The Ten Roads to Riches

by Ken Fisher

Saving $6 Million???

  Seems too much. How can you save so much? That would be salting away $200,000 annually for 30 years. Few folks can do that. So you save less and invest en route. Over time, through the magic of compounding interest, you get to $6 million. So how much to really save each year?

  PMT is your payment—how much you must save each year. This is the number we’re trying to figure out. The interest rate is i—your assumption of what rate of return you will get. The number of years between now and when you want to start taking money is n. And, again, FV is your desired future value—in this case $6 million. (If this terrifies you, Excel has a function you can use—just remember future value—or you can ask your teenager for help.)

  For this exercise, assume i is 10 percent (about what I expect the long-term stock market average to be). FV is $6 million, and you retire in 30 years (n):

  So for $6 million, save $36,000 a year for 30 years—$3,000 a month. Still seems like a lot? That’s why a high-paying job helps. But it’s not hard to get to $36,000:

  Contribute the 2017 401(k) maximum—$18,000 (plus, that cuts your tax liability!).

  If your employer matches 50 percent as my firm does, that’s another $9,000 (free!).

  Contribute the 2017 IRA maximum—$5,500.

  That’s already $32,500. Now save another $3,500 a year—$292 a month—in a taxable account. Easy! If married, get your spouse to save via a 401(k) and/or IRA. Maybe you can save every dime tax deferred!

  Estimate a desired ending value and create a saving schedule. Stick to it.

  Maybe saving $36,000 per year is out of reach now. Should you give up? No! Use Excel and make assumptions about how you can increase savings each year, assume a rate of return, and tinker until you hit your end value. Stick to the plan. Remember the time value of money—earlier saving is simply worth more. Save as much as you can as early as possible and you’ll have an easier time later. Can’t say it any simpler!

  What difference do a few years make? Tons. A 25-year-old saving $6 million by age 60 need only save $22,000 a year (assuming 10 percent returns). Max your 401(k) with a partial employer match, max your IRA, and you’re done. But start at 40 and you must save $105,000 a year, or not retire at 60, or give up your $6 million dream. Your call.

  The 3 percent inflation and 10 percent returns are just assumptions. Play with those a bit. For example, maybe you’re a pessimist who thinks the stock market will only average 6 percent over the next 30 years. Then you must save more. I’m not saying saving $36,000 a year is easy. I’m saying know how much you need and create a plan to achieve it. Then stick to it.

  How the Heck Should I Save?

  A high-paying job helps. Being frugal helps, too. There are plenty of books preaching how to be frugal—I don’t even need to name them. They’re all variations on the same theme: Skip mocha-caramel-triple-lattes. Pay off credit card debt. Avoid designer labels. Shop at discount stores, thrift shops, or eBay. Buy used cars. Eat in more, out less. Total no-brainers. Some can’t do this—just can’t. If you can, great! If you can’t, reprogram yourself (very difficult) or get a better-paying job.

  Here’s an eye-opener if you don’t think you can save that much. Figure what you’re saving and see where you’ll be after 30 years. Suppose last year you saved $2,000. Solving for future value (you’re a pro at these by now):

  You promise yourself you’ll save more next year. Will you? Use the previous assumptions for i and n. Your PMT (amount saved each year) is $2,000:

  Saving $2,000 gets you to $329,000—kicking off about $13,000 a year in 30 years (about $6,150 in 2015 dollars). That’s no road to riches.

  GET A GOOD RATE OF RETURN (BUY STOCKS)

  We keep using 10 percent as our assumed return. Fact is, few folks do that well. Most professionals don’t, even though it’s not hard.

  How can you? Easy—invest in stocks, pretty much all the time. Diversify globally, using something like the MSCI World Index or ACWI Index as your guide (www.msci.com). While you must be sure of your goals, time horizon and cash flow needs, I am a huge fan of stocks because they have superior long-term returns. An all-equity approach is wrong for people with short time horizons. But that’s not you on this road, presuming you aren’t saving to buy a house in the next five years (for the roof over your head, not an investment). This chapter, by definition, means you have a long growth goal and need stocks. Almost always.

