This is the third article in a series of how to take a new investor, and turn their working capital from $15,000 to a nest egg of over $400,000 in six years. More importantly, we show how this same individual can use this to become financially independent, semi-pro investor taht derives the bulk of their future income from their investment portfolio.
In the first two articles
(1) &
(2), we showed how using only 3 simple, ordinary investments, the investor grew their capital base to over $192,000 after 4 years! How did they do that? Simple, they put their money in Harm's Way to have it start working for them rather than their banker. In addition, they employed the concept of leverage in a responsible, but aggressive manner.
In my dealings with people all around the country, I find that there is one major denominator for many in the 30-60 age bracket, they would love to find a safe way to leave their current source of icome and have time to pursue interests closer to their heart. They have little passion to continue in their current profession until their golden years where they hope that their savings, their 401K's, and their social security will be enough. Instead, I find that most people are interested in becoming what I call semi-pro investor where much of the person's income is now tied to their investing ability. However, I also find that for most people, investing is not their ultimate goal but just a tool to finance some dream they have had on the back burner for years.
In case you think this is all theory and the stuff od informercials, this is exactly what I did at the age of 40 "retiring" from waht many people considered to be an excellent job on the graduate engineering faculty of the University of Florida. Over a period of several years, and a heck of a lot of mistakes, I was able to rely on a pool of assets and continuing investments to step out as a semi-pro investor who could then spend my time creating investments (to creat money) and creating financial educational material (my passion).
Defore we can even talk about financial independence, we need a frame of reference to see how much investment return might be needed to support our investor who is now going to turn into a semi-pro investor. Suppose that this investor decides that they need $75,000/Year to "break even" with their current lifestyle. That is, they can support their current lifestyle with that amount of money coming in but yet they are not adding to their net worth. For sake of argument, let's say this produces $60,000 per yaer after tax. For you, you may need 2X this amount, or 1/2 this amount but that does not change the underlying concepts.
With their current $192,000 in working capital, can this investor "retire" and become semi-pro? Maybe but it could be a little risky. Since tax has already been paid on this working capital, the investor KNOWS that they can support over 3 years with NO OTHER INCOME! i.e, $192,000/$60,000 > 3 years. For many people, that is HUGE revelation that within 4 years, starting with $15,000, thay have created something that can lrt them be job free for 3 years. Not bad but still a little scary in my opinion if the goal is to chuck the job permanently.
To avoid depleting their original capital, the investor would need to produce $75,000/$192,000, or 39% per year returns. As we have shown, this is quite possible but would make for some sleepless nights. Suppose now that the investor decides that they should go through one more round of investing to further grow their capital base. They know that with another 2 years od strong investment returns behind them, they could really make it into the big time and be able to "retire" to the semi-pro status with complete confidence.
Using smart leverage (see previous articles
(1) &
(2), suppose now that the investor manages to produce a modest, 150% gain over the next two years, or $288,000. They accomplish this objective by making 2, diverse investments in condos that are located in completely different states. after long term, capital gains treatment, this produces $244,800 now giving the investor a working capital base of over $430,000!; All of this started from a investment of $15,000 only 6 years ago.
Ignoring the effect of inflation for simplicity purposes, this investor has now accumulated enough cash to support themselves, with zero addittional income, for about 7 years. Hower, it is extremely unlikely that for someone that has successfully navigated themselves to this point can produce at LEAST a 20% return on their working capital. Basically, they have now acquired the skill set, and the required capital, to be a semi-pro investor. At that return level, the investor now has all the income they need.
There is another effect that people often ignore. When the semi-pro investor leaves their current occupation, there is a ton of hours that can be applied to whatever they choose. It has been my observation that for people with working capital of less than 2 million dollars, it does take much time to generate their semi-pro investments. Invariably, I find that people have another activity that they always wanted to do., like starting a business, be an author, artist, fishing guide, or what ever that produces revenue as well. This further reduces income requirements.
