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Investing total Income for Max Growth

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Money Talk > Investing, Stocks and Bonds

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Mad_Scientist
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Investing total Income for Max Growth  Reply with quote  

Hey everyone,

So back story here. Im in my early 30s. Way behind on retirement savings, but now making really good money. I have a family of 4 and my income more than supports us comfortably, and will allow me to make some good moves to catch up.

My significant other, however, in her early 20s, is now out of the infant / toddler phase, and wanted to get out of the house and back to work.

What we are planning, is to invest 100% of her income (which will most likely be meager) into an aggressive growth fund. We could afford to lose all of it, but certainly wouldnt want to, so Im thinking along the lines of VIGRX, or maybe FBIOX, or some other 4/5 star fund. We want to be very aggressive the next 10 years. That said, Im also considering The vanguard 500, for obvious reasons.


At the same time, i will be investing my income into profit generating and living cost lowering schemes, such as Purchasing cattle, buying a house instead of renting, and probably setting a couple of mobile homes for rent. Most of this should take place over the next 4-5 years.


Ultimately my goal is to get to a point where investment return exceeds 'job' income, and the only way i know to get there in a 20 year time frame is though very aggressive investing.

Im just curious on your thoughts on this strategy, and if you have any recommendations.

Thanks for reading. Look Forward to your comments.
Post Wed Jul 26, 2017 1:08 pm
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oldguy
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quote:
living cost lowering schemes, such as Purchasing cattle, buying a house instead of renting, and probably setting a couple of mobile homes for rent. Most of this should take place over the next 4-5 years.


I have some young relatives with similar aspirations - one was buying 13 cows (~$13,000) and a used 3/4 Ton Pickup and a stock trailer ($30,000) to haul cattle to his pasture, and then later to haul feeder calves to market. At this point he is spending his total income stream on payments on the $43k debt, plus the feed/hay/vet bills for the cattle.
Another relative has a side business of 500 hens, sells organic eggs. Has about $20k tied up in renting 2 acres, paying the Feed bill (a 2000 pound pallet per month). The hens, transportation of the hens, the nests, the feeders/waterers, portable tents/shades cost around $16,000. It's gonna take a lot of eggs to pay down that headwind, before any profit shows up.

As for renting trailers - we had 4 rental houses for about 35 years, sold them after we retired. Some tips - the first rule of landlording, never rent to a acquaintance, a coworker, a friend, and never ever to a relative - you need a formal arms length agreement with a STRANGER. That holds true for several things - realtor, lawyer, mechanics, plumber, builders, repairman - in all cases you need people that you can hold accountable, ie a stranger.
Buy houses that are at least 1/2 mile from home - your renter doesn't want you seeing his every move - and you don't want him watching your every move.
During our 35 yrs of landlording the houses, I continually refi'd the houses and pulled out the equity. I used that equity as seed money to invest in stocks. Over that 35 years, the houses appreciated by about 5X - and the total rental income was in the $500k to $700k range. But the bigger profit was from the seed money that went into stocks. (But if you buy trailers, that won't work, no appreciation). I bought small houses that were 2 to 5 years old - the first owner had planed the grass and hung the drapes ll I needed was the key and a renter. Almost no expenses for the first 10 yrs - new roofs, new appliances, new flooring, modern plumbing, modern electrical service, etc.

Example - refi a house, add an extra $50k to the loan. That adds about $270/m ($100,000 total for 30 yrs). The $50k, placed at 11%/yr for 30 yrs, grows to about $1,150,000. If you do that 3 or 4 times, your investment income will easily exceed your "job" income stream.

Re - VIGRX, or maybe FBIOX. Both good choices. Personally I prefer unmanaged funds, that way I don't get capital gains tax bills every yr, I can just allow my full investment to to keep compounding unencumbered. And the expense ratios are lower for unmanaged funds.

Here's my thoughts on risk management - the US market statistically returns about 11%/yr over 30 year blocks - think of that as Risk 1. If you narrow your selection to a a sector (ie, an ETF) the risk of that sector (Risk 2) falling out of favor in 30 years is superimposed onto Risk 1. Then, if you select an individual stock, the risk of a corporate failure (Risk 3) is superimposed onto Risks 1& 2.
For me, the 11%/yr, 30 year plan, was enough to make me wealthy. It turns out that 85% of professional mangers are unable to beat the unmanaged index. And that makes sense, they would need to reliably get a 14% return (from a population of 11%/yr stocks ) to pay the OH and leave an 11% net for the clients.