  There may be times when, to sidestep an upcoming prolonged market downturn, you step into cash and bonds—that can help put serious spread against stocks. If your benchmark is the global MSCI World Index, and it’s down 20 percent one year, but you’re down just 5 percent, you’ve beat stocks by 15 percent—that’s awesome. But true bear markets are more rare than the media wants you to think and if you really know how to time them you should go into OPM instead (see Chapter 7).

  To get rich on this road, you must own stocks, pretty much always.

  Most folks have a far longer time horizon than they think (we’ll get to that in a bit), and if you weren’t interested in growth, you wouldn’t be reading a book about getting rich.

  Life Expectancy Tango

  Does being all in stocks scare you? It’s less risky than most people think because they envision their time horizon all wrong. People think, “I’m 50. I want to retire at 60. That’s 10 years, so I’ve got a 10-year time horizon and should invest that way.” Very wrong! Unless you want to run out of money, your time horizon is as long as you need your assets to last—usually your life or your spouse’s (at least as long as both of you)—longer if you leave money to kids.

  Even those who get that right usually err—they underestimate how long they’ll live. Figure 10.2 shows median life expectancy as well as 75th and 95th percentile expectancies from IRS mortality tables. The x-axis shows current age. The y-axis shows years past current age. The dashed line is median life expectancy—85 for a 65-year-old.

  Figure 10.2 Life Expectancy .

  Source: IRS Revenue Ruling 2015-53 Mortality Table

  The average 65-year-old will live another 20 years—if you’re average. Half live longer. If you’re healthy and from a long-lived family, you may live much longer! Plus, you should assume on the long-lived side so you won’t hit age 85 and run out of money. A healthy 65-year-old should plan on at least a 35-year time horizon. And life expectancy keeps rising. If you’re young now, by the time you hit 65, median life expectancy will be much longer.

  So? Longer means holding more stocks longer. Figure 10.3 shows how to think about equity exposure based on your time horizon. For time horizons greater than 15 years (like you), you want all-equity if this is your road to riches.

  Figure 10.3 Benchmark and Time Horizon

  Goal Confusion

  Another factor where investors err is determining goals. Most can’t articulate their goals in a few short words. We think we’re unique (we are—just like everybody else) and our goals must be, too. No. The finance industry likes to confuse with complicated surveys and questionnaires—from which they can justify expensive services. There are only three prime investing goals:

  Growth. You need your money to grow as much as possible to cover living expenses later, or stretch now to cover current cash flow needs. Or maybe you just want to leave a bundle to kids, grandkids, or albino snow leopards, or whatever you’re into.

  Income. You need cash flow now or soon to cover living expenses, and you don’t really care about growth so long as you get your cash flow.

  Growth and income. Some combination of the first two.

  One of these goals fits 99.993 percent of you. I didn’t include capital preservation. It sounds nice! But it means you take no risk and get no growth—not helpful on this road. A true capital preservation strategy means losing money at inflation’s pace. Capital preservation and growth is a finance industry fairy tale. Calorie-free cake. Not possible. Ever! For growth, you take risk, and capital preservation is total absence of risk. Someone selling you this str
ategy is conning you, whether he knows it or not. If you’re on this road, the more equities you can stomach, the better.

  THE RIGHT STRATEGY

  So, you know you need stocks, preferably global, like the MSCI World. Now what? Invest like your benchmark, most of the time. Sounds simple, right? But I can’t tell you how often I hear, “Yes, I need an equity benchmark, but stocks scare me right now. I’ll be safer for a while with bonds and cash.” People see being safe as having big allocations to cash or bonds. Bonds reduce volatility. That’s safe—right?

