Am I a little crazy to be thinking this way?

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bigguy8437
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Am I a little crazy to be thinking this way?

Post by bigguy8437 »

Lately, all I have been thinking about is just to keep adding as much money as I can into the stock market. I've read around on this forum of people who have been gifted a million or more dollars, and seen responses of people telling them to just invest the principal with vanguard and live off interest. How nice must that be to have ~5 million dollars, and live off dividends of roughly 100k each year? Now I'm not saying I am aiming for 5 million dollars, but as I have started to earn income (60K a year at age 23), I have been just funneling as much money as I can from my paycheck into the stock market, almost to a point where it has been obsessive with saving money so I can do it. I have started with a larger egg nest than most, as I have around 280K now invested in the stock market (was gifted to me from my grandfather a couple years ago), and my goal has been to add as much as I can to this amount so that I can too one day be living off maybe not 100k in dividends but maybe 50K in ~20 or so years. I know time is on my side, and compounding interest can do wonders. Then, once I get to that point, I can spend time doing a ton of other things that I would like to do, such as travel the world and spend more time with friends/family, etc.
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in_reality
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Re: Am I a little crazy to be thinking this way?

Post by in_reality »

Seems like par for the course of a large number of people here. Investing early is definitely better!!!!

Definitely not crazy at all.
Lafder
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Re: Am I a little crazy to be thinking this way?

Post by Lafder »

Are you buying stocks or mutual funds?

Do you have a work retirement plan? What are the options?

What is your AA ?

Yes saving is fun and addictive! Do enjoy yourself on the way too!

lafder
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Bogle_Feet
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Re: Am I a little crazy to be thinking this way?

Post by Bogle_Feet »

Don't put it all in stocks unless you can stomach stock market crashes. By default I think everyone should have AT LEAST 20% in bonds. Like brakes on a car. You have to have them.
And a lot of people with 1 million say "I wish I had 2 million". Well you're already there! You don't NEED to swing for the fences with 100% in stocks.
BTW I hope you investing in index funds - not individual stocks and bonds.
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bigguy8437
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Re: Am I a little crazy to be thinking this way?

Post by bigguy8437 »

I am talking about investing the gifted money as well as my income in VTSAX and around 10% in international. I am putting it all in the market/stocks because I am not going to touch this money until I retire. I'm 23 right now so obviously not retiring anytime soon. What I was musing about in the post was being able to have enough principal to be able to live off of just dividend income.
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catdude
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Re: Am I a little crazy to be thinking this way?

Post by catdude »

It's great that you have (or want to) put your money into VTSAX (Vanguard Total Stock index) but is it going into an IRA (traditional or Roth)? A workplace plan? A taxable account? (I'm guessing it's the latter) If you give us more information we can be of more help to you. In particular, tax-advantaged vehicles such as IRA's confer tremendous advantages when earnings compound over decades, which would be the case for you. I gotta say, you're doing a helluva lot better than I was at 23!
catdude | | All generalizations are false, including this one.
NMJack
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Re: Am I a little crazy to be thinking this way?

Post by NMJack »

Bogle_Feet wrote:Don't put it all in stocks unless you can stomach stock market crashes. By default I think everyone should have AT LEAST 20% in bonds. Like brakes on a car. You have to have them.
And a lot of people with 1 million say "I wish I had 2 million". Well you're already there! You don't NEED to swing for the fences with 100% in stocks.
BTW I hope you investing in index funds - not individual stocks and bonds.
Image
Does our wiki have a topic on cherry picking? If so, this chart needs to be exhibit A. To whomever came up with this unbelievable combination of facts; well done sir! :sharebeer

I'll now have to excuse myself while I put in orders to get my portfolio to 28/72 ASAP. 8-)
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bigguy8437
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Re: Am I a little crazy to be thinking this way?

Post by bigguy8437 »

johnny wrote:It's great that you have (or want to) put your money into VTSAX (Vanguard Total Stock index) but is it going into an IRA (traditional or Roth)? A workplace plan? A taxable account? (I'm guessing it's the latter) If you give us more information we can be of more help to you. In particular, tax-advantaged vehicles such as IRA's confer tremendous advantages when earnings compound over decades, which would be the case for you. I gotta say, you're doing a helluva lot better than I was at 23!
Tax advantages as well as an IRA.
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catdude
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Re: Am I a little crazy to be thinking this way?

Post by catdude »

I want to recommend that you explore the Bogleheads wiki: https://www.bogleheads.org/wiki/Main_Page

It has a lot of very useful and helpful info. Do some exploring there and come back and ask us questions if something doesn't make sense or needs further clarification. Don't get overwhelmed by all the information there -- just soak it in a bit at a time. Once you've checked out the wiki perhaps you can read a good book, such as The Bogleheads Guide to Retirement Planning.

Happy reading!
catdude | | All generalizations are false, including this one.
letsgobobby
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Re: Am I a little crazy to be thinking this way?

Post by letsgobobby »

At age 23, not crazy. Aggressive, but making up for it with a high savings rate. If you get hit with a 50% loss, just remember you asked for it and have been saving lots of money to compensate for the potential losses.

As long as you don't bail when we lose 20%, 40%, or 60%, you should be fine.
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Re: Am I a little crazy to be thinking this way?

Post by NMJack »

letsgobobby wrote:If you get hit with a 50% loss, just remember you asked for it and have been saving lots of money to compensate for the potential losses.
When you get "hit with it," don't worry. You didn't "ask for it" and it probably won't happen for a long time. Just remember that you will have a whole lot more to cover "losses" than if you had followed conventional wisdom. :sharebeer

I keep hearing about all this money that I lost in the crashes during the past decades with 100% equities, but my balance sheet just doesn't seem to line up? :confused
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Re: Am I a little crazy to be thinking this way?

Post by BolderBoy »

bigguy8437 wrote:...so that I can too one day be living off maybe not 100k in dividends but maybe 50K in ~20 or so years. I know time is on my side, and compounding interest can do wonders. Then, once I get to that point, I can spend time doing a ton of other things that I would like to do, such as travel the world and spend more time with friends/family, etc.
So you want to retire at 43, eh? I retired at 47 (the first time). Know what I found out? All my friends and family were still working so there wasn't much "spending time with them", after all. So I went back to work because I was bored.

