The path to a Billion Dollars.
The Great Investment Experiment
Hello there! my name is Shadow, I currently work as an investment professional in London for one of the largest asset managers in the world. The content I am about to publish here, would probably not be taken lightly by my firm and hence my use of an alias.
Currently I oversee over 10 Billion Dollars in assets for professional clients around the world. We have a very conservative approach to money management and the experiment I am about to take is anything but conservative.
Lately I have been watching influential personal finance YouTubers talk about how to responsibly invest in the stock market. To put this simply, when you are at your twenties, if you invest $100 every month in an index fund, by the time you retire you will reach a whopping one million dollars.
I like this idea. it is simple, responsible and easy to implement.
But is it realistic?
The underlying assumption in the above statement is that the stock market will return the same annual compounded returns as it did previously — in this case around 12% a year.
As we look at historical data, we do come close to this in some markets — the Nasdaq 100 and the S&P 500. However, some markets are not even close. For example, the Nikkei has gone nowhere for the past 30 years and is unlikely to break its all time high any time soon (more on this is future posts). Some markets do go up, but not at a 12% annual rates — the FTSE 100 has been yielding positive returns when including dividend income but this is not even close to what we need to show the full power of compounding.
In fact, in today’s financial modelling practices in top investment banks, modellers would use a 4.5–5.5% expected return when using valuations. so even the top bankers do not believe we can get close to the above. At this rate of return, the total investment at retirement would become around $200,000 — smaller by a factor of 10.
Why this is down so much? Well there are a few reasons — economic growth is slowing, technological growth is slowing, interest rates have gone to zero leading to multiple expansion and rich valuations, etc. My own opinion — the financial markets are just getting more efficient. In the past, it was easy to make money, now it is hard. As simple as that!
So if markets are efficient, forward looking returns are looking disappointing and compounding does not seem to work as well, how can we still become millionaire when we retire? To make it more interesting, how can we become Billionaires? not the usual personal finance article now eh?
I thought about this a lot — I truly believe in efficient markets and I do not think there is way to beat them and earn abnormal returns. For me, the only way to make a lot of return is to take a lot of risk (CAPM is the secret sauce after all).
But how do you take a lot of risk?
Well… so we begin. I will use this platform to debrief, plan, execute share and work towards a Billion Dollars in the next 40 years. I am using real money and sharing my real statements from my brokerage accounts. In each post I will attempt to cover current market news and explain how it is affecting my portfolio. The systems, investment strategies and trades I am about to show are extremely dangerous and involve substantial amount of risk — this is not for the average investor and I am in no way recommending this as a personal finance plan. Furthermore, this is exactly the opposite of how we invest at my firm and may not even be suitable to the most sophisticated investors.
Why am I doing this?
- Document my journey.
- Hopefully stimulate more discussion about unconventional ways of managing investments.
I have used the Covid-19 crisis as a catalyst for me to start this and have bought into the market at the beginning of April with around $160,000 (shortly after the market bottomed).
Portfolio’s Net Asset Value: $310,000
Have a great week and see you in the next post.
