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Earn more & Save more or Invest differently ??

Aug 30, 2021

We are often told that the path to Financial Freedom is through earning more and saving more. In all likelihood most of us have been doing this to some degree. What I recently learned is that your asset allocation is the biggest determinant of portfolio  growth and passive income withdrawal in the long run. In other words, the annualized ROI (Return on Investment) of the different asset classes you are invested in has the largest impact on how fast you get to Financial Independence. 

I wanted to do a deep dive today and run some examples of how your portfolio would perform if you Earned more and Saved more vs shifted your asset allocation. 

Earn more:

I know many physicians who have been working more than one job for years. Sometimes we take on additional shifts, work additional jobs, yet others have side gigs - which also take a lot of time and commitment. Another active business is not something to be taken lightly - oftentimes it takes more time and effort than your main gig. The hustle and burnout from your side gig can be significant. 

Save more:

Have you found yourself looking for coupons and discounts every time you have a major (or minor) expense?  I have! How many times do we hold ourselves back because we want to stay within our budget - we put things off for when we can really afford it. What if living on a shoestring budget was not the most efficient way to get to Financial Freedom?

Invest efficiently: 

The question to ask yourself is - do you really know what your asset allocation is and what your average Return on Investment (ROI) is across your portfolio? In other words, how much money do you have in cash vs stocks and bonds vs real estate  and once you factor in the historic returns for these asset classes, what is the average ROI of your portfolio during growth? How long will it take you to get to Financial Independence if you continue on the same path making the same contributions? How are you rebalancing over time and what impact will that have? If you don't have an IPS Investment Policy Statement or would like more help figuring out what your asset allocation should be - check out my previous blog posts on this topic. 

Now before I start running examples, I want to be honest with you - I am guilty of having had huge cash reserves the first few years that I was out of training. So I speak from experience - the opportunity cost of not being intentional with asset allocation is HUGE!

I wanted to run two different scenarios to highlight the impact of increasing contributions vs changing asset allocation to a portfolio over 20 years. 

Baseline: Investing $2000/ month with into a Stock/Bond/ Cash portfolio with an average annualized ROI of 7.5%

Historic average returns for index funds is close to 10% over the last 75 years, and its around 5% for bonds over the same time frame. If I had a portfolio that was 65% in stocks, 30% in bonds and 5% in cash I would be averaging around 7.5% ROI annually.  If I contributed $2,000 every month into this portfolio, I would likely end up with close to 1.1 million dollars in my portfolio at the end of 20 years.

Scenario 1 - impact of doubling your contribution: 

If I decide to earn more or save more and double my contribution every month - and contribute $4000 every month into the same portfolio with the same asset allocation described above, I will likely end up with close to 2.2 million dollars in my portfolio at the end of 20 years.  

Scenario 2 - impact of changing asset allocation to double your ROI:

What happens when I don't increase my contributions but decide to change my asset allocation so that my investments now average 15%  Return on Investments (ROI) annually over the same 20 year period. 

At the end of 20 years, I will have close to 3 million dollars in my portfolio. Without having to earn more or save more. Just because of a difference in my asset allocation. 

Why is this important??

Since your ROI has such a significant impact over the long term performance of your portfolio, I want you to really pay attention to what your asset allocation is. As  I mentioned before, for the longest time I had a disproportionately large amount of money in fixed income assets (CDs, Bonds etc) which in hindsight was dragging down the performance of my portfolio significantly. So take a look at your investments and if you have more than 6 months to a year of expenses in cash, you may want to rethink your asset allocation.  

Returns from Real Estate Investments...

So what is the ROI when you own rental real estate and why should you be considering it? Let's run a scenario for a bread and butter buy and hold Single Family Home.

Suppose I take the same $25,000  I am investing annually and purchase a Single family Rental for $100,000. Assuming cash flow of $2,500 at the end of the year after factoring in all expenses, that's a 10% Return on Investment. 

National historical average home price increase is around 3-4% annually. That's around $3,000 annually in equity increase in the property from market appreciation. Also my renter is paying down the principal portion of my mortgage which is around $2000 on average. That's total equity build up of around $5,000 annually which is about a 20% ROI. Along with cash flow, that's a whopping 30% ROI annually. So how would your portfolio grow if your ROI was around 30% annually? Can you imaging the impact this would have over time?

Withdrawal during retirement:

Before I wrap up, I also want to remind you that during the withdrawal phase (as shown by William Bengen and the Trinity study) there is a 4 % safe withdrawal for a pure stock/Bond portfolio to ensure that your portfolio lasts you 30 - 50 years in retirement. This factors in a shift in asset allocation closer to 50 - 50 in stocks - bonds in retirement to ensure your portfolio can weather volatility and also factors in inflation. What this translates to is that to safely withdraw $100,000 from a Stock Bond portfolio in retirement- you need a portfolio of around 2.5 million dollars.

Contrast this with a real estate portfolio that continues to grow at the same rate in retirement and throw out tax free money. This essentially boils down to the fact that you could have less than half the money invested in a leveraged real estate portfolio compared to a stock: bond portfolio and have the same passive income in retirement

So, isn't it about time you looked closely at your asset allocation? And found a smarter way to get to Financial Independence - one that doesn't include working more shifts or living on a budget?

 And if you haven't downloaded my Financial Independence worksheet yet where you get to figure out what your Financial Freedom Number is and how long it's going to take you to get there, click here... As a bonus, I have also included my Financial Independence numbers and how my portfolio looked in early 2021. 


Looking for Resources to help you Start or Scale your Real estate portfolio so you can hit Financial Independence faster


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