“Eat your betting money but don’t bet your eating money.”
Even though we hit our FIRE (financial independence, retire early) target at the beginning of the year, my Apple News feed seems to think that I am still looking for quick ways to make a buck.
I mean…I am…it’s in my blood…
Joking aside, there are all sorts of click bait articles out there which seem designed to convince you that you can make truckloads of money overnight just by investing $1,000.
Such as this one. My feed is full of them, but I don’t want to belabor the point and have you fall asleep at your keyboard and short it out from drooling into it. I promise I don’t speak from personal experience on this one.
Still, the point is that if you’re enticed to believe that you’re going to be the next whiz kid (or whiz adult) who manages to make the miracle investment and turn $1,000 into $1,000,000, you’re going to click on those articles, give those sites ad dollars (hey, no shame there…this site is chock full of Google ads and Amazon affiliate links…gotta pay for the hosting somehow), and, almost certainly, wind up disappointed.
Why will you wind up disappointed?
As of 2012, a study showed that the average investor underperformed the market by 4.3% and that only approximately one in twenty investors actually beat the market.
Remember, by the time you’re taking the advice of whatever Jim Cramer tells you to buy, he and all of his buddies who have access to much better information than you do have already made that investment, and you’re last in line. You’re PT Barnum’s next bigger fool.
Yes, I get it that the Cramer trust doesn’t make investments until a couple of days after he names something, but look at how many talking heads on CNBC or authors at Seeking Alpha are already long/short whatever they recommend you buy/sell.
Furthermore, you’re almost certainly not going to turn $1,000 into $1,000,000. You’d need to double your money almost ten times in order to turn $1,000 into $1,000,000. If you have that sort of crystal ball, you’re Johnny Carson.
Let’s look at this a different way.
Aqua cavat lapidem non vire, sed saepe cadendo. (Water hollows rock, not by force, but by constantly dripping.) – Latin proverb
Let’s say that you want to FIRE and have a 40 year retirement. That would lead you to need a 3.4% safe withdrawal rate.
To spend that $63,036 per year during a 40 year retirement, you’d need about $1,854,000.
You’d need to double that $1,000 investment nearly eleven times in order to hit that number.
To put that into perspective, let’s say that, POST PANDEMIC, you walked into your favorite casino and plonked down $1,000 on black.
You have a 46.37% chance of doubling your money, which is WAY better than you have in trying to get rich by following gurus’ investment ideas.
So, let’s just say that you decide that if it hits black, you’re going to let it ride and hope that the roulette wheel is super hot and will hit black eleven times in a row so that you can walk out of that casino (assuming the pit boss doesn’t hunt you down and make you sit in a windowless room for several hours explaining how you knew that it was going to hit black eleven straight times) and retire.
What is the probability that you’re going to walk out of that casino and straight into retirement?
Two times out of ten thousand.
That is the same odds of any randomly chosen women’s college basketball player getting drafted in the WNBA.
Feel like Sue Bird? Crushing on Megan Rapinoe?
Perhaps a live example will help show that hitting a massive, life-changing home run is really hard.
Long-time readers will know that back in April, 2020, we tried for a moonshot by buying a bunch of LEAPs to take advantage of what we thought were once-in-a-decade(ish) buying opportunities.
How has that turned out so far?
As of the time I started writing this article, that moonshot set of investments was up 144.5%.
Note that one of those investments has already, for all intents and purposes, gone to zero.
Also, only one of those investments is currently in the money, and it’s barely in the money. This is almost all still time value in the options, so this is all paper returns for now.
But, for the sake of this discussion, let’s see how it really impacts us.
If our entire net worth aside from this moonshot stayed constant, then our net worth, if this was a 5% of our net worth moonshot, would be at 102.3% of what it previously was.
For that moonshot to double our net worth, we’d need nearly a 20x return.
The chances of that happening are between slim and none.
Let’s say that Fates are kind to us and we double this moonshot again, and are up 300% by the time the options expire.
Now, let’s convert that into the average family’s 40 year FIRE that I discussed above would look like.
They would need $1.834MM to retire and spend $63,036 annually.
If they took 5% and did a moonshot investment that got them a 300% return on investment, they’d add $275,100 to their net worth.
That would mean that they could, theoretically, go from $63,036 in annual spending to $71,709.40 per year.
That’s a couple of very nice vacations, but it’s not time to start singing “I’m on a Boat” as you’re launching your new yacht.
Swinging for the fences with your investments in an attempt to shorten your path to FIRE is almost certainly only going to pour a bucket of water on your FIRE ambitions.
The better approach is to not swing for the fences, but, rather, to increase how much you’re saving. Your much bigger and better lever to get to FIRE is your savings rate, not your rate of return.
The problem with expecting a moonshot to truly light your FIRE (don’t you hate these puns?) is that, even if you do hit a home run with your investment, you’re only using a whiffle ball instead of a giant Zorb ball. You’re not investing enough in the moonshot to truly catapult you there. If you can raise your savings rate from 10% to 20%, you’ve already, effectively, doubled your returns, since your numerator is now much larger. If you decide to push all your money in the middle to try for a moonshot, then the most likely outcome is that your pile of money is going to wind up in someone else’s stack and you’re going to have to start all over again.
When I spoke with my wife about taking our moonshot in LEAPs in April, the discussion revolved around the following tenets:
- We could afford to have that investment go to $0 and not affect our lifestyle
- I thought this was an opportunity to get a five bagger (e.g., a 400% ROI)
- That net gain in net worth, if my investment thesis was correct, would enable us to increase our lifestyle at the margins, e.g., more travel, more dining out, not buy a jet and live a baller lifestyle
All of these click bait “invest $1,000 and get GREAT returns” articles won’t get you to FIRE any faster. Instead, they’ll kill your FIRE dream with a death by a thousand cuts. The better approach is to save more to invest $2,000 instead of $1,000.
- John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.
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