Over the past couple of weeks, I have been traveling through Portugal and have met some very nice people. And once they find out I’m a life coach, many of them have become very interested in any financial advice I can provide to help them create a brighter future. So, this inspired me to write the “Joe Brennan 6-Step Process to Financial Success” with minimal effort:
1. Get into the practice of automatically saving a minimum of 20% of everything you earn – wages, gifts, tips, whatever and open an online brokerage trading/investing account to place your money in such that it earns a decent interest rate (I earn about 5% interest via my Fidelity standard trading account). The reason this is important is because you don’t want to fall behind inflation when saving money. A lot of banks pay much less interest than online brokerage trading/investment accounts do. The 20%+ automatic savings is important because it forces financial discipline – resulting in a greater ability to accumulate financial wealth and achieve financial freedom much sooner than would be experienced otherwise. In fact, if you have kids and get them into this practice at a very young age, then this would serve to not only benefit them, but you as well since you won’t have to worry so much about their finances and they won’t have to rely on you as much in the years and decades to come. The earlier you start saving, the less of your overall income percentage wise you would need to save over the years of your life. I generally recommend 20% for people who start at the age of 20 and increase it by 1% per year if they start later than age 20. So, if you start at age 24 you need to save 24%, if you start at age 31 you need to save 31%, and if you start at age 41 you need to save 41% for the rest of your life. So, the earlier you start, the less of your overall income you have to save percentage wise over the years of your life. So, if you start at age 20, you can save 20% for the rest of your life and be in good shape financially speaking – but if you start at age 34, you’ll need to save 34% for the rest of your life. So, the earlier you start, the better. And the percentages above include any matching funds or financial incentives your employer might provide (some employers provide up to 5% or so of matching funds and such for retirement plans).
2. Track one of the major stock market indexes representative of the overall stock market. In the United States, I like to track the S&P 500 index [SPY is an Exchange-Traded Fund (ETF) that tracks the S&P 500 Index]. When the major index falls 10% or more (I’m a very low risk investor so I will wait for a 25% drop), check the other major indexes and see which one has fallen the most. In the United States, frequently the Russell 2000 index (IWM is an ETF that tracks this index) falls much more than the S&P 500 index – especially, when a recession is expected. A 5% drop in the S&P 500 index generally happens about three times a year, a 10% drop generally happens about once a year, and a 20%+ drop generally happens about twice every five years. A lot of times major stock indexes will decline more once they drop 20% (defined as a bear market). However, the recovery is often swift. So, you want to be fully invested fairly soon after that happens. Otherwise, you can miss out on substantial gains. Just for some points of reference: a 25% drop results in a 33% gain once the index or ETF gets back to breakeven, a 33% drop results a 50% gain once the index or ETF gets back to breakeven, and a 50% drop results a 100% gain once the index or ETF gets back to breakeven. So, waiting for a drop before putting money to work can be greatly beneficial while being fully invested when a drop happens can substantially hurt your finances. This is why avoiding investing at the top can be an important factor for your overall, financial well-being (e.g., if you experience a 33% drop, you need a 50% gain just to get back to even, and if you experience a 50% drop, you need a 100% gain just to get back to even).
3. Move your accumulated savings to date into the ETF you have selected in Step 2. As long as this ETF continues falling or rises somewhat, keep putting your new savings into the ETF.
4. Once your ETF gains to the point to where it approaches the all-time high (or if you are a higher risk investor, you might wait for additional gains before selling or not sell at all), stop putting your new savings into the ETF and just keep it in your online brokerage trading/investing account earning the standard interest rate.
5. Only pull money from this account when gains are experienced and only for that which invests in your future such as a down payment for a house, educational expenses likely to lead to a higher paying job, rental properties as an investment, a new business you want for yourself, or after reaching your long-term financial freedom or retirement goal.
6. Repeat steps 1-5 for any new savings accumulated.
The above is a simplified process which might be helpful for some of you. If you are in your mid-thirties or so (or even less – the younger you are, the better you will likely do over time), then this process should get you where you need to be in your life financially speaking. However, there is never a guarantee, and you might want to adjust this process. If you elect to take a higher risk approach, then you can earn substantial gains if you wait things out – although you might experience substantial losses in the near term. If you elect to take a lower risk approach, then you may not experience substantial losses in the near term but will probably not make as much in gains over the longer term. For example, a higher risk investor might start moving savings after only a 10%-15% drop in the major index and stop investing new savings once the ETF hits its all-time high (or above) while a lower risk investor might start moving savings after a 20% drop or more in the major index and stop investing once the ETF gains to the point that where it is about 5%-10% from the all-time high.
The above process guarantees that you never invest at the market top. It also ensures that you invest early enough in bear markets so that you will hopefully, eventually, earn substantial gains.
The reason the above process should work well for many people is that in the first few years of investing, the amount saved matters much more than the actual gains or losses experienced in the stock market. So, people can just save and wait for a substantial stock market drop to invest and will probably do pretty well over time. Once savings have been accumulated for a few years or so, then the gains and losses experienced matter increasingly more over time and a lower risk investment approach will probably be more appropriate.
The above process is not perfect, but give it a try, make adjustments over time, and if you need help with any of this just ask.
You can learn about all of my investing techniques via my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books where you can learn the “end to end” process to investing: https://brighterdayslifecoaching.com/published-books-and-life-coaching-services/.
Also, you can read all about my stock market activities here: https://brighterdayslifecoaching.com/stock-market-activities
I wish you much investing success for 2024 (and beyond!).
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