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January 06, 2011

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"Made low $100's to almost $500 for next 16 years."

As in low $100k's to almost $500k? Would imagine it would be "easy" to invest heavily with such an income.

These stories always leave me with a sort of 'aaaaaannnnd.....now what?' frame of mind.

I know lots of folks who make $200K~++ combined famuily income and don't even max their retirement plans, have car payments, credit card debt, not enough liquid emergency savings and not even $250K~ in assets in their 40's and 50's!!.....And this person made very little money early in their working life, graduated college w/ no debt and amassed $225K by their early 30's, and just 16~ years later RETIRED fully, yet never made over $500K! (Figure $250K average and take away all the taxes,especially in the 90's when tax rates were HIGH) and WOW, getting to almost $3M IS an accomplishment!

Most folks can't get there in 40++ years of investing say age 25-65, with compounding. They did it in 25~ years by my count. And note no debt at age 22!

Please don't take the following observation as minimizing the reader's accomplishments. Clearly he was very disciplined and did all the right things right from the start. I admire his story.

Having said that, I think it's important to understand the time frame that was given - 1982 to 2007. Compound annual returns in the equity markets were almost 15% during that period. 1982 was the beginning of a huge bull market. For the first 18 years of that time period, the return was more than 19% per year and there was only one down year.

So while I agree with the approach and admire the discipline, such results are unlikely to be repeated in such a short time frame again. The rest of us will almost surely need more years or more savings.

considering he was putting money IN the market all the years, and probably w/ increasing income, more money later years than earlier, the equity returns HE actually realized were much lower as a %. Folks who invested thru the 60's and 70's and stuck with it were the ones who really made money in the markets. I bet this investor actually only averaged single digits as a real rate of his return based on weighting...

9 out of 10 businesses fail.
The fact that his succeeded, and not just succeeded but made a HUGE salary, is a very lucky thing.

Everyone who starts a business will not be fortunate enough to succeed in it. Most won't be so lucky.

So this advice is almost as good as "win the lottery" or "receive a huge inheritance" or something similar.

I've been investing whatever money I can for the past 20 years (since 1989), and the market has just been mostly down. The past 10 years have been totally awful overall. Even my financial adviser said the market has been unusually bad for the past 10 years.
As a result, my initial investment has barely grown at all.

My story has some similarities but I got there differently.

ME
Age 58 - Retired in 1992 ---------- Portfolio=$320K
Age 73 - 15 years later in 2007 - Portfolio=$5.78M -- Only income was SS starting at 62 & modest pensions for each of us.

OTHER FMF READER
Age 32 - 1992 - Portfolio $225K
Age 47 - 2007 - Portfolio $2.46M

The difference
He started a business, earned a lot of money over 15 years, invested a lot, paid a lot of taxes.
I was very successful in riding the dot.com bubble up and then bailing out during the 4 days after the peak. A large portion of our investments were in tax deferred IRAs - taxes fairly low.

My conclusion
I was lucky but became a smart investor after I retired, started with a higher portfolio and had a small amount of earned income.
He was a very successful businessman with a smaller portfolio but with a far higher income and probably too busy to actively manage his investments the way I did.

My way required a once in a lifetime opportunity and retiring at a perfect time when I could devote all my time to my investments.
His way happens year in and year out regardless of bubbles, but a growing economy is generally necessary.

Posts like this provide me with the positive reinforcement to keep doing what I'm doing. At age 25, I'm saving or investing 31% of my gross annual salary of ~$48,000. It can chafe sometimes knowing that I could spend more on luxuries now if I reduced my saving, but then I remember the big picture. As the poster did, I hope to build a solid nest egg over time.

I hope someday to combine the two approaches pointed out by Old Limey - constant investing over time + smart investing. I agree that to really become expert in the market is a full-time job, so for now I stick with index funds and solid dividend-paying stocks.

This guy started right at the onset of the biggest bubbly long-term bull market in history.

So when's the next one starting? Now? Sure.

If he started in '82 the Dow was at 777 and everyone proclaimed "equities are dead". And the drops of '87, '90, the poor year of '93, the BURST of 2000, 2001 (9/11) drop, the stall in the middle of last decade and finally the bust of 2008. I think he was pretty gutsy to keep it all up when there were multiple times that the "experts" said RUN! the time to invest is when everyone says NOT to!

I think the MAIN point(s) was missed here. Only $9K income in '82, graduated college no debts. Had the discipline to invest and save even with low military income (much lower salaries than today in the military then - below civilian equivalent) and got to $225K in 10 years!! At that low income level and no debts!! Risked it all and made $5K in business year one! Then made $100-500K a year (lots of people did and a LOT more in the gay '90's!). Coulda stopped investing thinking he was golden.Kept it up and faced the neltdown in 2000, 2001 and 2008 and RETIRED at AGE 47! HAd almost $3M.I think a lot of readers missed all that. They seem to think "it can't happen again" or don't stay so disciplined. Back in early 80's unemployment, the stock markets, defecits, misery index, exploding gas prices, etc., etc., were all the news. Familiar???

Really good reminders, FMF. While it's important to make money and focus on growing the top line, it's not necessary to be pulling in $500k per year to be able to ultimately be financial secure. Rather, it's having the discipline to live within your means, maximize the income minus expense gap, invest the savings intelligently, and allow years for compounding. It's a time-tested formula.

Compound annual returns in the equity markets were almost 15% during that period. 1982 was the beginning of a huge bull market.While it's important to make money and focus on growing the top line, it's not necessary to be pulling in $500k per year to be able to ultimately be financial secure.

Sorry for your bad luck BD.
We pulled out of the market when it was beginning to fall and put it back in at 7000. Today our portfolio is up 15% for the last two years. It is about timing. Some people make it- some people don't.
I tell my husband all the time-
the market is like poker....

The reader's story- very believable.
It is my brother in law's story- but he didn't go to college, has two boys and married a smart woman- my sister. They are worth at least as much as this story projects.

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