full time private investors who left their day job

[ourkid8]

Hi all,

 

I was wondering if I can get some advice from any full time private investors who left their day job to focus on their portfolio?  I have a portfolio between $500k-1 million and I am reaching a point where I would like to focus fully  on increasing my circle of competence and investing full time for myself then working a 9-5 type of job.  I have a well paying job but its not my passion at all and I do love investing and have been rather successful to date.

 

I know there are many people here who are in exactly the same situation.  What risks/ challenges or even advantages do you see in leaving your job to invest as a private investor?  Is my portfolio too small at this time to go ahead with that route? Any guidance would be greatly appreciated.

 

Thanks,

S

[StubbleJumper]

I've done a little bit of thinking about this too.  I guess the primary issue is whether you are viewing this shift as:

 

1) a means to increase your portfolio size, or

2) early retirement.

 

 

If it's #1, then you have a tough row to hoe because you have to pay your living costs out of your portfolio returns.  So, assuming that you have $1m capital and your annual living costs require a $50k draw, essentially you will impose a "management fee" of about 5% annually on your portfolio.  Now, in the context of the past five years, a 5% draw sounds like bugger-all because double-digit returns have been easily attained.  However, if you believe in Siegel's Constant and if you believe that inflation will be 1-2% going forward, then you might expect that nominal equity returns might be roughly 8%.

 

With such a high management fee, you run the risk of having to draw down your portfolio after a bad year.  So, if we hit an air-pocket that results in a 40% decline in the S&P, suddenly your $1m portfolio is valued at $600k.  But the problem is that your annual draw is still $50k, which suddenly becomes a "management fee" of 8.17 percent.  In short, there is a significant risk that you'll find yourself in a situation where your portfolio drops in value to the point where your returns do not exceed your inflation-adjusted draw.  At that point, you either need to dust off your CV and head back to work, reduce your annual draw by eating cat food, or accept that your portfolio will slowly deplete itself.

 

On the other hand, if your objective is #2 (early retirement), then it might be completely acceptable to incur the risk that your portfolio will deplete itself over the course of a few decades.  Effectively, what is the point of accumulating assets if we do not eventually dispose of them (either on ourselves or on others)?  However, before making that jump, I'd recommend that you spend a little bit of time reading up on safe withdrawal rates (SWR) which underpin the early retirement theory.  One of the better fora to obtain info on ER and SWR is www.early-retirement.org

 

 

SJ

[snowball82]

My best advices to you ...like you are my friend ...before the decision :)

 

Financials

 

0.5) pay all your mortgage, debt, credit card and have a cash amount for short time need

1) Do a budget with increase in expenses over time (don't forget your wife !)

2) have professional advices with balance sheet and budget (includind kids :))

3) own a minimum of 3 M$ with 100 k$ growing dividends in a minimum of 3 stellar companies

4)have a minimum track records of 5 years with an average return in 10-15% range

5) have a clear and effective process to invest, urgent to write it

 

Mental process

 

1) Speak with your wife and your best friend to know their opinions

2) ask yourself if after 2-3 years you will continue to like it. Doing it alone in a basement could be boring after few years... Who know ?

3) if market is flat or down 50 % for next 5 years, will you be happy with your decision ?

 

My final question to my best friend would be. Could you have one year break without pay from your boss ?

 

Hope it helps. Let me know... Have a good sucess

 

 

 

 

[rukawa]

From Snowball, Omaha 1956-58

"I had about $174000 and I was going to retire. I rented a house at 5202 Underwood in Omaha for $175 a month. We'd live on $12000 a year. My capital would grow"

 

In 2013 dollars:

"I had about 1.5 million dollars ....I rented a house for $1500 a month. We'd live on $100 k a year. My capital would grow"

 

This was the point at which Buffet originally decided to retire at the age of 26. I think its a reasonable point of reference. It should noted though that Buffett's returns in period before this (1950-56) were 61% a year!! (see Snowball p.200). So he basically retired when the odds of him ever needing an income was extremely low.

[frommi]

When you withdraw not more than 4% per year you should be safe as long as you can generate market like returns.

Perhaps you find these links helpful:

 

www.earlyretirement.com

www.mrmoneymustache.com

 

In the end it all comes down to your expenses.

[ASTA]

rukawa

Buffet did not retire he had a Hedge-fund I think about this time so if he produced more the 6 percent per year he got a "salary" so that was a help.