  Wrong! Cash and bonds when you need an all-equity benchmark is about as risky as can be! You are seriously deviating from your plan—increasing the odds you’ll miss your goal, maybe by a lot. That’s not safe, that’s dangerous. If your benchmark is up 30 percent one year, but holding bonds you’re up only 6 percent, you may be comfy but you lagged by 24 percent. You’re behind now—huge. You need to beat the market by an average of 1 percent every year—tough to do—for the next 24 years to make up for that.

  Go Global

  Why the global emphasis? Isn’t the S&P 500 enough? US stocks are only about 41 percent of the overall world if you include emerging markets (and you generally should).1 By not investing globally, you miss opportunities—and a chance to reduce volatility. Why? The broader your index, the smoother the ride.

  Think of the super narrow and very volatile NASDAQ—it had a steep ride up in the late 1990s and a steep ride down after. It only just broke even. World stocks, meanwhile, are up 78.9 percent since the tech bubble’s peak.2 Broader indexes are smoother, and nothing’s broader than global. Plus, US and foreign stocks trade leadership, as shown in Figure 10.4—one leads the other for years, by a bunch. You just don’t know which will lead next. So own both by going global. If you do know which will be best; again, be an OPMer.

  Figure 10.4 Domestic and Foreign Leadership Trades Off .

  Source: FactSet, as of 1/12/2017. S&P 500 Total Return Index and MSCI EAFE with net dividends from 12/31/1969 to 12/31/2016

  Invest smarter by investing globally.

  Passive or Active?

  Now what? How much time do you want to spend on investing instead of focusing on your job to earn as much as you can so you save and then invest? If a lot, I’d say, “Really?” If you’re on this road to get rich, you probably don’t have the spare time to become expert at a very difficult activity where most folks fail. If you’re determined, then read my 2007 New York Times best seller, The Only Three Questions That Count. It covers the turf.

  Avoid anything suggesting a “magic formula” or “all you need is these types of stocks and not those.” Most investing books lead you astray because they’re largely based on faulty assumptions that one size, style, or type of stock is best forever. Untrue! (I give heavy detail why in my aforementioned book, too.) Fact is, the only way to beat the market in the long term is knowing something others don’t, repeatedly. And that is very hard to accomplish. Just a warning.

  If time for you is scarce, as it should be on this road, what you do depends on how much money you have and whether you want to be passive or active. (Passive means getting market-like returns investing just like the market, active means trying to beat the market by varying from it somehow.) With less than $200,000, just be passive.

  Many try to be active, but odds are 4-to-1 or more you lag markets—huge. Most who try, fail. With under $200,000 you’d mostly use mutual funds. Many people do, but they’re costly and tax inefficient. You can actually have a loss and receive a tax bill for gains—very perverse tax-wise. You own the fund but get taxed on realized gains inside the fund. Only in America! Overseas, they don’t do this.

  Next, most funds lag the market. And there’s no way to know which will and won’t, so the odds are stacked heavily against you. Diversify into a handful of active mutual funds and you are almost guaranteed to lag a passive strategy.

  Doing Passive Right

  You can do passive easily! As I write, the whole world market is about 41 percent US, 47 percent developed foreign, and 12 percent emerging markets.3 Open a brokerage account somewhere cheap—I don’t care where. A discount online broker is fine. Now, buy index funds or exchange traded funds (ETFs—pure passive slices of the market but taxed like a stock instead of a fund) to match the weights of the world. Buy about 41 percent of a cheap S&P 500 index fund or ETF; 47 percent Europe, Australasia, and Far East (EAFE); and 12 percent Emerging Markets. Buy more in the same percentages as you save. Then leave it alone. The idea is, like Chapter 8’s Ron Popeil would say, “Set it and forget it.” Hands off, for decades.

  Make sure your funds have low expenses. For the S&P 500, you could buy the “Spider” ETF (stock symbol, SPY), an iShares ETF (IVV), or Vanguard’s index fund (VFINX). Whatever you choose, make sure you buy a cheap, plain, vanilla ETF or index fund. Some fund families label pricier strategies as “index” funds. Don’t be fooled. Be frugal. For EAFE, consider the iShares ETF (EFA), Vanguard’s ETF (VEA), or their VDMIX. For Emerging Markets, you could buy the iShares ETF (EEM) or Vanguard’s ETF (VWO). Your broker may have differing additional fees for these, or not. There’s scant difference between ETFs and index funds except maybe 30 basis points of costs—pick the cheaper one.

