A Back of the Envelope Formula for Financial Security

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November, 2018

A BACK OF THE ENVELOPE FORMULA FOR FINANCIAL SECURITY
by LARRY


	Investing is often thought of as a complicated affair, best left to the experts. Yet there are a few basics one can apply that might well assure monetary independence without hiring a professional or doing so only for assistance in getting things set up. Various writers may differ on the exact steps called for, but most successful programs have certain elements in common. Here is a version with which I am comfortable:


	Pay off credit card (and other) debt without delay, and then send in the full amount that's due each month. Keep expenses lower than moneys coming in, and then regularly save and invest 15-25% of household income. Maximize use of tax-deferred financial instruments such as IRAs, 457 Plans, 401(k)s, SEPs, Roth, and 529 accounts. In bullish times, slowly build up reserve funds - money market accounts or short-term bond assets - (for example, by redeeming assets in excess of a 10% annual rise in portfolio value) for when equity markets are again down significantly, and then use them to gradually buy stocks, stock mutual funds, or exchange traded stock funds at a discount if the S&P 500 Index and/or the S&P Small-Cap 600 is/are currently down 7% or more from their 52-week highs. Decide whether you want to study investing enough to know which individual stocks to buy when markets are down and sell when markets are substantially up, or else avoid them entirely and basically invest only in low-cost index funds or exchange traded funds, adding to them over time and probably never selling until necessary to redeem assets for required minimum distributions. Whichever way you want to go, be consistent with that choice.


	Whether of dividend-paying small-cap companies or strong, established corporations, if choosing to buy stocks oneself, assets that have little debt, significant yields, and relatively low price to earnings ratios have generally proven to be profitable over the long-term.


	Annual Investment Returns at 8% (AARP)


	The average household, saving and investing 20% of income annually and investing as above, might typically see $12,500 in the first year (and total investments over the life of the program of about $600,000) grow to $4,000,000 or more after 30 years, though with some variation, depending on exactly when in their investing experience bear markets occur. Those who have not had as much chance to put substantial reserves into low-cost shares during severe market downturns or who have suffered large bear market losses just as they are retiring might do worse, yet even for them the approach should be a winning one. Over the long haul, average compound total returns even 20% lower than those usual for the S&P 500 Index can be rather gratifying in their capacity for turning fairly modest investment amounts into a large nest egg. After 30 years, the indicated approach would likely raise that initial investment (as supplemented in subsequent years) to over $2,000,000, assuming only an 8% average yearly return.


	DISCLAIMER Larry is not a professional. Don't take him seriously! Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site. (Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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