Regarding going out on your own depends on how much stress you can take. I could not do it as I need a stable income which I get. And kids and wife is a big sink hole that needs to be taken care of :D     

[ERICOPOLY]

I quit at age 34 with a 7-month pregnant wife, and a 2 year old.

 

My salary+benefits at the time was comparable to a 4% yield on my net worth.

 

[snowball82]

I've done a little bit of thinking about this too.  I guess the primary issue is whether you are viewing this shift as:

 

1) a means to increase your portfolio size, or

2) early retirement.

 

 

If it's #1, then you have a tough row to hoe because you have to pay your living costs out of your portfolio returns.  So, assuming that you have $1m capital and your annual living costs require a $50k draw, essentially you will impose a "management fee" of about 5% annually on your portfolio. 

 

I like your way to say it. Living cost is "management fee". So for fund managers people say 2 % is too hight. Not same context but we have to be prudent. With Last years return... everebody feel like they are Buffet :) I earn 88 % last year, more than 20 % yet this year, so I continue to work with 8 % forecast for my portfolio. We don't know futur. I or we could be down 25 % at the end of the year. We have to be humble, prudent. Just my opinion

[stahleyp]

I quit at age 34 with a 7-month pregnant wife, and a 2 year old.

 

My salary+benefits at the time was comparable to a 4% yield on my net worth.

 

 

^Quitting work and focusing on investments worked pretty well for this guy. Just sayin'. ;)

[Palantir]

You could take a job with fewer hours, or maybe something like a teacher with 2 mos vacations.

[EliG]

I plan to quit when our family portfolio reaches $2M.

 

$2M * 4% withdrawal rate = $80K pre-tax income.

 

Budgeting 25-30% for taxes, I get $56K-$60K in after-tax income. This is about what we spend now, with one kid still at home.

 

[stahleyp]

You guys who plan on retiring early and live in a fairly low cost of living area should remember that long term capital gains are federally tax free as long as your marginal tax bracket doesn't go over 15%

 

If you're married and have long term capital gains of about $94,000 or so (more if you have children), you pay no federal taxes. If you move to a state with no income tax, you're basically home free.

[StubbleJumper]

I quit at age 34 with a 7-month pregnant wife, and a 2 year old.

 

My salary+benefits at the time was comparable to a 4% yield on my net worth.

 

 

^Quitting work and focusing on investments worked pretty well for this guy. Just sayin'. ;)

 

 

Yep.  But a 4% inflation adjusted draw is also about the right level for a 30-year safe withdrawal rate.  However, it is possible that Ourkid might need a higher annual draw, which would not necessarily be consistent with a safe withdrawal rate.

 

In general, once your living expenses are down to about 3% or 3.5% of your portfolio, you effectively have enough money to never work again, irrespective of your current age.  For a 30 year horizon, 4% is reasonable, for an 18 year horizon a 5% draw is safe.  So, it just depends on how long you expect to live, and as Clint Eastwood said, "...you've got to ask yourself one question: "Do I feel lucky?" Well, do ya, punk?"  ;D

 

 

SJ

[ERICOPOLY]

By the end of 2013, my RothIRA hit a level equivalent to 100 years of my 2008 after-tax salary (at 20% tax rate).

 

Worked for 10.5 years.  Quit.  And six years later I've banked 100 years of peak-earnings. 

 

Okay, sorry.  Bragging  :D

 

Now I'll say something humbling.  It fell 10% in value during January when I decided that I didn't need the stress of managing it anymore.  So maybe it's only 90 years' now.

[stahleyp]

 

So maybe it's only 90 years' now.

 

Poor guy.  :D ;D

[yadayada]

I think the way to aproach this is to set aside like ~250k for living expenses for the next 4 years. Dont spend much. Be v frugal the first few years, which doesnt seem hard, unless you live somewhere expensive. And then put the other 750k$ in a brokerage account, that is your investing money. Now if you survive for 4 years on that, odds are extremly good you made money with the rest of it.

 

Seems to me that things have to go really badly for this to go wrong.

 

But I would def seperate investing account and living expenses account, and treat it like a 4 year experiment/risk. The 750k$ is your investing playmoney so to speak. So if there is a crash, you can still afford everything without having to sell in any bottom.

 

if you make bank like packer or eric, your pretty much set for life after a few years.