Guess I have the wrong mix of friends (and family). Make sure you have plenty of things you can do by yourself.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
KlangFool
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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

bigguy8437 wrote:I am talking about investing the gifted money as well as my income in VTSAX and around 10% in international. I am putting it all in the market/stocks because I am not going to touch this money until I retire. I'm 23 right now so obviously not retiring anytime soon. What I was musing about in the post was being able to have enough principal to be able to live off of just dividend income.
bigguy8437,

<<I am talking about investing the gifted money as well as my income in VTSAX and around 10% in international.>>

Why are you doing that? 100% stock has greater RISK but not SIGNIFICANT better average return than a 75/25 portfolio.

<<I am putting it all in the market/stocks because I am not going to touch this money until I retire.>>

1) You have 280K at 23 years old. You have a very good chance to be early retired at 40 to 45. Hence, you have less than 20 years to invest. You do not have the TIME to be aggressive.

2) With 280K at 23 years old, you do not have the NEED to be aggressive either. You can get there without doing the 100% stock. So, why are you taking THE RISK?

Do not take the UNNECESSARY RISK. You have ENOUGH MONEY to reach YOUR GOAL.

KlangFool
Last edited by KlangFool on Sat Jul 02, 2016 3:24 pm, edited 1 time in total.
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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

BolderBoy wrote:
bigguy8437 wrote:...so that I can too one day be living off maybe not 100k in dividends but maybe 50K in ~20 or so years. I know time is on my side, and compounding interest can do wonders. Then, once I get to that point, I can spend time doing a ton of other things that I would like to do, such as travel the world and spend more time with friends/family, etc.
So you want to retire at 43, eh? I retired at 47 (the first time). Know what I found out? All my friends and family were still working so there wasn't much "spending time with them", after all. So I went back to work because I was bored.

Guess I have the wrong mix of friends (and family). Make sure you have plenty of things you can do by yourself.
BolderBoy,

My older brother early retired at 49 years old. He travels all over the world with friends and families. I have to check his facebook page regularly in order to know which part of the world he is at the moment.

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davidsorensen32
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Re: Am I a little crazy to be thinking this way?

Post by davidsorensen32 »

KlangFool, at 45, OP will have $3M assuming following growth : 7% of invested capital and 4% of savings each year. Assume start with $280,000 investment and $30,000 saved. $3M in 20 years is like $1.5M today adjusting for 4% inflation - while respectable, but hardly enough to retire on. OP is targeting 2% SWR = $30,000 per year. Its not enough.

Age 7% 4%
23 280,000 30,000
24 329,600 31,200
25 383,872 32,448
26 443,191 33,746
27 507,960 35,096
28 578,613 36,500
29 655,616 37,960
30 739,469 39,478
31 830,709 41,057
32 929,916 42,699
33 1,037,709 44,407
34 1,154,756 46,184
35 1,281,773 48,031
36 1,419,528 49,952
37 1,568,847 51,950
38 1,730,617 54,028
39 1,905,788 56,189
40 2,095,383 58,437
41 2,300,497 60,774
42 2,522,306 63,205
43 2,762,073 65,734
44 3,021,152 68,363
45 3,300,995 71,098
Last edited by davidsorensen32 on Sat Jul 02, 2016 11:23 am, edited 2 times in total.
davidsorensen32
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Re: Am I a little crazy to be thinking this way?

Post by davidsorensen32 »

How much did he retire with at 49 ?
KlangFool wrote:
BolderBoy wrote:
bigguy8437 wrote:...so that I can too one day be living off maybe not 100k in dividends but maybe 50K in ~20 or so years. I know time is on my side, and compounding interest can do wonders. Then, once I get to that point, I can spend time doing a ton of other things that I would like to do, such as travel the world and spend more time with friends/family, etc.
So you want to retire at 43, eh? I retired at 47 (the first time). Know what I found out? All my friends and family were still working so there wasn't much "spending time with them", after all. So I went back to work because I was bored.

Guess I have the wrong mix of friends (and family). Make sure you have plenty of things you can do by yourself.
BolderBoy,

My older brother early retired at 49 years old. He travels all over the world with friends and families. I have to check his facebook page regularly in order to know which part of the world he is at the moment.

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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

davidsorensen32 wrote:How much did he retire with at 49 ?
davidsorensen32,

1) If a US person CHOOSE to retire oversea and travel for fun, he does not need as much to retire.

2) Both of his children received close to full scholarship. So, he could early retire when they went to colleges.

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Re: Am I a little crazy to be thinking this way?

Post by rbaldini »

bigguy8437 wrote:Lately, all I have been thinking about is just to keep adding as much money as I can into the stock market. I've read around on this forum of people who have been gifted a million or more dollars, and seen responses of people telling them to just invest the principal with vanguard and live off interest. How nice must that be to have ~5 million dollars, and live off dividends of roughly 100k each year? Now I'm not saying I am aiming for 5 million dollars, but as I have started to earn income (60K a year at age 23), I have been just funneling as much money as I can from my paycheck into the stock market, almost to a point where it has been obsessive with saving money so I can do it. I have started with a larger egg nest than most, as I have around 280K now invested in the stock market (was gifted to me from my grandfather a couple years ago), and my goal has been to add as much as I can to this amount so that I can too one day be living off maybe not 100k in dividends but maybe 50K in ~20 or so years. I know time is on my side, and compounding interest can do wonders. Then, once I get to that point, I can spend time doing a ton of other things that I would like to do, such as travel the world and spend more time with friends/family, etc.
You have a lot in the market (speaking as fellow 20-something-er). To me, this means that even if you lose *half* of it in a very big crash, you'll still have plenty to survive and be okay. Of course, if you have a lot of debts and obligations, you need to make sure you can still pay these even in that case. You might also lose your job during this crash - how quickly can you get another one? If you have nerves of steel, and understand the history, you'll keep your money in the stock market even after one of these big crashes (unless your funds get so low that you can no longer afford to risk them). If you do not have nerves of steel, you should probably put some in bonds, emergency funds, etc, so that you don't panic when the inevitable crash happens.
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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

davidsorensen32 wrote:KlangFool, at 45, OP will have $3M assuming following growth : 7% of invested capital and 4% of savings each year. Assume start with $280,000 investment and $30,000 saved. $3M in 20 years is like $1.5M today adjusting for 4% inflation - while respectable, but hardly enough to retire on. OP is targeting 2% SWR = $30,000 per year. Its not enough.
davidsorensen32,

<<$3M in 20 years is like $1.5M today adjusting for 4% inflation >>

Stop double counting the inflation.