BYW, where is MWA?
Post Wed Jul 26, 2017 4:37 pm
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Mad_Scientist
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Thanks for your response. You definitely bring up some valid points, and things I hadn't thought of. As far as the farming thing goes. I'm looking to by a couple, and let nature do its thing. I'm not putting the overhead cost in. I'm sure i will have a higher loss rate, but at a much lower overall cost. And I figure im buying the land anyway...might as well get "something" out of it. I see farmers that waste a lot of money and I'm just like ???? why? Why spend 15,000 dollars to bail hay when you could of just brought the cows over and let them eat grass? Cows didnt have hay bails before 1900. what a waste of resources.

I digress. The points about being a landlord are spot on. I'm "hopefully" going to be able to find some young hard working couples, with maybe a kid or two. I'm not putting up with rift raft, or people that damage my property. They will be out quickly.

While i understand the motivation for using the re-fi to fund investment accounts, that certainly scares me. Knowing my luck the market would crash. Though, I do think that's something Im going to consider in my more stable years.

Do you have any recommendations on umanaged funds? I believe the Vanguard 500 etf is unmanaged with a expense rate of .05% I thought i understood how the taxes worked,, but I'm a bit confused on why one set of funds get the cap gains tax and the other doesnt. I thought the only way to avoid that tax was with retirement funds (401k, ira, etc) or by holding them over a year and paying a lower rate at the end.


NWA is North West Arkansas. Thanks for the reply. Food for thought.
Post Fri Jul 28, 2017 9:17 pm
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oldguy
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quote:
Why spend 15,000 dollars to bail hay when you could of just brought the cows over and let them eat grass? Cows didnt have hay bails before 1900.


When I was kid (WW2) we raised Herefords - that was before bales. At that time, farmers filled their hay mows with loose hay, we laid rope slings on a hay wagon, pulled a hay loader behind the wagon, piled hay onto the wagon. When the hay was about 3 feet deep, we laid another sling on top of the load. And repeat - when the load was about 12 feet deep (4 slings) we took it to the barn. We pulled each sling load up to the hayloft with a eam of horses using a rope/pulley arrangement.

That method was used back into the 1800's, Amish style barns.

Thru the 1970s/80s, wife and I raised 2 steers each year, grass fed beef for our freezer. The loacal dairies sold day-old calves for $2 or $3. We fed them powered milk for about 3 or 4 weeks, then pastured them for about 18 months, up to about 1000 or 1100 lbs. Pasture fed, organic beef - lol we were ahead of our times.

But raising a few cows needs to be thought of as a hobby - organic lean meat for your family. But the monetary value will be a few $100/yr, at best.
Putting a couple rental trailers on your land is in the same category - ie, a few $100/ year.

quote:
While i understand the motivation for using the re-fi to fund investment accounts, that certainly scares me. Knowing my luck the market would crash. Though, I do think that's something Im going to consider in my more stable years.


I relate those tidbits to you just to point out where money comes from. You are good at math, you probably know the compounding factor e^(YR). Or, more directly, the multiplier for compounding at 11%/yr is 1.11^Y.
The power of compounding is where money comes from - eg, just $5000/yr placed into a 401k @ 11%/yr = $1,150,000 in 30 yrs. Or, if your wife does that with her whole salary, say $20,000 /yr, that's $4.6M. The point is - you WILL need to scare yourself - the Law of Investing, risk and return are directly proportional. So you must learn to identify risk, manage risk, a take risk. You have picked the right vehicle - the SP500, Vanguard has a good one, so does Fidelity.

Take a look at this site - check a few 30 years blocks of time, most of them have a longterm average return around 11%/yr.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.WXvOMulGmUl
Post Fri Jul 28, 2017 11:58 pm
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Mad_Scientist
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I just made a spread sheet with that 1.11 return consistent over the next 30 years. and with NO other input, just what Im comfortable with from salary, and extra input from employer match and what i save on my mortage, tax refunds etc. it all works out to 3.5 million in savings when I'm 60.

its not enough. Sure I could easily live on the return every year, plus social security, but its not enough to fully fund the things i want to do in retirement.


