Saturday, January 8, 2011

First day of last summer month 2008. The beginning.

I have to admit that over last year (2008) my small family spent about US $80 K, hadn’t spent on a single purchase more than 600 USD. We do not owe a house, some there is no mortgage, no credit card debts. Thinking about it I realize that our expenditure risen dramatically and I am uncertain whether I manage to maintain such income in years to come.
I decided to set a goal: to achieve financial independence from my current job by 2019,  i.e. to have an annual income at least US $60 K in money at 1st January 2009 for next 40 years (until 2059) from my investments and be able to send some of the income for re-investment to overcome inflation .
It does not mean that I am going to quit working in 2019, as I believe that life is work, but wish to achieve financial independence from an employer.
Doing our in-house budgeting/accounting we decided to fix our expenditure at 2008 level despite inflation of 5%, as believe that we can spend our money in more rational way. As the budget contains a lot of sensitive information I do not plan to make it public, however overall allocation of expenditures will be presented at some stage.
I found that there is a lot of financial blogs and web-sites all over the world and Russia is not an exception authors of which are dedicating time to discuss personal finance and investments, but these are lacking following:
  • Ex-Russian citizens migrated somewhere overseas did not manage to become part of the culture they are working in and achieve desired level of income beating about the bush of financial matters, not being specific and not setting an example.
  •  Pseudo-investors putting a lot of general information and motivational posts about financially successful people in Russia and abroad, stories about stock market and trying to generate number of visitors so the owners could benefit from advertising on the websites and selling books via partners programs.
  •  Stock operators (speculators) posting a lot of very specific information about stock markets, which is hard to understand by a novice investor and really  meaningless to great extend as they talking about daily speculations, as most of the people do not have time nor knowledge to track the markets every minute.
  •  Most of such blogs have got very strict moderation where by doing so being created image of happy community adoring its author, all critical or questionable info is erased.
My basic principles until August 2009 (one year):
  • With my today knowledge and time available to me I do not want to speculate on stock market daily/monthly.
  • This year all investments are going to be made in mutual funds only, not individual stocks, in a hope to achieve return over long period of time of rate of inflation +7%.
  • I have a sum of annual expenditures, which will deposited on savings account with yield 3.5 % and serve as buffer, just in case I need money unexpectedly over course of next 10 years.
  • I will subtract a fix sum from my monthly income (US $5 K) and put on wife’s account. If we will manage better our budget the difference will go to her personal investment account, which I am going to discuss briefly here but only in way of choosing the instrument of investments, the money won’t be counted towards my goal.
  • My contribution to family budget : US $5 K USD monthly, US $8 K  – annual vacations, US $5 K towards presents and unforeseen expenditures. Overall: US $73 K a year, after taxes.
  • Working on self development and seeking additional sources of income for investments in my financial independence. 
It is what I am going to discuss here : analyzing investments opportunities and results with real money , my money. In addition I will find resources to secure a web site for my blog and the web design, than it will become live.
My today (end of July 2008) portfolio:
  • Reserve fund in size of annual expenditures on savings account with yield 3.5%
  • Precious metals and bonds invested – US$10 K in the beginning of 2008
  • I  did initial investment in three mutual funds being managed by Bank of Moscow at the end of June 2008 (market was it its peak ;-):
                   -          Read Square (primarily state run companies such as GazProm, SberBank, etc..)
-          Manezhnaya Square (mainly Russian stocks)
-          Index fund (Russian
  • I have got a small number of shares which I was presented with back in 2005, I submitted a re-investment form, so all dividends to be re-invested in new shares. Expected growth – 5% annually.
How does it look in a table and a graph, my road plan towards financial independence: 

Base scenario:

- Annual sum of money I am going to invest will increase by 5% every year (so I need to work harder). I have got rather unexpected position where I can invest more in 2009, than in 2010 due to some money available to me.
- In 2010 I expect to start receiving some additional income from renting my flat (I expect that it will be built and decorated by than). Expected income 320 USD a month, all money above that will be accumulated towards flat maintenance.
- I expect mutual funds to demonstrate growth of 7% on top of the inflation rate, despite gloomy economy outlook. I am going to invest in small sums over the course of the year, to get more value for my money. However for accounting purposes I am count that investment is made at the end of the year and start grow only than.
-  Desired income in 2020 will be generated in accordance of yield of the source. For example,  I will have US $632 K by than, meaning that it will generate 632*7%= US $44.2 K, income tax is 13%, hence I got $ 38.5 K USD to spend, if I will have US $11 K accumulated in precious metals and bonds, it would give me ( at 1% yield) – 110 USD annually, minus income tax, it gives me 96 USD annually to spend, etc.

How it looks on the graph:

As you can easily realize although such scenario is most probable in terms on sum of investing, based on my current income, it does not allow to achieve me my goal – financial independence in 12 years.
What sort of investments shall I do to get there?

Scenario #2 - absolute minimum investment rate with maximum exposure to stock market. Annual contribution should start at  US$ 24 K and grow 17% a year.
It is clearly shown that to get there I need more aggressive investment programme and instead of 5% increase of my investments I need to do 17%. I deliberately not count of better performance, as I think it is a naive – to count on tail wind.
However you can also see a next flaw in my aspiration-  highly imbalanced portfolio – 88% in mutual finds and 1% in stocks of single company. Such aggressive portfolio can help to achieve profits on paper, but may be unlikely to give chance to be independent, as market is highly volatile thing.
I would like to highlight again, that desired income in January 2009 money.

More easily to see it on the graph below:

Scenario #2 - to achieve my goal I have to increase annual investments by 17%.

Scenario #3 is the most aggressive one but is the most desirable. In order to achieve aspired level of divestment I need to increase annual level on investments by 21% every year:

Using such approach I have to invest more than US $80 K in money of 2008, a year. This looks very challenging to achieve today.
It gives me chance to have 80% in mutual funds and 20% in bonds and cash. A rule of thumb is that percent of bonds should be equal of age of the investor. However I want to leave it more aggressive, as I am not planning to quit my job by then.

For me is much more important to accumulate enough money which gives me feeling of assurance and independence and be more financially educated. 

At the end I would like to share an interesting fact: time means a lot for the investment, for average person most likely more, than money. Invested US $30.6K  in mutual funds in 2008 and 33 next year and leave the rest of portfolio as it is, in 40 years I can achieve scenario #1 and income of US $42 K a year after taxes, without further investments.

Let’s go and have a look of scenario # 3 on the graph below.    

Scenario #3 - essential portfolio diversification for security reasons. Annual investments must rise by 21%.

From here I can set my goals for period of Aug 2008- Aug 2009 to achieve financial independence by 2020:
-          Accumulate at least US $33 K after taxes for investment purposes
-          Choose investment vehicle and time careful ( as I mentioned I entered market in June 2008 when it was at peak in Russia)
-          Start preparing on flat redecoration, so I can rent it out by 2010
-          Choose criteria to benchmark my investment results
-          Earn additional money to public my thoughts in a blog, as I need your opinion and ideas.

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