1) If OP is targeting 2% SWR, he only need 50 X 30K = 1.5 millions. For safety, let's call it 2 millions.

2) If OP is saving 30K per year, he is spending less than 30K per year with 60K per year of income, he has to pay some tax. At the minimum, he has to pay FICA and Medicare.

Inflation affects annual expense. Let's assume that it is 30K per year. The investment at 280K is growing at REAL RETURN aka faster than inflation. And, it is around 10 times larger than annual expense.

Let's assume annual expense = X
Inflation = 4% = Y
RETURN = 7% = Y +3%

So,

Annual expense increase at X * (1 + Y )

Investment grow at 10X * (1+Y + 3%)

If you look at numbers, if investment at 7% and inflation at 4%, OP definitely can retire at 40 years old.

Back to the question, OP does not have THE NEED to take RISK. Only BAD THING can happen to him if he goes with 100% stock. And, he has NOTHING to gain by taking THE RISK anyhow. He can early retire in 10+ years with AVERAGE RETURN.

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Re: Am I a little crazy to be thinking this way?

Post by davidsorensen32 »

Housing ? Kids ? College ? Cars ? Lifestyle creep ? And retiring outside of US is definitely the exception not the norm for a vast majority of the population. I don't think this is a realistic plan unless OP starts saving a lot more.
KlangFool wrote:
davidsorensen32 wrote:KlangFool, at 45, OP will have $3M assuming following growth : 7% of invested capital and 4% of savings each year. Assume start with $280,000 investment and $30,000 saved. $3M in 20 years is like $1.5M today adjusting for 4% inflation - while respectable, but hardly enough to retire on. OP is targeting 2% SWR = $30,000 per year. Its not enough.
davidsorensen32,

<<$3M in 20 years is like $1.5M today adjusting for 4% inflation >>

Stop double counting the inflation.

1) If OP is targeting 2% SWR, he only need 50 X 30K = 1.5 millions. For safety, let's call it 2 millions.

2) If OP is saving 30K per year, he is spending less than 30K per year with 60K per year of income, he has to pay some tax. At the minimum, he has to pay FICA and Medicare.

Inflation affects annual expense. Let's assume that it is 30K per year. The investment at 280K is growing at REAL RETURN aka faster than inflation. And, it is around 10 times larger than annual expense.

Let's assume annual expense = X
Inflation = 4% = Y
RETURN = 7% = Y +3%

So,

Annual expense increase at X * (1 + Y )

Investment grow at 10X * (1+Y + 3%)

If you look at numbers, if investment at 7% and inflation at 4%, OP definitely can retire at 40 years old.

Back to the question, OP does not have THE NEED to take RISK. Only BAD THING can happen to him if he goes with 100% stock. And, he has NOTHING to gain by taking THE RISK anyhow. He can early retire in 10+ years with AVERAGE RETURN.

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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

davidsorensen32 wrote:Housing ? Kids ? College ? Cars ? Lifestyle creep ? And retiring outside of US is definitely the exception not the norm for a vast majority of the population. I don't think this is a realistic plan unless OP starts saving a lot more.
davidsorensen32,

<<Housing ? Kids ? College ? Cars ? Lifestyle creep ?>>

Conversely, OP could double his income and saves a lot more. But, in any case, with 280K at 23 years old, OP has a very good head start.

<< And retiring outside of US is definitely the exception not the norm for a vast majority of the population.>>

Vast majority of population does not have 280K at 23 years old. Hence, they do not have OPTIONS like OP.

<< I don't think this is a realistic plan unless OP starts saving a lot more. >>

I am using YOUR NUMBERS. It shows that it is a REALISTIC plan. With 280K at 23 years old, OP does not need to save a lot more to early retire. OP just need to make sure that he does not increase his living expense substantially.

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Re: Am I a little crazy to be thinking this way?

Post by NMJack »

KlangFool wrote: Why are you doing that? 100% stock has greater RISK but not better average return than a 75/25 portfolio.

KlangFool
Source?? :confused
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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

NMJack wrote:
KlangFool wrote: Why are you doing that? 100% stock has greater RISK but not better average return than a 75/25 portfolio.

KlangFool
Source?? :confused
NMJack,

I made a mistake. It should be

<<Why are you doing that? 100% stock has greater RISK but not better SIGNIFICANT average return than a 75/25 portfolio.>>

https://personal.vanguard.com/us/insigh ... about-risk

The average return for 100% stock = 10.2%
The average return for 70/30 = 9.2%

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Re: Am I a little crazy to be thinking this way?

Post by NMJack »

KlangFool wrote:
NMJack wrote:
KlangFool wrote: Why are you doing that? 100% stock has greater RISK but not better average return than a 75/25 portfolio.

KlangFool
Source?? :confused
NMJack,

I made a mistake. It should be

<<Why are you doing that? 100% stock has greater RISK but not better SIGNIFICANT average return than a 75/25 portfolio.>>

https://personal.vanguard.com/us/insigh ... about-risk

The average return for 100% stock = 10.2%
The average return for 70/30 = 9.2%

KlangFool


Thanks for the clarification. "Significant" is, of course, subjective. Using the two rates of return you just mentioned, a long term (30 year) investor would wind of with 31% more funds going 100/0 vs. 70/30. Depending upon individual situation, that may be reasonable support for going 100/0 with long term investments (i.e. retirement). That means that it would take a 31% market drop on day 1 of retirement just to get to the point where the investor would start to "risk" money.
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Re: Am I a little crazy to be thinking this way?