[Hielko]

I was wondering if I can get some advice from any full time private investors who left their day job to focus on their portfolio?  I have a portfolio between $500k-1 million and I am reaching a point where I would like to focus fully  on increasing my circle of competence and investing full time for myself then working a 9-5 type of job.  I have a well paying job but its not my passion at all and I do love investing and have been rather successful to date.

I don't know what your expenses are, but between $500K/$1MM it's probably doable if you don't spend too much and you are indeed able to generate some alpha. You can use http://www.firecalc.com/index.php as a quick sanity check to see how you would do if your portfolio would provide historical market results. Given current valuation levels you probably need to generate some alpha to get those results today.

 

If your portfolio would be $750,000 and your yearly spending would be $50,000 it gives you just a 20% success ratio if you would need it to generate income for 60 years. But if you only spend $40K it already increases to more than 45%. But I think quitting at this level is not the safe/conventional thing to do. You need some money management skills to make it, and it could be though psychologically if you don't have a big margin of safety. And this in turn might influence your actions and results in a negative directions.

 

Having said that; I don't think it's a bad choice, because you can probably always get a job again if things don't work out, and  there are always ways to generate a bit of income on the side if you aren't employed. I write for example the occasional article for SA, and generating a couple of thousand/year will increase those odds quoted above a lot (even if you don't generate alpha).

 

For the record; I never quit my day job, but I never started a day job either. I'm now a part time poker player and part time private investor.

[watsa_is_a_randian_hero]

I struggle with this same decision. I want an income of about $250k pre-tax for our family.  We have no kids now, but will.  Variables I consider:

 

-A withdrawal rate must be considered in the context of taxes and inflation.  I think 5 percent is something I would consider conservative.  If I cant return an average of at least 5% after inflation, the highest and best use of my time is going back to work full-time, and not portfolio management. 

-2/3 of my money is in IRA's/HSAs/401ks.  While this could be tapped without penalty via annuitizing my IRA's, this would not be the most beneficial thing from a tax perspective.

-I could go back to work if I needed to, so there is no catastrophic risk to our family if I fail to generate high enough returns.

-My wife may work once we have kids (not sure).

-I have an income from managing assets right now; this income will grow over time, and hopefully accelerate once I focus on asset management full time (reducing need for reliance on portfolio for income). 

-I could potentially have part-time consulting gigs bringing in extra money (reducing need for reliance on portfolio for income)

 

Considering all of these factors, I am hoping to have around 2-3mm before I break off, with 1mm in taxable accounts.  I am also hoping my income from asset management would grow to 25-30k before breaking off, and my wife would continue to work once we have kids. 

[cubsfan]

I did this 5 years ago, having lost my job on March 1, 2009 - during the recession. I'll tell you my experience:

 

You can't be under pressure to make money. I told my wife, if this did not work, I'd go back and find a job in 18 months.

Fortunately for me it did work. But I've seen people attempt this thinking that money would consistently roll in.

I don't measure my performance monthly - I think of my performance in 6 month increments - the longer the better.

 

You have to love doing this - or I do not think it will work - it's just too hard. Sounds like you do.

 

Much of not putting too much pressure on yourself will have to do with your "burn rate". You really need to be

comfortable with that in order to make good, long term investment decisions. So I don't know your burn rate.

I started with $1.4M - and a high burn rate - around $150K per year. If your burn rate is significantly

lower than mine - it may work with your amounts.  But I figured I needed to make approx 10% in order to stay even.

And it worked out far better than that - so here I am 5 years later - with the best job in the world.

 

You have to KNOW that you will have a bad year and lose money. That will suck and you'll get depressed - I had periods during

the summer of 2010 and 2011 - where it was very hard mentally because of the paper drawdowns that happened with

the European banking crisis. You need to be able to make it through those periods mentally - and it won't be fun.

It will put pressure on you - you need to know you can handle that.

 

So far, I am waiting for that big down year - it has not happened yet - but it's coming.

 

Something that helped me a lot - a couple years ago - I put 200K aside, essentially for the next 18 months "operating expenses".

That helped me a lot mentally rather that withdrawing money from investment accounts to constantly fund living expenses.

 

Also - from DAY 1 - I set aside $25K/yr for education, seminars, subscriptions.

I did not have an accounting, finance or investment background - I came out of software sales.

So while I had capital - there were important aspects that I did not have.

