I sometimes write articles on more overarching, philosophical, and esoteric issues that investors face. While overarching, this one is neither philosophical nor esoteric.
This is a very real issue that many investors face, and it causes many investors to "fail", losing money and falling back down in terms of their net portfolio value.
In this article, we'll talk about the issue of moving from one "tier" of income or net worth to the next, and the challenges that I as well as others face.
You may remember the article where I wrote about having reached one of my initial investment goals, in when my investable portfolio assets, or my "cash", went above $1,000,000 a few weeks back.
This is a significant milestone for many investors. It's one of those things that many of my readers, friends, and even clients speak about. How to become a "self-made" millionaire. In Sweden, the sum of course isn't 1M SEK - that would be equivalent to about $120k. Instead, it's around 6-8M or so, where people would go ahead and consider themselves "really rich", even if some may consider that 1M SEK to be a good indicator as well.
The point is, getting there and what to do next, is hard. Incredibly hard.
So let's look at what we can describe as the challenge in this context.
The journey of making your first million is an absolutely brutal undertaking.
I remember well the day I started, and I scrimped, saved, worked, and learned for the next 8-9 years to get there. For some, that milestone passes unnoticed, and the entrepreneur or investor just sort of "doesn't care" and moves on, as money isn't that important.
That wasn't the case for me.
I don't view myself as an entrepreneur, necessarily, though I would like to consider myself as such in the future.
I run companies, but they're not massive, nor do I currently intend them to be. They are more vehicles to sell services that I personally offer. I knew from the get-go that my main consulting company would never even break the $1M mark in overall revenues because I wanted to keep my COGS low and my services to an overall extent where I could still manage things myself without outside interference or assistance - it was the best way for me to make money, but the idea isn't necessarily all that scaleable.
Because of that, reaching $1M in my personal portfolio was a matter of putting aside savings, reinvesting, and being very strategic for a very long time, with many, many mistakes along the way.
Some put their savings in a company, and that company balloons to $5M overnight - not the case for me.
I believe that regardless of how you go about it, reaching that first million will always be a brutal undertaking.
However, once you find yourself in that situation, the question that usually arises as a result of this is:
For some time now, I knew that I didn't want to stop working.
I knew that I'd want to continue being active, making money (aside from dividends), learning, and growing as an individual. It's who I am. If I woke up and didn't know what to do that day, I'd likely grow restless within 30 minutes.
However, being a very goal-oriented person, what you're faced with is that the next "step", in my journey of reaching $5M, and then $10M in your allocated/investable capital, is invariably similar as brutal as the first million.
Even with your capital now growing conservatively, and you reinvest the dividends, very little has changed in terms of your income power and how you tend to allocate the capital.
One difference, you definitely have more to fall back on. The way that growth tends to work, you won't grow $1M into $10M in 10 years, even inclusive of your similar deposits of $50k/year (or whatever you can spare) by investing in blue-chip dividend-paying stocks in 10 years. The annual growth rate of 5-9% usually offered by the market simply isn't enough to produce this. At an annual contribution of $70-80k a year, just reaching the second million may take you around 10 years.
You may reach your $10M goal in 20 or 30 years in such a way, which at my age will put me at retirement once I do so.
Now, one thing is true.
Once you reach your first million, much of the heavy lifting is taken over by that capital, with you mostly reinvesting into similar stocks or investments as before.
I can attest to this, looking over things today in terms of my investments.
This part of the article is about the challenge, and the challenge I see is this. The way to reach $1M or $10M conservatively is roughly the same fashion, with little space for shortcuts or alternative investment strategies that don't hold major risks for you.
The same things that spell true at $1M still do at $5M. Any sort of major setback could take a long time to recover from. If 10-20% of your portfolio is wiped out, that's incredibly serious.
Indeed, A lot of entrepreneurs and people who succeed put "everything" on the line, essentially mortgaging their lives and put it into the business they're trying to create. What too often goes unsaid is that only a quarter of all businesses actually manage to go past 15 years, leaving unsaid how successful they actually are (Source: U.S Bureau of labor statistics).
Those aren't very encouraging odds.
You shouldn't, at least in my view, be too concentrated or undiversified at that point. Diversify away some of the market risks. You can't diversify away all risk, and certainly not individual company risk, but you can diversify away certain amounts of market risk by having at least 40-50 investments in your conservative portfolio, which is my target.
However:
Once you do reach levels of $8-$10M, investment usually becomes a different sort of ballgame for most people.
It becomes more about strategic capital allocation as opposed to investments.
Some, at this point, become "Angel Investors" or subscribe to similar approaches. I have friends who have done this. Some start businesses on the side or invest differently than before with new capital. It's a similarity seen in both new and more experienced investors, and it's one thing large investors such as Kevin O'Leary from Shark Tank speaks about.
According to him, the first million is brutal, the first five are equally hard, and after your ten, it essentially takes care of itself because of the amount of capital "force" you have at your fingertips and can deploy.
At that point, the principal generates even at conservative levels annual interests of $300k-$500k, which even considering some lifting of your living standards and "luxury" is enough to start pushing capital around in a way that's not conceivable when that number is 10% of that, and when a loss of $400k-$500k could either wipe you out for years or set you back.
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