Post by arcticpineapplecorp. »

KlangFool wrote:
NMJack wrote:
KlangFool wrote: Why are you doing that? 100% stock has greater RISK but not better average return than a 75/25 portfolio.

KlangFool
Source?? :confused
NMJack,

I made a mistake. It should be

<<Why are you doing that? 100% stock has greater RISK but not better SIGNIFICANT average return than a 75/25 portfolio.>>

https://personal.vanguard.com/us/insigh ... about-risk

The average return for 100% stock = 10.2%
The average return for 70/30 = 9.2%

KlangFool

The returns from that Vanguard link are for average returns over the time period 1926-2013. That's an 87 year time frame. If we're talking about returns over the next 10 years, I think most experts (including Jack Bogle himself) have said returns "could" be 7% nominal. Therefore the OP would NEED to be 100% in stocks to achieve those returns. I'm not recommending that, but I think the OP should be realistic about what returns might be for either a 100% stock portfolio (perhaps 7% if the stars align) vs. 5.5% for a 75/25 portfolio (if you subtract 0.5% for every 10% in bonds that are added).
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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

NMJack wrote:
Thanks for the clarification. "Significant" is, of course, subjective. Using the two rates of return you just mentioned, a long term (30 year) investor would wind of with 31% more funds going 100/0 vs. 70/30. Depending upon individual situation, that may be reasonable support for going 100/0 with long term investments (i.e. retirement). That means that it would take a 31% market drop on day 1 of retirement just to get to the point where the investor would start to "risk" money.
NMJack,

OP has 280K at 23 years old. He can be FIRE at 45 with 5.5% annual return. So, why should he do 100% stock?

Assuming OP save 30K per year with 5.5%, OP will have 2.1 million at 45 years old.
Assuming OP save 20K per year with 5.5%, OP will have 1.7 million at 45 years old.

KlangFool
Last edited by KlangFool on Sat Jul 02, 2016 5:00 pm, edited 2 times in total.
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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

arcticpineapplecorp. wrote: The returns from that Vanguard link are for average returns over the time period 1926-2013. That's an 87 year time frame. If we're talking about returns over the next 10 years, I think most experts (including Jack Bogle himself) have said returns "could" be 7% nominal. Therefore the OP would NEED to be 100% in stocks to achieve those returns. I'm not recommending that, but I think the OP should be realistic about what returns might be for either a 100% stock portfolio (perhaps 7% if the stars align) vs. 5.5% for a 75/25 portfolio (if you subtract 0.5% for every 10% in bonds that are added).
arcticpineapplecorp,

OP has 280K at 23 years old. OP could be FIRE at 45 with 5.5% return too. So, please tell me why should he do 100% stock?

Assuming OP save 30K per year with 5.5%, OP will have 2.1 million at 45 years old.
Assuming OP save 20K per year with 5.5%, OP will have 1.7 million at 45 years old.

KlangFool
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Re: Am I a little crazy to be thinking this way?

Post by TomCat96 »

bigguy8437 wrote:Lately, all I have been thinking about is just to keep adding as much money as I can into the stock market. I've read around on this forum of people who have been gifted a million or more dollars, and seen responses of people telling them to just invest the principal with vanguard and live off interest. How nice must that be to have ~5 million dollars, and live off dividends of roughly 100k each year? Now I'm not saying I am aiming for 5 million dollars, but as I have started to earn income (60K a year at age 23), I have been just funneling as much money as I can from my paycheck into the stock market, almost to a point where it has been obsessive with saving money so I can do it. I have started with a larger egg nest than most, as I have around 280K now invested in the stock market (was gifted to me from my grandfather a couple years ago), and my goal has been to add as much as I can to this amount so that I can too one day be living off maybe not 100k in dividends but maybe 50K in ~20 or so years. I know time is on my side, and compounding interest can do wonders. Then, once I get to that point, I can spend time doing a ton of other things that I would like to do, such as travel the world and spend more time with friends/family, etc.


You're young, 23. You have all the time in the world. Your peers probably aren't thinking about money. When I was in my 20s my friends certainly didn't give a crap about saving or buying a house. Some of them went to spend everything traveling the world, enjoying life, buying their dream car, etc. In fact, even after I showed them the math of compounding interest by most of them, they still didn't listen. Retirement was/is simply too remote for them do consider doing something like dumping paycheck after paycheck into the market.

My guess is that social pressure informs the dissonance of why you framed the OP topic as "Am I crazy to be thinking this way?"

Firstly, You're not crazy to be dumping every pay check. Many people on this site are doing just that. I'm doing that. It's called dollar cost averaging, and it's fantastic way to build wealth. The more you invest, the more you win in the long run.

But what are you missing if you do this? What are some potentially bad consequences for dumping every paycheck into the market?
I have 3 answers for you.

1) In the event of a crash, you might be too deep into the market which causes you to panic sell.
2) You need the money sooner than you think.
3) Related to 2, you miss out on life's opportunities.


Point #1 Market Crashes/Overexposure.

The market crashes. You have been dumping every single paycheck for the last 6 months into the stock market, and all of a sudden half the money you dumped into the market is gone. All the BS you put up with at work. It was for nothing. It's easy to get into that line of thinking if you're so invested. Wealth building is a little like working out. Maintain the right form. If your weights are too high, lower them until you can maintain proper form. Likewise, if you're going to be building wealth through diversified index funds, stay the course. If you cannot stay the course, lower your risk and exposure until you find that you can.

Point #2 You need the money sooner than you think.

Retirement is...double your lifetime plus an additional seventeen years away. Jeez. You really don't need that money anytime soon. Or do you?
Picture where you will be in 5 or 10 years. Are you still renting an apartment in 10 years? Are you still at the same job a decade later, with no grad degrees? If the answer to either of those is no, you will probably be needing the money sooner than 42 years later...alot sooner.

You might feel confident about not cracking that 401k nest egg to buy a house. But as for the rest of your paychecks you've been dumping into the market, you're going to need that money a lot sooner than retirement. If your timeline for needing the money for a house or grad school comes far sooner, then your investments should reflect that.


Point #3 You miss out on life's opportunities.

