Are you planning to buy a home when you turn 30? Will you be buying it as a single or couple? These are some big questions for which you may have a vague idea of how you’re going to execute your plan.
When a goal seems daunting, e.g. building a 6-figure investment portfolio, one way to think about it is to reverse engineer the process. This concept was highlighted by blogger Money With Katie, who illustrated how allocating $100 every month on “miscellaneous spending” can mean when you realise how much you’ll need 20 years from now to produce that $100.
Private investor Max Koh, whose investment portfolio crossed the $1-million mark when he was 29, finds this approach helpful and is something he adopts too.
The 32-year-old shares, “I start with how much money I would need to comfortably sustain my expenses yearly. Then I work backwards to shoot for a net worth goal. That’s how I started my investing journey.
“The only issue with the 4% rule is that one must be comfortable with volatility. Because during drawdowns like now, taking out a % of your net worth can still be a scary thing when you’re selling your ETF shares that have been corrected.
“So yes, it’s a good rule. But I need to add in some active income to help give more buffer.”
What does it take to be successful with your investing goals, then?
To build the ability to stick with investing in the long run, Max says it’s crucial to understand what the stock market is and how it works so you’ll have the confidence to stick to your plan.
It’s also important to know how the 4% withdrawal rule originated, what has changed about the economy since then, and the backtests of the data. Knowing that information would be a good starting point as you evaluate your options for wealth planning and accumulation.