double (4) on the third, how bad can it get? 2^64 will bust even an emperor. Small differences in fees/returns compounded long term make a big change.
- Understand all the risks. It is not just the markets that go up and down. Nowadays banks and investment houses go down. What happens to your Vanguard or Blackrock managed index tracker if these companies go bust? Saxobank charge a custody fee of 0.12% as an insurance against such eventualities.
Despite several regulation and investor protection safeguards, if your investment platform goes down, you may lose all your shares — and the various insurances are inadequate
for big portfolios. So use many
brokers instead of one, don't put all your eggs in one basket.
- Beware of fools gold. If it's too good to be true, it usually is rubbish. Who on earth would invest on bitcoin and why? Because it is a quirky idea nobody understands? Because it is unworkable if it was to be widely used as a regular means of cash? Because there's no value behind it? How many south sea bubbles before people learn a lesson? Greek bonds offer 10% return, why do you think that is?
Optimal savings management is really an impossible problem to crack. So many stocks to consider; this tracker matched the market for 10 years, is it going to continue like this? Do I buy in dollars or euros? Do I buy to let property in London or in Bratislava? Do I buy small flats for students or luxury beach houses for rich tourists? How do you avoid double taxation if your investments spread national boundaries? The good news is nobody has a crystal ball, so don't despair. Whatever would be the "right" investment today wouldn't remain so 10 years down the road with ever changing market trends and taxation policies. The answer is to buy into everything. Calm, average return is the objective. And don't forget to spend some of it now and then!
ps. If you are in cyprus and own a yacht, and require experienced inexpensive able crew, I may be able to help :P
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