This is where I go against the grain of this site's denizens. I was putting my money into the market like you were doing at 23. My friends were not. But, most did not end up worse than me. They went on to become doctors and lawyers. One of them went into venture capital. Many got their MBAs from top 10 schools. They focused their time, energy, and financial resources into pushing for what they really wanted to do without focusing on the few hundred thousand to a million they could have made.

I blame myself for missing out a little. I equated staying the course with my investments with staying the course in life. The pressure I imposed on myself to stay the course made me more conservative in desiring to maintain a steady stream of income. That conservatism sapped my passion to take risks. Only you can know whether investing in yourself and future education is a good financial decision.

But if it should come to that, my advice is don't let the stay the course attitude impede you from fulfilling your destiny. Money is there for a purpose.
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Re: Am I a little crazy to be thinking this way?

Post by abuss368 »

An excellent choice and one that many folks should have. That is our financial goal for retirement.

From my observations, a $5,000,000 investment portfolio often generates $150,000 or so in cash flows from dividends assuming approximately 3.00% yield (Stocks, REITs, Bonds, etc.).
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Re: Am I a little crazy to be thinking this way?

Post by NMJack »

KlangFool wrote:

NMJack,

OP has 280K at 23 years old. He can be FIRE at 45 with 5.5% annual return. So, why should he do 100% stock?
a) He may feel confident that his skills/work ethic/learning patterns will enable him to easily find the next job after Megacorp goes down in flames.
b) There is an extremely high probability that he will wind up with a LOT more money whenever he chooses to retire.
c) He may have broader goals than just taking care of himself until the day he passes away.

I'm sure there are many other potential answers. Besides, I never said that the OP "should" do anything. I thought he was looking for food for thought, so tossed out a few nuggets to chew on. :sharebeer
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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

NMJack wrote:
KlangFool wrote:

NMJack,

OP has 280K at 23 years old. He can be FIRE at 45 with 5.5% annual return. So, why should he do 100% stock?
a) He may feel confident that his skills/work ethic/learning patterns will enable him to easily find the next job after Megacorp goes down in flames.
b) There is an extremely high probability that he will wind up with a LOT more money whenever he chooses to retire.
c) He may have broader goals than just taking care of himself until the day he passes away.

I'm sure there are many other potential answers. Besides, I never said that the OP "should" do anything. I thought he was looking for food for thought, so tossed out a few nuggets to chew on. :sharebeer
NMJack,

He can accomplish all of the above with LOWER RISK via 75/25. Why take the unnecessary RISK?

10+ years ago, I was 100% stock with substantial Telecom stocks. I lost 50% of my savings by taking unnecessary RISK. I am a 30+% gross income saver. I can achieve my goal with 0% REAL RETURN. I was unnecessary GREEDY. It costs me dearly.

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Re: Am I a little crazy to be thinking this way?

Post by BolderBoy »

KlangFool wrote:My older brother early retired at 49 years old. He travels all over the world with friends and families. I have to check his facebook page regularly in order to know which part of the world he is at the moment.
Like I said, I didn't have the right mix of friends and family (ie, financially independent at the same age I was).
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Re: Am I a little crazy to be thinking this way?

Post by clashcity »

I'm all for saving aggressively and living frugally to some extent, but I must encourage you to think about your quality of life and enjoyment along the way.

With $280k to start, you're already well ahead of the game for someone who is 23 years old. Say you're saving $30k a year now, 50% of your income. That means you're putting away $2,500 a month into the stock market. In 20 years, your investments will be worth around $2.4 million assuming 7% rate of return. (rough estimates - just for the sake of the argument).

Now, what if you invested $2,000 a month instead, and used that $500 for fun stuff - traveling, meals out, dates, whatever. In 20 years, you'd be worth $2.13m... a difference of ~$300,000.

While $300k is certainly no small figure, given the value of your accounts it's not that significant in my opinion. In exchange for a slightly decreased future wealth, you get to have considerably more fun over your next 20 years of life. That $500 a month could be saved to take one awesome trip every year or two - or spent on nights out with friends - or spent on nice dinners with dates, seeking you partner - or any number of combinations.

Also, consider the fact that there is no guarantee that you will be healthy, or even alive, in 20-30+ years when you plan on traveling and starting to enjoy the fruits of your labor. Anything can happen, and if you spend your entire life scraping by in order to save for your future, then get hit by a bus before you can enjoy your life... well, what's the point?

I'm also 23, and worth a lot less than you, AND making a lot less than you, and I still travel internationally at least once a year. Why? Because I want to enjoy my life. It gives me something to look forward to, and it makes me more worldly and aware. It's my passion. And it's absolutely worth the money.
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Re: Am I a little crazy to be thinking this way?

Post by soboggled »

Since you are 23, you have not seen a drop in the stock market. Believe me, it is next to impossible to not lose sleep when you lose 25% to 50% of your money and it keeps dropping. That is why 100% in equities is a mistake - you don't know that you won't panic and sell. For that matter, you don't know if the stock market is going to go down and stay down - it happens for very long periods of time.
Worrying about retirement at age 23 seems to me to be an unworthy goal and basically futile. It's always good to plan, budget and be frugal, because anything can happen between then and now and many of them will likely require money. That includes major milestones, both good and bad. You are likely to get married and have children, which has important financial implications. You may want to buy a house or start a business, which may require investment. (You may also suffer setbacks and emergencies like unemployment, divorce, disability or pre-mature death. So it's hard to see how you can be sure of anything, certainly not when you will retire).
In retirement you don't need to "live off the dividends", you can draw down capital or buy an annuity, since you will not live forever. (On the other hand, scientific breakthroughs may extend life by so many years, everyone may have to keep working forever and annuities will pay nothing. Again, it is impossible to predict your future or society's.)
At your age, you should be starting to plan your life - retirement may be a small part of it, and in any case you will want to store up memories and establish relationships to enjoy in retirement.
If your primary goal in life really is retirement, don't get married (unless it is to somebody rich), then either: (1) Try to get rich, which if successful will be sure to allow you to retire very early or (2) get a federal government job, which is extremely secure and allows you to retire no later than age 60.
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Re: Am I a little crazy to be thinking this way?