  I can’t stress the importance of picking boring, vanilla index funds or ETFs enough. The more popular passive funds get, the more active strategies try to masquerade as passive. It’s all branding. Some shops create new niche “indexes,” then launch a fund to mirror them. Presto, an index fund! There are newfangled indexes for companies surpassing a minimum book value, companies that invest a certain percentage of free cash flow back into the business, companies run by women, and other niche—often arbitrary—criteria. Some of the indexes are even actively managed. No disrespect to any of these strategies, but they aren’t passive. They’re active, presuming one type of company is superior for all time. But everything has its day in the sun and the rain. My advice: Forget the gimmicks, and remember, boring is best in the long run.

  Help or DIY?

  Have much over $200,000? (Good for you! You’re making the world a better place.) Now you belong in individual stocks. It’s cheaper and more tax efficient—hands down. Folks rarely notice, but lump in expense ratios, broker fees, and so on, and you can give away 2.5 to 3.5 percent or more on mutual funds.

  If you’re in the $200,000 to $500,000 range, you’ll do less harm and be more efficient with an ETF strategy. (Remember, ETFs track indexes but act and trade like single stocks.) Under $500,000 you really can’t diversify enough with individual stocks; but above $200,000, you can begin making country and sector decisions via ETFs that, done right, can add to your bottom line. And if you have over $500,000, you absolutely belong in individual stocks. No mutual funds! Too expensive for you.

  But that question again: Passive or active? Passive beats most who try to manage money actively. To be passive, you want to own stocks best representing the world. To do this, you can go to http://www.ft.com/ft500 and download the Financial Times 500—this is a list of the world’s 500 largest stocks by market cap, updated regularly. You needn’t own all 500—that would be very pricey—but you could buy the largest 100 or so and get good global coverage. To round out your portfolio, you could buy some percentage in a small-cap global ETF (like State Street’s International Small Cap ETF—ticker GWX)—the cheapest way to go. That’s passive. As you save more, keep buying in the same percentages. Otherwise, leave everything alone.

  Whether you have a smaller asset pool in ETFs or have graduated to individual stocks, to be active and try to beat the market, you must hire a money manager. This isn’t easy, either. You must ask the right questions. You don’t want anyone who suggests he “manages” a portfolio of mutual funds or “selects” a stable of discretionary money managers. All you’re doing is layering cost on more cost, eating into return. Don’t hire an intermediary—hire a decision maker who knows what he/she is doing. Few do. On the following pages I list questions to a
sk the potential caretaker of your assets. Memorize them. Type them up. Take them with you.

  Stick with Your Stocks, Unless . . .

  Stocks sometimes fall a lot, but most years they’re up. For almost the entire bull market that started in 2003, folks griped about how terrible stocks were and how bad they would do. Yet stocks rose each year: 2003, 2004, 2005, 2006, and 2007. We’ve seen similar during the bull market that began in 2009, shaping up to be history’s least loved. Take most five-year periods and they’ll be up, too. The 1990s bull market ran nearly the entire decade, as did the 1980s. The 2009 bull is eight years young. During all that time, you belonged in stocks. And you will in the future.

  Great Questions to Ask a Money Manager

  Don’t have time or training to manage your own assets on this road to riches? You’re not alone. But hiring money managers isn’t trivial. These questions help assess whether you want to trust someone with your money.

  Since asset allocation is the single most important decision made on my account . . .

  Who’s responsible for making or recommending changes to my asset class mix? You? Someone else at your firm? Does the ultimate responsibility lie with me?

  Are my portfolio’s reallocations primarily driven by your market views or my needs?

  How often is my portfolio allocation reviewed?