A Little Light at the End of the Tunnel

11 Jun 2018 21:54
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This month marks and interesting milestone for me. As of now I am no longer counting double digit years until financial independence and now have 9 years left to my goal! And the best news of all is that I am exactly on target.

To achieve financial independence I need to replace two-thirds of my income and currently have replaced one-third of my income with passive dividend growth. If all goes well, I can continue to grow my passive income by 10% annually and hit the mark dead on. Of course this success has not come overnight but represents 30 years of saving and investing with the last 6 years converting my portfolio to a dividend growth strategy. Initially it was not an instant success and mistakes were made. Luckily the mistakes were early and small enough amounts that it did not de-rail my efforts.

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As the old saying goes you have to break a few eggs to make an omelet and here is a list of the mistakes and lessons learned during that time:

1. Chasing High Yield

Yep this was an early guilty pleasure but the pain of a falling knife hurt more. Luckily stumbling out of the gate this early did not act as a deterrent. Instead I went back to the basics by going back to my Accounting 101 days from college to tear into financial statements and built this into my investing rules. Yes I did save my AC101 college text book from so long ago and I am so glad I did. I still refer to it on occasion and it remains one of my most valuable books

2. Investing in What You Don’t Know

After fixing the chasing yield problem I thought I had my act together by incorporating financial statement analysis but this did not apply to commodities and I learned the hard way after investing in iron, mining and oil stocks. With commodities a strong financial statement is a small component of selection and what you really need is a strong understanding of commodity markets (which I did not have). Boy did I time this wrong and invested at the top of a cycle, when it dropped it was ugly. To this day I still wince at the topic and have avoided commodities since. I am not saying commodities are bad but if you do not invest the time understanding commodity markets then you are playing with fire.

3. Buying Stocks Too Early

This is not timing the market as much as it was buying stocks without understanding how it should work with my goals. The issue was two-fold; first I placed too much urgency on diversification and second my goals & strategy were way too broad. In regards to the later I did not do the hard math to understand exactly how and when I needed to invest to meet my goals. This lead to me creating my dividend yield to dividend growth rate combinations that I needed to meet my goals.

4. Not a Tax Efficient or Beneficial Portfolio

For the first 20 years of saving & investing I made the mistake of placing 90% of my investments in a 401K which locked in my money till age 59 ½ and when withdrawals are made they are taxed as ordinary income. I should have just contributed just enough to the 401K to get a match and then split the rest up evenly between my regular brokerage account and a Roth IRA. I did not realize this until 2010 when I was watching friends get laid off and I thought about how would I get by if I was laid off? Better late than never but I started a Roth a few years back and thankfully I still have 9 years left to invest.

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Looking back I can see how each one of these lessons influenced my investing rules and I was fortunate enough to recognize the issues early and course correct accordingly. I am sure there are more lessons to come but hopefully they will not be that painful. With only 9 years left to my early retirement it is getting pretty awesome that I can see some light at the end of the tunnel.

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