Post by EdLaFave »

TomCat96 wrote:You're not crazy to be dumping every pay check. Many people on this site are doing just that. I'm doing that. It's called dollar cost averaging, and it's fantastic way to build wealth.
To minimize any confusion the OP may have, this is not what dollar coast averaging is. TomCat96 is describing plain old regular investing.

Dollar cost averaging is when you start with a large sum of money but invest small portions of it over time because you're too scared to invest all at once. Dollar cost averaging will on average reduce your returns but will mitigate risk, similar to having bonds in your portfolio.
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Re: Am I a little crazy to be thinking this way?

Post by Toons »

Put compounding to work for you ASAP.
More Time(of which we all have a limited amount)
More Compounding.
Don't delay.
Invest as much as you can as often as you can.
According to your RISK TOLERANCE . :happy
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Re: Am I a little crazy to be thinking this way?

Post by EdLaFave »

KlangFool wrote:I was 100% stock with substantial Telecom stocks. I lost 50% of my savings by taking unnecessary RISK. I am a 30+% gross income saver. I can achieve my goal with 0% REAL RETURN. I was unnecessary GREEDY. It costs me dearly.
That may be more of a cautionary tale about the need for diversification than bonds. I am not aware of a 30 year window, although it may exist, where 100% stocks wasn't the better investment...and I am definitely not aware of a 30 year window where 100% stocks was a horribly bad decision.
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Re: Am I a little crazy to be thinking this way?

Post by InvestorNewb »

You are not crazy. In fact, you are smart to be thinking that way.
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Re: Am I a little crazy to be thinking this way?

Post by happyisland »

EdLaFave wrote:
To minimize any confusion the OP may have, this is not what dollar coast averaging is. TomCat96 is describing plain old regular investing.

Dollar cost averaging is when you start with a large sum of money but invest small portions of it over time because you're too scared to invest all at once. Dollar cost averaging will on average reduce your returns but will mitigate risk, similar to having bonds in your portfolio.
Thanks for that clarification! One of my few pet peeves on this site is the misuse of the DCA term. I think the conflation of normal periodic saving (a normal, good thing), and dollar cost averaging (a returns-lowering psychological trick) can be troublesome, especially for newer BH members.
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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

EdLaFave wrote:
KlangFool wrote:I was 100% stock with substantial Telecom stocks. I lost 50% of my savings by taking unnecessary RISK. I am a 30+% gross income saver. I can achieve my goal with 0% REAL RETURN. I was unnecessary GREEDY. It costs me dearly.
That may be more of a cautionary tale about the need for diversification than bonds. I am not aware of a 30 year window, although it may exist, where 100% stocks wasn't the better investment...and I am definitely not aware of a 30 year window where 100% stocks was a horribly bad decision.
EdLaFave,

1) OP does not have 30 years. He plan to retire in 20 years.

2) OP has 280K at 23 years old. He can reach his goal with 5.5 % return. So, WHY should he takes the RISK?

<<I am definitely not aware of a 30 year window where 100% stocks was a horribly bad decision.>>

3) The person has to last 30 years with 100% stock FIRST. Many people with 100% stock do not last 30 years. My brother-in-law was burned by Telecom crash. His is out of stock market. He is keeping most of his savings in cash.

4) So, please show me somebody that actually invest 100% stock for 30 years.

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Re: Am I a little crazy to be thinking this way?

Post by EdLaFave »

The OP hasn't said he'll need the money in twenty years. The OP approximated that in roughly 20 years he'll have a nest egg large enough to generate 50k in dividends and in that case he'd probably retire. That is a VERY different thing than needing all of the money in 20 years.

I used portfolio visualizer to back-test investing 30k every year (adjusted up for inflation every year) in a portfolio with 100 stocks, 80/20, and 60/40 (which is presumably closer to what you'd recommend).

Below is the data for rolling 20 year periods. In 79% of these windows the 100% stock portfolio out performed, some times by margins greater than or approaching 7 figures. There were only 5 years of under-performance triggered by back to back collapses (2000 and 2008) and even then the under-performance was generally relatively mild 168k, 71k, 20k, 72k, and 23k:
1972-1992 = 5,910,334 vs 5,549,785 vs 5,180,331
1973-1993 = 6,103,086 vs 5,720,539 vs 5,335,253
1974-1994 = 5,449,253 vs 5,076,553 vs 4,709,769
1975-1995 = 6,269,543 vs 5,697,280 vs 5,158,016
1976-1996 = 6,467,337 vs 5,772,532 vs 5,129,121
1977-1997 = 7,477,071 vs 6,498,378 vs 5,618,624
1978-1998 = 8,060,547 vs 6,875,951 vs 5,835,375
1979-1999 = 8,397,123 vs 6,936,607 vs 5,694,293
1980-2000 = 6,029,749 vs 5,270,877 vs 4,571,156
1981-2001 = 4,345,443 vs 3,986,341 vs 3,624,393
1982-2002 = 2,910,903 vs 2,868,148 vs 2,789,764
1983-2003 = 3,308,761 vs 3,135,217 vs 2,929,772
1984-2004 = 3,241,681 vs 3,045,861 vs 2,823,821
1985-2005 = 3,011,946 vs 2,823,263 vs 2,613,476
1986-2006 = 3,019,930 vs 2,798,120 vs 2,561,246
1987-2007 = 2,890,270 vs 2,702,249 vs 2,497,923
1988-2008 = 1,630,003 vs 1,733,113 vs 1,798,957 xxxxxxxxxxxxx
1989-2009 = 1,850,810 vs 1,908,656 vs 1,921,370 xxxxxxxxxxxxx
1990-2010 = 1,912,703 vs 1,945,095 vs 1,932,935 xxxxxxxxxxxxx
1991-2011 = 1,707,744 vs 1,762,214 vs 1,779,475 xxxxxxxxxxxxx
1992-2012 = 1,768,662 vs 1,798,432 vs 1,791,128 xxxxxxxxxxxxx
1993-2013 = 2,135,080 vs 2,064,191 vs 1,951,423
1994-2014 = 2,172,655 vs 2,085,166 vs 1,959,779
1995-2015 = 1,977,079 vs 1,906,762 vs 1,804,020

