A physician whom I befriended through this blog is in his late 60’s and he’s been retired for a few years. A simple guy who had a satisfying career as an internist with a small-group practice.
He shared the details of his portfolio with me and I wanted to post the information which has stood out. This man has been invested in stocks for the past 3 decades.
Investing in Stocks
He enjoyed the excitement of trading individual stocks but that process wasn’t quite as easy in the 1980’s and so he mostly played the long game. His long investing time horizon allowed him his current healthy profits.
He remembers investing in companies like GE, Johnson and Johnson, IBM, and Pepsi. Once he settled down with his partner and had a couple of kids, he switched to stock index funds based on his brother’s advice who was an investment banker. Individual stocks were draining his time.
Ironically, his brother hasn’t owned a single index fund in his life but he knew it was the right advice for his brother.
He was drawn to stocks because he believed that the US economy would remain strong for a few more decades. He believed in capitalism and product innovation. He was right.
For the rest of us, we need to answer the same question – will the US economy remain strong over the next few decades, allowing us to retire successfully?
He doesn’t recall his annual returns but he remembers checking in with his broker who would give him quarterly updates as to how his portfolio was performing. Even now, he rarely checks on his portfolio balance and doesn’t know his investment returns – he lets his financial advisor worry about it.
The most important thing he did is to constantly invest.
He invested when his wife had cancer and he had to take time off.
He invested when he was going through a lawsuit.
He kept investing when his portfolio was doing shitty.
He didn’t care for the ups and downs of the market. Nor did he want to invest in the effort needed to maintain an individual stock portfolio. More and more companies were going public and just as many companies were going belly up.
Even though his broker would update him on the balance of his investments, this doctor was rarely preoccupied with it. The idea was that he would keep adding to his portfolio. And when he was in his 60’s, he’d start taking a little off of the top.
Of course, I had to throw the above graph at him. He told me that he owned Apple Inc. back in the day and that wished he had kept some money in it. However, it wasn’t part of his investment plan and he realizes that it would have caused him a lot more headache than he cared for.
He mentioned that back in the early 90’s, IBM and Apple were going head to head. Everyone was rooting for IBM. To go for Apple would have been a gamble. And if he had stuck it out with IBM:
$100,000 investment in 1988 would have been worth $10M if invested with Apple Inc. We both laughed at this. Yet, he wouldn’t change his investment strategy if he had to do it all over again – which makes sense to me.
The 1980’s was a hot time for energy stocks. Enron was among them. If he had maintained a portfolio with high energy representation then he would have gotten murdered. Not to mention other ‘hot’ stocks such as Yahoo and AOL.
He didn’t have a lot invested in bonds, early on. Later, sometime in early 2000, he started adding some bonds into his portfolio.
Despite that, the majority of his retirement portfolio has been invested in stock index funds.
To balance out that volatility, he has kept around $150,000 in cash which he moves around from savings accounts to CD’s and even had it invested in peer-to-peer lending notes for a while.
As for the balance of his portfolio, it’s over $2M. Him and the wifey only spend around $48,000 per year so they have more than enough money. His wife has a seasonal job which earns them another $18,000 every year.
For the first time this year they rented out their home in the US when they went abroad with another couple. They stayed away for 2 month and had their place rented to two different couples for 30 days at a time.
Stock Index Funds
How do you pass up the chance to invest in an individual stock like AAPL when you see those kind of returns? How do you settle for something like an index fund which is so conservative?
At some point you just have to make a decision and find the right experts who will help you put that decision into perspective. If index fund investing is the strategy you choose, then find the right financial advisor who will help you build a financial lifestyle around it.
It’s not like it’s a final decision with no way out. You can make stock index funds the backbone of your investing method and slowly add other items to your portfolio as you get more comfortable or confident.
If you are wealthy enough then you can park $50k into AAPL and let it ride.
I have an automatic investing routine in place. Every week I have an automatic purchase order which executes on the Vanguard website. I purchase $250 every week worth of VTSAX which is deducted from my checking account.
30-Year Stock Portfolio
Here is a sample 30-year stock portfolio invested in a passive index fund. To be exact, it’s an S&P 500 index fund (VFINX) which is a broad enough fund, capturing a good portion of the US stock market.
VFINX would allow you to have a $5M inflation-adjusted portfolio balance after 30 years. This is assuming that you started with an initial investment of $100,000 and added $1,000 every month for the next 30 years.
How much passive income can you have from $5M in retirement? It depends on how old you are and what it is invested in. If you’re in your late 60’s then it’s quite possible to have $200k of annual income from such a portfolio – probably more than you’ll need.
$10k + $1k/month
If you are in your late 30’s and start with only $10k then you can see from the graph above that you could end up with a $1.3M portfolio by your late 60’s. Assuming you will invest $1k/month.
What could you earn from a $1.3M portfolio? Somewhere in the $40,000-60,000 range should be possible.
Ups and Downs of Stocks
The toughest part about investing in stocks, whether individual stocks or an index, is the ups and downs of the market. Can you handle your investment dropping from $500k → $290k as we saw in early 2000?
Can you watch your investment drop from $577k → $300k as we saw in 2008?
What if you invested in individual stocks the same way? $10k initial investment and $1k/month for the next 30 years.
I picked 5 random stocks. Stocks which I was aware of even back in the 1990’s when stock investing was popular. Sure, I could have picked Apple or IBM or other successful companies but this is just a random choice.
You can see the result isn’t terrible, $390k – about $20k more than I invested in cash over the 30 years. If I could have picked better stocks or allocated my monthly $1k investment into better stocks then I may have been able to beat the $1.3M result from the passive index fund.
That said, it would require only one big loser to destroy my returns in a portfolio where each fund is weighted 20%.
The solution might be to hold more funds. If that’s the case, how many funds? How do you stay on top of each and every fund? That requires a lot of research and work.