Welcome to Year 9 of of our 15 Year Millionaire Series. If you are new to compounding returns, make sure to sign up free to our RSS Feed or Email Newsletter.
So far we have covered the first 8 years of our plan to become a millionaire in 15 years. To read the rest of the series, please visit The 15 Year Millionaire Series.
The intent of the 15 Year Millionaire Series is to provide a step by step guide to building a million dollar net worth in only 15 years. This extremely ambitious wealth building program is designed to show how through very simple sacrifices and deferred gratification, it is possible to build wealth quickly and in the most tax efficient manner available.
Throughout the series, we use examples of a "typical participant". We also make numerous assumptions about historical rates of return and annual pay raises. We understand that these factors are impossible to predict, but they reflect the best historical estimates and provide us with a benchmark off of which to base our financial plan.
Using these benchmarks, at the end of each post we have included a financial summary for each year of the series. The purpose of this is to provide readers with an idea of how quickly one can build wealth through the strategic use of the techniques discussed in the 15 Year Millionaire Series.
Working the Plan:
Throughout the last several years of the 15 Year Millionaire Series, we have challenged you to consistently raise your savings rate in an amount proportional to your annual raise.
While this is an excellent strategy to employ throughout your career, at this point in the series, the 15 Year Millionaire Participant has achieved a savings rate sufficient to build a million dollar net worth in the 15 year timeframe.
At this point in the series, it is time for the participant to begin a new series of challenges. In Year 9, it is time for the 15 Year Millionaire participant to take a close look at their current portfolio and ensure it is invested appropriately.
Diversification Challenge:
Throughout the 15 Year Millionaire Series, participants have invested in a 401(k) plan, Roth IRA, 529 Plan, and a taxable brokerage account. During year 9, these account balances have likely become significant, and as we get closer to year 15, it is important to review your level of risk and asset allocation.
Are You Diversified?
Whether you are an active or passive investor, it is important to know precisely where your money is invested, and the level of risk associated with these choices.
If you are a passive investor, it is important to review the allocation of your mutual funds and ETFs.
If you are an active investor, it may be time to look at your holdings to determine whether you are holding too much company stock, or too much stock in one sector of the economy or even one part of the world.
Most people believe themselves to be adequately diversified across the board, and yet are unfamiliar with the holdings of their favorite mutual fund or ETF. That's why, in year 9, it is time to do a little research into your portfolio and determine whether your risk is appropriate to your age and financial strategy.
Age Based Asset Allocation:
For most people, risk is much more acceptable over a long time horizon, which is why for many people the most simple and appropriate strategies for measuring whether you are adequately diversified is the age based measurement.
One simple strategy is to subtract your age from 100 and split your assets accordingly.
For example, if you are 25, you should hold 25% of your portfolio in conservative fixed income assets and 75% in stocks.
We like this strategy because it is simple, easy to remember, and prevents people from making egregious errors of asset allocation.
Diversification Within a Stock Portfolio:
After reviewing your asset allocation, you will also want to take a look at your stock portfolio.
A well diversified portfolio will have as many stocks as the investor can actively monitor and track, which is why for most of us 10-12 individual stocks is around the most we can handle without losing track of the company's performance.
Within this portfolio, it is important to hold stocks in different industries, sectors of the economy, and regions of the world.
There are as many theories on what percentage you should hold in each type of stock as there are investors, and so we will not bore you with the "rules" of modern portfolio theory. The most important thing is to give yourself a gut check to ensure that your eggs are not all in one basket, that you are diversified across different sectors of the economy, and that you are invested overseas as well as domestically.
15 Year Millionaire Stats: End of Year 9
As promised, each week we will offer another set of tips and challenges for becoming a millionaire in 15 years, along with tracking the effect of these changes and strategies over time. By following the 15 year millionaire plan, your accounts and net worth will be somewhere in the neighborhood of the following. (Assuming that you began the plan within the parameters described in the first post of our series. All changes instituted throughout the program remain in effect. In addition, we will assume a 5% annual salary increase as well as the following: 10% annual stock market returns, a 1.5% return on savings, and a 3.0% annual increase in the value of real estate.)
Salary: $73,870.00
Bank Account- Emergency Savings ($300.00 per Month): $33,734.54
Bank Account- Down Payment on a Home: $0.00
Debt- Mortgage: $51,370.00
Real Estate Value: $184,480.00
401(k) (15% Contribution + 6% Employer Match): $184,071.00
Roth IRA (Max Contribution): $73,615.30
529 Account ($200.00 per Month): $8,448.00
Bank Account- Itemized Savings ($275.00 per Month): $20,360.90
Taxable Brokerage Account Balance ($200 per Month): $5,280.00
Net Worth: $458,619.74
Next Week's Post:
This week, we focused on diversifying our investment portfolios. Next week we will look to diversify our income. Click here to read Year 10: Diversify Your Income.
Photo By: Vincent Desjardins
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