Below is the data for rolling 30 year periods. In 93% of these windows the 100% stock portfolio outperformed, frequently by margins greater than 7 figures. The only window of under-performance was by a mere 23k:
1972-2002 = 14,829,332 vs 14,108,651 vs 13,194,595
1973-2003 = 18,125,492 vs 16,521,945 vs 14,791,694
1974-2004 = 18,113,186 vs 16,252,584 vs 14,334,398
1975-2005 = 16,233,990 vs 14,489,775 vs 12,727,368
1976-2006 = 16,028,306 vs 14,178,818 vs 12,339,647
1977-2007 = 14,977,279 vs 13,370,544 vs 11,748,621
1978-2008 = 8,324,801 vs 8,458,722 vs 8,347,906 xxxxxxxxxxxxx
1979-2009 = 9,113,993 vs 8,993,217 vs 8,612,022
1980-2010 = 8,655,606 vs 8,445,217 vs 7,998,907
1981-2011 = 7,141,167 vs 7,089,977 vs 6,838,596
1982-2012 = 7,057,039 vs 6,863,382 vs 6,488,631
1983-2013 = 8,206,581 vs 7,581,625 vs 6,795,271
1984-2014 = 8,093,147 vs 7,431,180 vs 6,625,583
1985-2015 = 7,163,330 vs 6,603,366 vs 5,917,859

You always talk about risk mitigation but I see far more risk associated with opportunity cost.

As far as people not sticking to their plan, that is common. I'd argue it is much less common when they understand math and actively put away emotion. I certainly will be sticking with my plan for more than 30 years.
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Re: Am I a little crazy to be thinking this way?

Post by TheTimeLord »

NMJack wrote:
Bogle_Feet wrote:Don't put it all in stocks unless you can stomach stock market crashes. By default I think everyone should have AT LEAST 20% in bonds. Like brakes on a car. You have to have them.
And a lot of people with 1 million say "I wish I had 2 million". Well you're already there! You don't NEED to swing for the fences with 100% in stocks.
BTW I hope you investing in index funds - not individual stocks and bonds.
Image
Does our wiki have a topic on cherry picking? If so, this chart needs to be exhibit A. To whomever came up with this unbelievable combination of facts; well done sir! :sharebeer

I'll now have to excuse myself while I put in orders to get my portfolio to 28/72 ASAP. 8-)
No more so than people including the 12/1/1987-1/1/2000 in a case for equities or retirement planning. And while I largely missed it because of my bias towards stocks, bonds have been incredible for about 3 decades if memory serves.
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Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

EdLaFave wrote: I certainly will be sticking with my plan for more than 30 years.
EdLaFave,

Why would you be 100% stock over 30 years? It simply does not make any sense.

Let's assume that your annual expense = 100K and you reach the following portfolio size at year 15

1) If your portfolio size is 2 million, would you stay at 100% stock?

2) If your portfolio size is 3 million, would you stay at 100% stock?

If a person has a pension that fully funded his / her retirement expenses, that person could go 100% stock all the time. For other folks, if the portfolio size is big enough, the person would take some money away from stock to avoid THE RISK.

If you had won THE GAME, why would you keep on playing?

It is VERY SIMPLE. Even for the people that KNOW THE MATH, it is unlikely that they will be 100% stock over 30 years. If it goes well, their portfolio will grow big enough that they will reduce their stock exposure.

OP has 280K at 23 years old. The portfolio is big enough that he could reach his goal easily without unnecessary RISK. So, why should he take THE RISK?

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Re: Am I a little crazy to be thinking this way?

Post by EdLaFave »

KlangFool wrote:Why would you be 100% stock over 30 years? It simply does not make any sense.
Several reasons:

1.) The expected return is larger and when I look at historical data any under-performance is minimal while over-performance is significant.
2.) The "risk" associated with having 100% stocks goes down as your holding period increases.
3.) By the time I am "old" I intend to have a portfolio large enough such that any of the financial calamities the US has experienced in the past wouldn't impact my financial security if (when) they occur again.
4.) I intend for my portfolio to serve a greater purpose than paying my bills until I die.

...for the record I actually do hold bonds (currently 13% of my portfolio) but only in amounts necessary to fund short term purchases/expenses that I've planned for.
KlangFool wrote: 1) If your portfolio size is 2 million, would you stay at 100% stock?
2) If your portfolio size is 3 million, would you stay at 100% stock?
This is where the need, ability, and willingness formula tends to break down for me. It seems that when my need decreases, my ability increases. Is it possible to assign numerical values to these changes? Are they proportional? If so that would leave you with just your willingness.

If I expected to live for 10 more years and had barely enough to make it then I wouldn't be 100% stocks.

However, if I was 100% stocks in the accumulation phase and wound up with a portfolio measurably larger than I needed (think Warren Buffett for the most extreme example) then I'd certainly continue to be 100% stocks.
KlangFool wrote:If a person has a pension that fully funded his / her retirement expenses, that person could go 100% stock all the time.
It is interesting to see how confident you are in the safety of pensions. I don't follow this topic closely but haven't there been a fair amount of companies (some of which are/were considered to be large and stable) who have failed to fully deliver on pensions promised to employees.

Without having researched it (I don't have the option for a pension), pensions scare me more than the stock market. It would seem you're reliant on a single company to plan for the long term (60-70 years?) in a culture where short term, quarterly, results are king
KlangFool wrote:OP has 280K at 23 years old. The portfolio is big enough that he could reach his goal easily without unnecessary RISK. So, why should he take THE RISK?
The OP hasn't provided enough information for me to say he can reach his goals easily. With my personal goals, I wouldn't feel comfortable enough with 280k at 23 years old to think about taking "risk" off the table.
KlangFool wrote:It is VERY SIMPLE. Even for the people that KNOW THE MATH, it is unlikely that they will be 100% stock over 30 years. If it goes well, their portfolio will grow big enough that they will reduce their stock exposure.
I didn't say people who know math will have 100% over 30 years. I said people who know math and actively fight against emotion are more likely to stick to their plan (whatever that might be).
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Re: Am I a little crazy to be thinking this way?