Now thankfully , I have my other half who will be imputing some funds, But based on these numbers, there is going to have to be additional revenue from somewhere. Im basically not even counting her input since we have kids college and cars etc.

the question is where, and most likely its going to have to be rental properties. I don't know another vehicle that would make it worth while to not invest the money directly into the market. lets just assume i lose 20k one year for down payment on a new rental property. then the next year i would be able to invest 20 + whatever is left after the mortgage payment. But your saying, not to do that right?

Instead Id want to pay it off quick Once its paid off THEN i could get the equity loan to invest, and make up for that 5-6 years of missing investments, plus the rent paid. correct? but then you still have to pay back the loan, so how is that better than just paying the mortgage out its 15 year term in the first place?


Last edited by Mad_Scientist on Tue Aug 08, 2017 4:42 pm; edited 2 times in total
Post Tue Aug 08, 2017 4:10 pm
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Mad_Scientist
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also, just FYI, my <ain goal is to leave my kids a fund of 5 million each, invested in perpetuity. I have 2 kids, and there will be a 3rd. If I'm frugal, and live till 75, That doesn't look like it will be a problem. But i wouldnt want to live TOO frugal, hence the need for additional revenue in the next 5 to 10 years. I might mention that even in my retirement I will still likely have significant income coming in due to the nature of my career, plus whatever property i own.

Maybe a partnership into some rental property would be a good way to start to lower my initial cost and get me into the game quicker. I do have a total of 2.5 houses that are willed to me, but I guess i have 20 years before those become my problem.
Post Tue Aug 08, 2017 4:16 pm
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oldguy
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leave my kids a fund of 5 million each, invested in perpetuity. I have 2 kids, and there will be a 3rd. If I'm frugal, and live till 75, That doesn't look like it will be a problem. But i wouldnt want to live TOO frugal


You are definitely on the right track with "in perpetuity", most of the magazine articles by 'pseudo planners" try to calculate how much money you will need if you die at 80, lol.

But your $15M goal in about Year 2075 (when your kids will start utilizing their trusts). A $35,000 lump invested now will be $15M in 2075 if you invest at 11%/yr.

As for living TOO frugal - no. The answer is to place your income stream to it's highest and best use, then you & wife can enjoy spending the rest on your family, safe in the knowledge that you are on-track to be multi-millionaires.
Eg, SAVING $5000/yr will be about $300,000 in 58 yrs. But INVESTING $5000/yr at 11%/yr will be about $21M. BIG difference between saving and investing.


quote:
Maybe a partnership into some rental property would be a good way to start to lower my initial cost


Lots of start-up failures happen with partnerships. There is often some weird sweat equity involvement. Then one partner has to move to a new town for a new job. And wife wants to cash-out. Or partner gets a divorce, his wife becomes your partner, and she doesn't like you. The beauty of SFHs is that it is easy to buy-in alone, no need for partnering. And as soon as your house equity grows a bit, refi it and use that equity to make a down-payment on a second rental. A few years later, refi one of your rentals and make down payments on two more houses. (it doesn't take long to pyramid up to 3 or 4 rentals.) Then refi and remove all of your rental house equity and invest that into the SP500 - and repeat.
Post Tue Aug 08, 2017 5:28 pm
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Mad_Scientist
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I see. So essentially your paying the bank interest, to let that money go to work faster. bigger investment sums up front = bigger payoffs. so instead of paying cash for the home and just getting a rental income. your getting a rental income + some % from the investment.

I can see how that would work.

i know what i need to do now.
Post Tue Aug 08, 2017 6:23 pm
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oldguy
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quote:
I see. So essentially your paying the bank interest, to let that money go to work faster. bigger investment sums up front = bigger payoffs. so instead of paying cash for the home and just getting a rental income.