But it was very important for me to not cut corners and treat this like a business - and make the proper investments in my skill development.

 

These are just some random thoughts - I hope they help - good luck!

[Hielko]

I started with $1.4M - and a high burn rate - around $150K per year. If your burn rate is significantly

lower than mine - it may work with your amounts.  But I figured I needed to make approx 10% in order to stay even.

I think this implies that you need to make a decent bit more than 10% to stay even because of the volatility in your net worth. If you get a bad year that $150K withdrawal is a lot bigger than after an up year, and you would need to make a lot just to earn that back. If the first year would be a -40% year you would start the second year at 0.84 million. Spend 0.15 million and you need to get a 21% return just to get back to 0.84 million. That's why I linked to that Monte Carlo calculator a few posts above. Volatility matters!

[james22]

I'm quite certain my returns would suffer were I to invest full-time.

[StubbleJumper]

I started with $1.4M - and a high burn rate - around $150K per year. If your burn rate is significantly

lower than mine - it may work with your amounts.  But I figured I needed to make approx 10% in order to stay even.

I think this implies that you need to make a decent bit more than 10% to stay even because of the volatility in your net worth. If you get a bad year that $150K withdrawal is a lot bigger than after an up year, and you would need to make a lot just to earn that back. If the first year would be a -40% year you would start the second year at 0.84 million. Spend 0.15 million and you need to get a 21% return just to get back to 0.84 million. That's why I linked to that Monte Carlo calculator a few posts above. Volatility matters!

 

 

Yes, I would never recommend that people begin with a 10% withdrawal rate.  For this to work, historically, you would need to have begun such a strategy during a "lucky period" where double-digit returns just seem to automatically roll in, or you would have needed to be a superinvestor who can regularly generate significant alpha.  Personally, I like to believe that I can generate a little bit of alpha, but realistically, I am just not a good enough investor to fund a 10% inflation adjusted withdrawal rate.

 

For this reason, I would encourage anybody who is considering an early retirement or full time asset management to carefully read the literature on safe withdrawal rates.  That literature will demonstrate the historical outcomes of an average investor managing a portfolio with a given annual inflation adjusted withdrawal.  For an average investor, given the level of historical volatility, a withdrawal of no more than 4% has been sustainable for a 30 year period.  If anybody is seriously contemplating a 10% withdrawal, they need to have a strong level of confidence that they can routinely generate significant alpha (and frankly, I know of very few investors who can actually generate that much alpha year-in, year-out).

 

The alternative is that you can roll the dice to see whether you are beginning your withdrawal during a "lucky period."  You'll probably know within 5 or 6 years whether you are fortunate in your timing.  If you are unlucky, then you could possibly return to work.  The only problem with that is that you might end up returning to the labour market for a much lower salary than what you had 5 or 6 years previously.  To a certain extent, it might make more sense to work for an extra year or two at your current high salary than to face the prospect of returning to the labour market at a potentially much lower salary.

 

 

SJ

[obtuse_investor]

I'm quite certain my returns would suffer were I to invest full-time.

 

I am glad you brought this up. I tend to completely agree with you.

 

There is an assumption being made that more time spent investing/researching would increase results, or at least, not harm them.

 

Personally speaking, it is excellent to have something time consuming (like a 9-5 job) that I can simply dedicate my attention to when I don't have anything to do in the market. If I didn't have that "distraction" from the market, I would probably be far more active than not-- there by lowering my rate of return. But maybe this is just me.

 

If and when I run into this high class problem of retiring early, I will make sure I take on time consuming hobbies.

[rayfinkle]

I quit at age 34 with a 7-month pregnant wife, and a 2 year old.

 

My salary+benefits at the time was comparable to a 4% yield on my net worth.

 

Eric are you looking gross pretax or net after tax? For example a $200k salary vs $2m saved I assume implies a 10% yield-- assuming the 200k number is fully baked with benefits, etc.

[mhdousa]

By the end of 2013, my RothIRA hit a level equivalent to 100 years of my 2008 after-tax salary (at 20% tax rate).

 

Worked for 10.5 years.  Quit.  And six years later I've banked 100 years of peak-earnings. 

 

Okay, sorry.  Bragging  :D

 

Now I'll say something humbling.  It fell 10% in value during January when I decided that I didn't need the stress of managing it anymore.  So maybe it's only 90 years' now.

 

Eric, who did you farm out the management of it to?