Post by nedsaid »

bigguy8437 wrote:Lately, all I have been thinking about is just to keep adding as much money as I can into the stock market. I've read around on this forum of people who have been gifted a million or more dollars, and seen responses of people telling them to just invest the principal with vanguard and live off interest. How nice must that be to have ~5 million dollars, and live off dividends of roughly 100k each year? Now I'm not saying I am aiming for 5 million dollars, but as I have started to earn income (60K a year at age 23), I have been just funneling as much money as I can from my paycheck into the stock market, almost to a point where it has been obsessive with saving money so I can do it. I have started with a larger egg nest than most, as I have around 280K now invested in the stock market (was gifted to me from my grandfather a couple years ago), and my goal has been to add as much as I can to this amount so that I can too one day be living off maybe not 100k in dividends but maybe 50K in ~20 or so years. I know time is on my side, and compounding interest can do wonders. Then, once I get to that point, I can spend time doing a ton of other things that I would like to do, such as travel the world and spend more time with friends/family, etc.
Big guy, I have a couple of thoughts here.

First, the stock market can be very volatile. Since the year 2000, there have been two bear markets with a downside of over 50%. $280K is a lot of money for a young person. Could you stand to temporarily lose $140K of that?

I started my first mutual fund in July 1984 and had just turned 25. I was a year out of college and had very little money so I invested with a fund company with a good track record and no minimum investment. October 1987 rolled around and the stock market crashed, the Dow Jones Industrial Average went down 22% in one day! I lost hundreds of dollars that day and I was crushed. It was like my financial life flashed in front of my eyes. Would the sun ever shine again or would the birds ever sing again? When I tuned in Wall $treet Week and saw the host Louis Rukeyser that Friday night, he looked shaken. He did his best to be calm and cool but you could see his unease and this was a guy who made of living as a financial journalist. Seeing that didn't enhance my confidence.

So this gets me to my second point. Though you are young, your risk tolerance may not be what you think it is. I lost hundreds as a 28 year old and was absolutely crushed. You are younger than that today, how would you feel about a $140,000 loss? At the time, I lived on the second story of an apartment complex and I suppose I would have only sprained an ankle or broken a leg if I had jumped. I am being a bit facetious here, but I am making a point.

The thing is, the US Stock Market has been gangbusters since 2009 and as a young investor, that is all you have known. Bull markets make us heroes, bear markets make us cowards. This sounds counter to what I would normally recommend to a young investor but I think I would take a moderate approach. That is a 60% stock and a 40% bond portfolio. Most young investors, like I was had little money to start with. So a 50% drop is easier to deal with when you have a small amount of money. For such a young person, you literally have a fortune.

Finally, don't defer your dreams too much. In recent years, I have been doing some travel including five trips to Europe. I started in my forties but traveled in earnest in my fifties. I will be turning 57 in a couple of days. Believe me, you won't get those years back. Youth, once it is gone, is at least in this life, gone for good.
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Lord Snow
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Joined: Thu Jun 02, 2016 9:03 pm

Re: Am I a little crazy to be thinking this way?

Post by Lord Snow »

EdLaFave wrote:I am not aware of a 30 year window, although it may exist, where 100% stocks wasn't the better investment...and I am definitely not aware of a 30 year window where 100% stocks was a horribly bad decision.
Have you looked at the Japanese stock market?
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

OP,

You have 280K at 23 years old. You have a lot of money at young age. You could reach your goal with moderate return. You could reach your goal with moderate saving rate. Life is TOO SHORT to be wasted on MONEY. Your GOAL in LIFE is to LIVE. It is NOT to make a lot of money. Money is just a tool.

My advice to you is

A) Do not take RISK. Go with a 60/40 portfolio.

B) Save moderately. Willing to SPEND MORE MONEY. Budget 5K to 10K per year for traveling or whatever you like. You are YOUNG and HEALTHY enough to do some of stuff that may not be possible in 20 years.

C) LIVE. You had given a GREAT GIFT. As opposed to most of your peers, you have ENOUGH that you do not have to worry about living paycheck to paycheck. Take this opportunity to live A GOOD LIFE.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

EdLaFave wrote:
If I expected to live for 10 more years and had barely enough to make it then I wouldn't be 100% stocks.
EdLaFave,

Why should life turns out like your EXPECTATION?

My oldest brother passed his full physical health exam without problem. Then, he fainted in the bathroom a few weeks later. They found a brain tumor insides his head. He died a few months later.

Moderation is the key. Life can throw a curve ball at you at any time.

I was 100% stock. Telecom stock and industry was booming. Why worry? The good time will last forever. Then, the stock / industry busted. I lost 50% of my life savings. Then, over the past 10+ years, all of my employers had annual or quarterly laid off of 5% to 10%. I was unemployed for more than a year a few times.

It is VERY SIMPLE.

You ASSUME that you have 20 to 30 years. You ASSUME that you have TIME to take RISK.

ASSUME = Making an ASS out of U and ME.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
EdLaFave
Posts: 434
Joined: Fri Dec 26, 2014 1:31 am

Re: Am I a little crazy to be thinking this way?

Post by EdLaFave »

Well if I don't have 20-30 years then investing is a moot point. When I drop dead of a brain tumor I surely wouldn't be thankful for my 40% allocation to bonds.

So I will go ahead and plan for a long life :sharebeer
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Am I a little crazy to be thinking this way?

Post by KlangFool »

EdLaFave wrote:Well if I don't have 20-30 years then investing is a moot point. When I drop dead of a brain tumor I surely wouldn't be thankful for my 40% allocation to bonds.

So I will go ahead and plan for a long life :sharebeer
EdLaFave,

You PLAN for the BEST CASE scenario. You counting on BEING LUCKY and you do not need the money for 20 to 30 years. You are assuming that you will be FULLY EMPLOYED for 20 to 30 years and not needing the money EARLIER. You are ASSUMING that you can flip a coin 20 to 30 times and you will get ALL heads.

I wish you best of luck.

I was YOU about 10+ years ago. I didn't listen either.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
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