Given a reasonable rate of return utilizing your investment strategy, how much capital would you need to become financially independent? Don’t think about some obvious huge number but what is the borderline number that would enable you to start thinking about it? $500,000? $1,000,000? $2,000,000? How much capital to provide an ample return needed to pay your bills and live a “good” life?
I became financially independent in 2008 at age 27, and back then I remember asking myself these same questions. I looked at my A account, my expenses, did some quick math using an expected compounded rate of return into the future, and decided it was time. It was that simple, so it seemed. It’s human nature to think highly of our abilities and to overlay the success of the past onto the future. We look at the future and see unemotional, consistent, up and to the right returns, described best in my penned chart below:
A couple years after I became a full-time investor I hit a rough patch, and I quickly realized the simple questions above weren’t the right ones at all. The following ones were:
What if my portfolio is down 20-30-40% next year and still drawing down on the capital base to pay bills? How would this affect me emotionally, psychologically? Would two or three bad years in a row cripple me? At what point would my investment strategy start to crumble by these emotions? At what point does my advantage of “focus on the long-term” shift to “this next quarter needs to be good” because I have bills to pay? When will it start affecting my communications with management, bugging them too much, because damn it I need this next quarter to be good? Am I mentally prepared to perhaps go to my wife and tell her I failed and can’t support us anymore? That I need to get a job, that she needs to get job. This set of questions are the real ones, and they can be paralyzing.
The chart below is reality. One that hasn’t been smoothed over by the CAGR in our minds:
Now that I’ve completely scared you off from being a full time private investor, let me tell you that financial independence is amazing. I will take it a step further. Not having to deal with bosses, customers, employees, clients is amazing. The thought of never having to wear a suit ever again, except for my daughters eventual wedding, is amazing. The time I’m able to allocate to honing my craft (microcap investing), making an impact (MicroCapClub), and spending time with family is worth the stress.
The first step to becoming a full time investor is realizing money is about freedom not consumption. The freedom you gain when you become a full time investor is worth 100x the income you lose when you leave your job. The motivation isn’t greed, but having the time to pursue your passion or purpose. You’re never going to be great at something you do part time. You need to see what you are fully capable of without restriction. It’s this determination that allows you to look at the second set of questions above and say, “Yes, it’s worth it”.
If you enjoyed this article, please read: So You Want To Be A Full Time MicroCap Investor?, Getting Started, You’re Smarter Than You Think, The Maturation of an Investor, and Protect Yourself From Yourself.
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