I got a later start on my Million Dollar Journey (MDJ) mainly because it took me until age 30 to figure out what I wanted to be when I grew up. The year I started making my first real income, I also got married. In retrospect, getting married factored majorly in to our financial success. Two travelers on the MDJ with similar goals and money views can journey faster, further, and happier. Divorce on the other hand, is one of the 5 biggest wealth-killers around.
Avoiding other big 4 wealth-killers such as annual tropical vacations, anything brand new with wheels, debt for depreciating assets, and expensive show homes and second homes, was also critical in our successful journey. You are now likely thinking “what a boring dude.” It’s not true but I’m happy it appears that way because living modestly is a key ingredient for a successful MDJ!
We reached the $1M net worth destination by age 40 and $5M by age 50. After working (we’re educators) and investing for about 20 years, working, which I still do, is now an option. Over the years, I’ve set many net worth (NW) goals and achieved them. The most recent milestone happened in 2013 – our NW increased by $1M; well $949,722 to be exact. That breaks out as 50K savings, about $170K in dividend income, and the balance in unrealized capital gains. 2014 is starting out on a strong footing with our NW increasing by ($254K) by March 21.
Here are the factors that led to our success
First, I took complete control. I realized early on that the only one that truly has my financial interests at heart is me! I rarely used brokers and advisors so I didn’t have to fire too many of them. Next, I consolidated all cash and investments in the fewest full investment trading accounts possible with one financial institution (FI) – my bank. Same with my credit card and line of credit (backed by house) used only for investing – I consolidated them to one FI. Tip: don’t de-register any investments in this consolidation process.
Managing a portfolio is complicated enough, so we didn’t want to make it harder by juggling multiple institutions. As a bonus, consolidation lowered my fees overall and let me manage the portfolio more effectively from one place. “Selling my soul” to one bank had other benefits too. All of a sudden I had better bargaining power and better service. It seemed like my business mattered more to my bank.
Then, I got financially literate. I don’t subscribe to any financial-related publications and services except two: the Canadian Money Saver (www.canadianmoneysaver.ca) and the Canadian ShareOwners Association (www.shareowner.com). Both of these offer independent advice and educational-based content. The CSA, in particular, has a stock study guide package, including video lessons that are fantastic. In addition to learning the “nuts and bolts” at the CSA, I also took the Canadian Securities Course. With a relatively small investment in time, I am now the most educated (but un-licensed) financial advisor that I know.
I don’t buy and read the seemingly endless barrage of financial self-help books. 20 years ago, I read Gordon Pape’s Building Wealth in the 90s and a seminal book called The Richest Man in Babylon. I read the original Wealthy Barber a few weeks ago and although now dated, it is excellent. But really folks, nearly all the current stuff is just a re-packaging of good old ideas. You’ve no doubt heard about the “pay yourself first 10%” wisdom? I read that in the Richest Man which was published in 1926. To be fair, there are some current tax and investment topics you should keep informed on but you can easily (and for free) do that online and in the Money Saver publication I mention above.
Next, I began to challenge accepted financial wisdom. For example, I’m wary of over-diversification. Stock diversification does not remove market risk and above a certain number of holdings, company-specific risk reduction is minimal to non-existent. Excessive diversification does serve the financial industry however by creating demand for their endless variety of managed fund products. It also creates portfolios with an excessive number of holdings which in turn is fertile ground for churn and hence frequent fees.
A friend of mine has a multi-million dollar portfolio with 150+ North American stocks managed by a broker. That size of “garden” needs a lot of pruning and weeding and is therefore very profitable for the broker. I have 49 stocks in a $5M portfolio – 75% Canadian and 25% US. My total commissions for 2013 for tending that garden – $150. That’s a tiny Management Expense Ratio (MER).
I also ignore often-cited rules-of-thumb for asset allocation. Other than my house, I have two asset classes: stocks and cash. The types of stocks I own has gradually shifted over the years from growth to blue chip dividend payers, but even in my retirement, I don’t see a reason to not hold all stock. A solid dividend paying utility or Canadian bank beats a deposit based investment any day in any market. Radical? I’ve “managed” a 2-stock (TD and PKI) RRSP/ RRIF portfolio for an older friend for about 15 years. He is now well into his 80s and the required withdrawals have just recently exceeded the dividend income but the growth component has maintained the account value at about $40k. I took over this when he was frustrated that his then $14K deposit-style RRSP wasn’t performing.
My kids’ RESP is another good example of effective asset allocation. Started in 1998, with deposits and CESGs of $108k over the years, it is now worth $250k and has never held more than 13 Canadian stocks and nothing else. I don’t see any reason to change that formula, even after they start attending post-secondary. Actually, with some luck, I might be able to eventually withdraw my contributions and have their education paid from just the income and CESGs. That’s a grand slam home-run in my opinion.
Along the way I became patient. I don’t have a magic touch when it comes to stock-picking. I do study the companies to determine if their stocks are “on sale” and if they aren’t – I wait. As per CSA wisdom, I also build positions over several quarters or even years rather than buying my desired holding in one shot. However, if bargains suddenly appear I am ready to act. While the media was in doom and despair mode in the 2008-10 period, I added tons to my holdings, even using large amounts of (additional) margin to do so. Best example of this was adding 1,000 SBUX at $9.53 in 2009 (price is $76 at the time of writing).
I’m also not afraid to hold a lot of one company if it has a long and stable track record of increasing earnings and dividends. Holding nearly 12,000 shares of TD doesn’t bother me. TD was the first stock I ever bought in 1997 – 100 shares for $12.50 per. You have to start somewhere and a Canadian bank stock is arguably the best place. Canadian banks survived the biggest “global economic crisis” since the Great Depression. Need more evidence?
I’ve become philosophical. The most important thing I learned on the MDJ is that you have to give up some “good” things to get some “great” things. If you want to succeed on your own MDJ you need to ask yourself: “what am I prepared to give up?” A bit of time away from the TV to learn about investing? Driving new cars? The latest show home? Annual tropical vacations? I happily gave up a lot of that stuff and more and somehow I survived.
A recent article by a financial writer ominously proclaimed “the correction is coming.” He then went on to tell us very eloquently how to defend our portfolio from it. A little re-allocation, a fancy mutual fund or ETF, a little global diversification perhaps…The only thing I agree with is that a correction is coming since given enough time any fool making this prediction will be right eventually. However, this time try preparing for it another way. Get ready to look for bargains and to start your MDJ! Or, add to your portfolios with good quality, dividend paying stocks that you have identified! Bon voyage!
About the Author: Pete and his wife are educators in Western Canada, and are regular followers of MillionDollarJourney.com