It’s exciting to watch your portfolio grow and hit major milestones. Even if you start with a few hundred dollars, it’s a big deal when you hit $1,000, then $10,000, then $20,000, and so on... 'til your first million (smile).
If you’re familiar with our investment philosophy you know why it’s important to have slow growth stocks and real estate in your investment plan. Without those investment vehicles you could see even larger swings in your portfolio on the order of 20% or more in one month. With the advent of ETFs and cryptocurrencies, one of my greatest fears is that the stock market is becoming more like Vegas with each passing day. People begin to get numb to large swings and expect it. You shouldn't get into this bad habit if you want to build generational wealth.
As your portfolio grows you need to get more comfortable looking at daily swings, but if you ever get used to 30-40% swings on a regular basis then you’re probably an amazing day trader and don’t need to read this blog.
The swings we’re talking about are on the order of 5-10% and I expect that this WILL become the norm in the next 5 to 10 years. If we just take a 5% swing in one day, it sounds like such a small number when you only have $1000 in the market - a 5% drop is only a $50 loss for the day. But when you have a $50,000 portfolio, then you’ve suddenly loss $2,500. A $2,500 loss is a big deal, especially when you’ve built your portfolio quickly. You have a tendency to want to not lose a single dime. But keep in mind this comes with the territory. A small percent of a really big number is a lot of money. If you’re living entirely off of stock investments and lose say 5% on a $1MM portfolio, that’s $50,000. That’s more than many people make in a year. That’s the equivalent of an experienced school teacher working a whole year and not getting paid.
Say you plan on living off your million dollar portfolio, using the money from dividends and stock appreciation each year to never touch the million dollar base. If you expect a 6% return then you’re living off of $60K each year. That’s really good for someone who gets to retire early at say 35 or 40 years of age and do nothing. Now let’s say the stock market has a bad year and your portfolio is now worth only $900K going into the next year. Even at the same 6% interest rate you now only take in $54K at the end of that year. Even if you are now comfortable with larger swings in your portfolio, that’s still $6,000 less for expenses that year. That’s $500 a month less - the equivalent of a car note, cable television and cell phone expenses, or even a good percentage of your mortgage if you still have one. This is why people who practice the principles of FIRE look for every cost savings they can find and don’t buy new cars or carry $200 cell phone bills each month.
So the lesson here, start getting comfortable with changes in your portfolio each week. Investments can’t constantly go up each day the way we get older each day. Just don’t get too comfortable, use slower investment vehicles to ride out the slower times. For extra financial safety, start adopting more frugal habits at an earlier age, it will make life easier and more enjoyable than trying to live like a king until your 60, then being stuck at home trying to pay off your bills each month in retirement with a fixed income.
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