Wondering if you can become a full-time investor? The short answer is yes, but it takes a lot of hard work and a solid starting point. It is especially hard in recent years as the typical rates for interests or dividends have dropped from 10%-8% to closer to 4%, according to About.com. Here are the three big steps you need to take to become a full-time investor:
1. Get Rid of Financial Baggage
Via Flickr by CDS Infographics
To be the kind of investor that can quit your 9-5 job, you should work on a few financial things:
Get Out of Debt
If you still owe money on credit cards , you aren’t ready to think about investing as a full-time job. In fact, you may also want to pay off your mortgage and all other debts first so you aren’t burdened by these obligations if your investments go south.
Create (and Follow) a Solid Money-Management Program
You must be able to limit your current income in order to reinvest it for future income. You also need to be completely aware of what your worst-case financial situation would be so that you can calculate how much money you need per year.
Save Enough Capital to Begin Investing
Finally, you need to have enough capital to invest so you can live off its interest or returns. While that is easy to say, it is much harder to do. Especially since a wise investor will only live off of 4 percent of their stock portfolio, which means you need over 1.5 million dollars invested to get $60,000 a year, a comfortable annual income.
2. Create a Nest Egg You Can Thrive On
As you may have gathered, the hardest part about living off your stock portfolio is creating the initial investment funds you need. Here is what you can do to create that huge nest egg:
Reinvest Dividends and Interest
While you are going to live off your dividends and interest later, now you need to invest it so that this money can grow. If you need more motivation, check out this chart from Get Rich Slowly. By reinvesting the dividends every year, $100,000 turned into over $300,000.
The earlier you start, the earlier you can become an independent investor. With good saving and investing strategies, you can reach your $1.5 million goal and be entirely independent in a few decades.
Diversify Your Portfolio
Know how to protect yourself from losses while gaining the highest return possible by diversifying your portfolio. For that reason, you do not want to choose only dividend stock options. Bonds are also a good idea, as are equities, especially if you are looking at long-term investments. For example, Joshua Kennon from About.com’s Investing for Beginners Guide suggests putting one third of your investments in dividend stocks, one third in short-maturity bonds, and one third in real estate.
This step and the second work together simultaneously. As you collect and invest savings for your job-free days, you can also work on eliminating debt and creating a structured budget.
3. Quit Your Job
You can quit your job at the crossover point. This is when your investment returns become greater than your expenses. Note that while all your investment returns may reach this point fairly early on, you don’t want to regularly take out all your dividends. You want to keep these investments reinvested and growing for years of income, so cap what you withdraw to the golden rule of four percent.
Create a Withdrawal Plan
Now that you are living strictly off of your investments, follow a system for withdrawing money that won’t deplete your resources. A popular plan is what the American Military Society calls the three-pot system. In this system, you create three main types of investment:
- Cash Flow: This investment pot is a savings account where you place money for your current expenses.
- Fixed Income: If your first pot holds enough cash for one year, this pot should hold enough money for four to ten years. This should have investments with differing maturities for the best gain on your investments.
- Long-Term Investments: This is where you place your stocks and other long-term investments. You generally want to keep as much money as possible here.
The idea of a system like this is that as you deplete one fund, you can use your excess from the two other funds to replenish it.
Invest in Gold
Many articles about gold and investing also recommend that you put five percent or more of your investments in gold, whether gold bullion, mutual funds, or exchange-traded funds. Gold works as a sort of insurance; if the market starts doing worse, gold prices typically not only stabilize but generally rise, giving you an extra cushion in tough times.
Via Flickr by Tax Credits
The road to becoming a full-time investor is long and difficult, but many times the sacrifices you make along the way will turn into a relaxing retirement. Take a look at these steps and tips to learn what you need to do to quit your 9-5 job and start investing full time!