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September, 2013


Here is a formula for plenty of ready funds by the time one usually needs or wishes to retire, one that may be too late for old fogies such as myself, yet with lots of potential for the young:

  1. Take one-tenth of your income and put it into savings and investments;

  2. Assure that as a minimum it averages a 10-cents-on-the-dollar annual return, which is in fact a little below the ordinary price gain plus yield on purchases of small-capitalization stocks, but takes into account a lower volatility allocation, with...

  3. At least 10% of the total to be held in non-equity assets such as money market funds, Certificates of Deposit, short- or intermediate-term corporate bonds, or in Treasuries, to cushion the effects of steep market corrections and then for use to buy up bargains when there has been a bearish period;

  4. Protect assets from taxes by investing a significant proportion in trusts or in regular or Roth IRAs.

  5. Finally, get at least a tenth better performance on your holdings than the norm by putting in just 10% greater effort than the passive investor (who turns over complete management of investments to fund managers but generally then receives no more than average results).

The effect of these one-for-ten tactics is a terrific long-term strategy for growing one's nest egg. It offers a good shot at eventually acquiring real wealth.

Let us say a person is 25 and has an annual income (individually or as a household) of $50,000, roughly average for families in the U.S. these days. In keeping with #1 above, he, she, or they will put $5000 (or more) a year into savings and investments. All of that can probably be protected from taxation for at least many years in a regular or Roth IRA. If 20% is put into an intermediate-term bond fund and 80% into a value equity mutual fund, then rebalanced annually or after a ten percent or greater correction, even without any extra investment research effort a 10% or better return is likely, assuming the performances are similar in future to what they have been in the past despite wars, recessions, major bank failures, terrorist attacks, etc.

For example, Fidelity Low-Priced Stock Fund (FLPSX), a value stock investment mutual fund, has had a annual average performance since inception (12/27/89) of 14.38%, and Fidelity Total Bond Fund (FTBFX), an intermediate-term bond mutual fund, has had a 5.40% average annual return since inception on 10/15/02. Their 10-year total returns were 11.30% and 5.28%, respectively. An 80% allocation in FLPSX plus a 20% allocation in FTBFX, rebalanced annually, would have provided a better than 10% average yearly return over the past decade (stats valid through the first half of 2013) and would have done so with generally lower risk than for the equity market as a whole.

Assuming the individual or family simply invested in that way and amount each year, a 10% average annual return on a $5000 a year investment would become over $822,000 after 30 years.

However, most families actually double, triple, or even multiply by more their early household incomes over a 30-year period. If we assume they gradually increase their income at a consistent rate to $100,000 by the last year before an early retirement, and keep putting 10% a year into investments as above, they will have average annual investments of about $7500, which at a 10% return would become roughly $1.2 million after 30 years.

Good as that sounds, even better results can be had if an investor will spend a little time learning some basics of value investing and so gradually acquire a portfolio of individual stocks and Treasuries or corporate bonds when such assets are at relatively bargain levels. With a modest amount of initial study and annual research and the investment of, say, a few hours a month, average annual returns might reasonably be increased by at least 10-20%. In the examples above, this might mean that, instead of a 10% average total return, one could average 11-12% over the 30-year investment period.

Assuming the individual or family invested in this way just $5000 each year, an 11.5% average annual return would become about $1.1 million after 30 years.

And that average $7500 annual family investment, if tax-deferred and not redeemed along the way, would at an 11.5% annual return become better than $1.6 million by the time one wished to take early retirement. Not too shabby for a merely 10% short-term cost to one's family budget.


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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