Correct. Eg, I refi a rental and add $50k to a 5%, 30 year loan, that costs $270/m ($47k in interest). Invest the $50k at 11%/yr, that grows to $1,150,000 in 30 yrs.. Do that whenever one of your houses has some built-up equity. Avoid building equity in your houses, that money just sits there, locked up in house equity. Instead put that equity to work for you.
Post Tue Aug 08, 2017 9:01 pm
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Mad_Scientist
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yep. i get it.

One quick question. Can you borrow against a retirement fund? this is more a curiosity question than anything. Lets say someone is 55 and haven't saved enough through their employer fund. say they have 180k. could they borrow another 150, and invest that using the 180 as collateral?
Post Tue Aug 08, 2017 9:24 pm
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oldguy
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employer fund. say they have 180k. could they borrow another 150, and invest that using the 180 as collateral?


Maybe - the rules are in each employer's 401k Plan - I think they all allow 401k loans but the limit may be lower than the 150/180 in your example. But if your 401k is already invested in an 11%/yr index fund, it won't help to borrow for that SP500 Plan and invest it in an 'outside' SP500 Plan, ie, they cancel.
Post Wed Aug 09, 2017 12:09 am
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Mad_Scientist
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I meant using it as collateral to double your investment. I researched it last night and you cant do that exactly the way i was thinking, but you CAN get securities back loans. Basically just a margin account, with the risk of margin calls. Im familiar with margin from trading forex years ago, and i find it interesting that i can very simply take out a margin loan on scott trade. I MAY consider this. if I do it, it will be after a dramatic drop in the market. one of those 600 point drops that makes the news would be the day. Ive been pretty good at timing the market over the last 10 years or so.
Post Wed Aug 09, 2017 1:11 pm
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oldguy
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Im familiar with margin from trading forex years ago, and i find it interesting that i can very simply take out a margin loan on scott trade.


In the 1960s & 70s I traded grain futures, sold covered options, bought 'calls' & 'puts', and made 'short' trades. That's when I sought and found a better way - ie, instead of borrowing on margin, (paying high interest and be forced into bad trades by margin calls) I started using mortgage money - much nicer to have your money supply safely locked for 30 yrs @ fixed rate, no deadlines, no margins. (BTW, no variable rate loans and no balloon loans - always use 30-yr FR, fully amortized money - that way you can concentrate on your investment, not your money supply)


quote:
Ive been pretty good at timing the market over the last 10 years or so.


I found it to be liberating to finally grasp the fact that Markets CANNOT be timed. Early on, I put my engineering and math skills to work to 'predict' markets - standard deviations, stocastics, chart formations - cup and saucer, head and shoulders, break outs, Eliiot Waves, Fibonacci ratios, yada. There are 100s of books & software on ways to predict the market, beat the market.
And then the answer became apparent - if there was actually a predictive algorithm, it could be written on a post card, no need for 100s of books by 1000s of authors. Today's markets are based on last night's events - the historic moves, patterns, yada, have nothing to do with it - you cannot superimpose a historic pattern onto recency and extrapolate the future. Like I said, it's liberating to grasp that - then you are free to simply invest and make money w/o worrying about future Market directions. So - I became a m-millionaire after I QUIT timing the Markets.
Post Wed Aug 09, 2017 3:53 pm
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Jack Hughs
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I like your article investing in the property nowadays is really big and healthy investment. Property rates will be increased in the future a lot. As we all can see from now the property rates are very high but if you will invest you will get a big bestessays benefit as well.
Post Wed Aug 09, 2017 5:35 pm
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Mad_Scientist
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I guess timing wasnt the correct word. I agree there is no way to predetermine the market. However. Macro and micro economic trends are real. Such as when i told my ex wife to pull out her stock investment in 2007 and put it into gold. She didn't and lost 60k in 2008. The other time was when sirius-xm merged. didnt take alot of thought to conclude that the .12 price per share was going to go up. They were merging and cutting cost, had no competition and are in almost every new car. not to mention the satellites they owned. I did almost 2500% on that deal when i sold out. I just wish i had invest 50 grand instead of the few hundred i could spare at the time.

anyway. I have a good idea of how to get where i want now. your advice has been very helpful. I tend to stay away from the super risky stuff, but leveraging a house, sounds like a really good strategy.

Thanks again.,
Post Wed Aug 09, 2017 6:44 pm
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