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How A 28-Year-Old Who Retired With A $2 Million Net Worth Is Investing In 2017


How A 28-Year-Old Who Retired With A $2 Million Net Worth Is Investing In 2017
Forbes

In 2016, JP Livingston celebrated her 28th birthday. She also retired. Last month, I spoke with her about how she was able to retire, despite the fact that she only graduated from college about seven years ago. JP (a pen name she goes by on her blog, TheMoneyHabit.org) was able to retire because of her high earnings, lofty savings goals and disciplined investment techniques. Her investment strategies are part of what allowed her to build a net worth of about $2.25 million.

With less than a week left in the year, so many of us are setting goals for the new year, which includes figuring out an investment plan for 2017. Deciding on investment strategies or goals can help us figure out what we want our long-term financial picture to look like, and shape our budget for the coming year. When laying out an investing plan, who better to learn from than a woman whose investments boast high returns, and who retired before 30? In our Q&A, JP discusses her personal 2017 investment plan, and provides useful insights for investors looking to build their nest egg more aggressively. This interview has been edited for brevity.



Maya Kachroo-Levine: You've had investments of over $1 million yield a 13% return ($130,000) in just one year. Can you speak to your investment strategy that year, and can you walk us through your 2016 investment strategy?

JP Livingston: My investment strategy for several years has been a twist on a broadly discussed strategy to go long on equities.

Many financial experts (those who aren’t compensated for getting you to invest a certain way) will tell you that if you are young and in the wealth accumulation phase of your life, to consider parking your money in a low-cost index fund, for example, Vanguard’s Total Stock Market Index Fund (VTSAX).

There are a few key arguments for this strategy. First, it’s a nice hedge against inflation because the companies in the index are presumably raising their prices with inflation; since companies are valued on a multiple of revenue or profit, this will be captured in the growth of the stock market.

Secondly, and most importantly, is that it’s hard to argue with its results. The compound annual growth rate for stocks on the S&P Index for the last 30 years has been 11%. There are very few if any opportunities available to us regular individual investors that can top that kind of return for the risk. (Note: you’ll get an entirely different view from hedge funds or mutual funds. They believe they can beat market returns and so they charge high fees for their time and efforts. A few of them are worth it. Most of them are not).

Kachroo-Levine: What are you planning on changing about your strategy in 2017?

Livingston: As a retiree, steady cash flow is going to matter more to me than it has in the past. There are only two ways to make money: appreciation and income. Stocks, for example, are about appreciation—you make very little money on a regular basis (usually a puny 1%-2% in dividends), but a year or two or three later, you can sell it for much more than you paid and pocket the difference. A heavily appreciation-based strategy, like going 100% into index funds, will no longer meet my needs.

Income-based strategies, by contrast, put a steady paycheck in the spotlight. Bonds are generally purchased for the interest they provide. Sure they can appreciate or depreciate in value, but the bulk of your return from a bond comes from the monthly or quarterly dividend it pays.

I have a few years to build myself an income-based strategy, as I still have some deferred compensation coming from my old employer, but I’m looking to add one or two rental properties to my portfolio in 2017. Interest rates are still fairly low so it’s not a bad time to be a borrower. I would also look at adding more bonds to my portfolio (specifically leveraged municipal bond funds; the leverage juices returns and municipal bonds are tax exempt), but I do not want to buy bonds right now, as the Fed has signaled a plan to increase interest rates (and even raised them just a week ago).

Kachroo-Levine: What are your financial/investment goals for 2017? What are your priorities?

Livingston: As I am newly retired, my main priority is transitioning my portfolio into more income-based opportunities that can provide steady money to cover my expenses each year. I’m on the lookout for a rental property or two to take advantage of low interest rates and which will provide some much-needed steady income. In some parts of the country like San Francisco, rental properties are actually negative cash flow exercises and are predicated on appreciation. In some areas, it will throw off 6%-7% or more in income each year and fit my income needs. Real estate is hyperlocal like that.

Kachroo-Levine: What are the key philosophies that help shape your investment strategy?

Livingston: I feel I’ve gotten pretty far on just two things.First, don’t be afraid to say you don’t know.

People get really weird and insecure when it comes to money. We’re all lifelong learners. I have to admit I don’t know basic things all the time. For example, while I’ve read quite a bit about real estate investment, I’m constantly finding myself with a giant question mark as I apply those concepts to my first live investments. My priority though is to make money and learn, not to impress people.

Second: Don’t give up until you really feel you understand something. Finally, my other silver bullet question is to ask “What are the arguments against it?” or “What are the three things that could break this strategy?” There’s no free lunch. Every strategy has some vulnerability.

Kachroo-Levine: What advice can you offer for novice investors in 2017? Specifically, if you were speaking to people who had never invested beyond a 401(k) or IRA, what would you say to them?

Livingston: You are in such an exciting place, because there is low-hanging fruit all around you. A few things:

1. Money management is an incremental game, not a winner-take-all game. 

That means every tweak you make has a noticeable impact on your money, and it means you don’t have to choose between going whole hog or absolute zero. You can devote however much time and effort you have and get proportional results and new ideas to employ.

2. Momentum matters most. 

Start by joining a few interesting communities and blogs and read a little bit a few times a week. Cruise around on the Reddit Personal Finance forum. Investment is only painful or boring when you try to cram too much too fast, or you go find a dry, “educational” source and force feed yourself the information.

Momentum is the most important piece when you start any new project. Too many people think “Alright, it’s time to do this investment stuff” and go and buy some highly rated book on Amazon to start their education. That’s such a self-defeating way to start. Is that how you got into skiing, or guitar or interpretive Celtic dance? Has that kind of textbook strategy ever succeeded in firing up your passion?

Kachroo-Levine: For those seeking early retirement, can you share why your investments are so crucial to your early retirement journey?

Livingston: Your nest egg is like an entire extra employee doing work for you, an employee that gets better and stronger and eventually eclipses you.

Say you make $100,000 pre-tax and save $30,000 a year. Once your nest egg is three times your salary, or $300,000, at a 10% return it will generate as much as you slaving a whole year to put away has accomplished.

At 10-times your salary and a 10% return, it is throwing off more money than you make in an entire year. You could be sitting on the beach drinking Mai Tais and still see a year’s worth of salary come in just from your investments. Of course, you can’t guarantee consistent 10% returns, but you have a long-term bet that you can achieve during your accumulation phase by investing in low-cost index funds.

Source: http://ift.tt/2iYJCSk

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