Becoming financially independent is a dream of many! Yet, only a very few achieve it while having enough health and strength to enjoy life to its full potential.
During my career as an engineer, I used to observe and learn from successful people at my workplace. Initially, it was out of curiosity — later I realized, it’s a powerful way of crafting a career by adjusting to the environment fully. Result — I have been very successful in climbing the career ladder faster.
That brought me to the obvious question — Can you follow the footsteps of successful investors who practically achieved financial independence and learn from them? Today’s media celebrates the successes of billionaire investors and offers tons of advice on how we can emulate them. In simple terms, they are telling us how to become a Warren Buffet! I think that’s insanely impractical! Why not we target to become like the average financially independent millionaire living next door instead?
Fortunately for me, there were a few FIs that I have associated with. In this article, I picked three portfolios of the FIs and try to explore what I’ve learned. And what we — the seekers of the goal of FI can learn from them.
Note that all portfolios do not contain personal assets (i.e. Assets that are consumed by the individual and the family such as homes and vehicles). Also, the cash flow composition does not include any employment income.
Mr. X — The Stock Investor
Mr. X is in his early forties and he is the stock market expert on my list. He has achieved FI in his late thirties. He is savvy with the locally listed companies and heavily invested in about 20 shares in his long-term portfolio.
He added, “In the short to medium term — Stock markets are going in cycles; But in the long run they grow steadily”. Mr. X has 58% of his investment portfolio in shares and getting nearly the same percentage from dividends.
“I have specifically picked certain stocks because of their steady dividends track record along with the decent growth potential”.
17% of long-term fixed income is performing well bringing in 31% of the cash flow due to its high returns.
“I have been able to acquire high yielding fixed income — mainly corporate debt instruments that provide higher than proportionate cashflow even under the current low-interest environment that the country is going through”.
Only a few of Mr. X’s real estate assets bring in cash flow — others are long-term growth assets.
Mr. Y — The Real Estate Investor
Mr. Y is in his mid-forties and he is the real estate expert on my list. He has achieved financial independence in his early forties. When it comes to real estate, he has a great eye on lands in growth areas — where he has heavily invested in.
Mr. Y has 75% of his assets in real estate and surprisingly he does not get any cash flow from any of his assets.
“Early in my investment life, I have seen the growth in land value in suburbs and decided to build my portfolio around that. I have deliberately invested in bare lands with many multiples in growth potential and it never worried me that it didn’t bring me any cash flow as the capital gains are at thrilling levels. Fixed income assets and shares cover my cash flow which is more than enough to cover expenses of our modest life”.
Mr. Z — The Business Investor
Mr. Z is also in his late thirties and he is the business expert on my list. He has achieved FI in his late thirties. When it comes to private equity — both established companies and startups, he has more than a decade of experience and a strong track record. Mr. Z has invested in private equity using the funds that he accumulated through real estate over a decade.
Mr. Z has a 75% private equity in his investment portfolio that yields 94% of his cash flow. The real estate portion is about 18% and that generates just 1% as many of the properties that he has invested in are growth properties. 7% of the fixed-income assets generate about 5% of cash flow income.
“I used to have a very dynamic real estate portfolio (back in the days) and has been able to make the best out of the real estate boom in the capital city suburbs. I was measuring the time to double the value of a property when I bought them and have been able to spot a few undervalued properties in good areas. That helped me build funds that were needed in acquiring a significant amount of stocks of the company that I’ve associated with for some time.” Mr. Z added.
Mr. Z is the closest to a serial entrepreneur that I’ve associated with — he has founded a few startups and has been very successful in building them with passion.
“When you are doing something right, there comes an opportunity — a golden opportunity that brings things to the next level. My private equity investments were that big opportunity and those businesses are my passion too”
Mr. Z is vocal in the local startup community in building wealth using businesses.
What Can You Learn From Them?
- They picked one asset class and mastered it for over a decade. That gave them an unfair advantage over the others.
“It’s impossible to be a master of all asset types. I had a limited amount of time & energy that you can put on as an employee. So, I picked the local share market which I diligently spend quality time studying and making my moves” Mr. X added.
2. They don’t have perfectly diversified portfolio wheels in terms of asset classes! But they have managed the risks by choosing different assets in their favorite asset classes. Both Mr. X and Mr. Y have perfected the 20% max per asset rule where none of their individual assets are bigger than 20% of their portfolio. Mr. Z was an exception with more than 70% of his portfolio coming from a single, yet very well-established company into IT.
3. They were in the game for the long term; not a few years, but a decade or more. For example, Mr. X says:
“As long as a company fits the performance criteria, I keep investing in them. I reinvest all the dividends back into my share portfolio. This expedites the compounding effect. I buy small amounts of those shares every week as long as the prices are in a favorable range. And I’ve been doing that for over a decade for most of the shares”
4. All of them have balanced the growth assets and cash flow assets in unique ways. Mr. X was the closest to having a balanced cash flow. But, both Mr. Y and Mr. Z had the majority of their cashflows coming from just two asset classes. Mr. Z in particular had most of his cash flow coming from a single asset — which he does not think is risky.
5. All these asset classes that they have chosen-stocks, real estate, and private equity are great ways to hedge against inflation. The value of their investments has not eroded and helped achieve FI faster.
6. Most of their journeys were from their late twenties to around forty. They started fairly early during a time risk-reward tolerance was higher.
7. All of them have a few million USD of value in their portfolios. But, that’s not obvious from their lifestyles. But all of them are working in some shape or form; the residences that they live in, vehicles that they use, clothing that they wear are simple. They don’t have lavish lifestyles; they enjoy modest simple lifestyles that helped them build wealth and freedom. Mr. Z explained:
“It’s the freedom that matters, not money or wealth. I get to choose what I want to do and when I want to do. We lived very well withing our means through out this journey and my family truely like the simplicity of the life that we live. Minimalism is the key to happiness! But, don’t get me wrong when I say that we spend freely on things that we value. for example, I don’t consider the price of a family vacation — its the experience that matters.”
Tell me what you would think about these real-life FI achievers and their portfolio strategy. Anything that I’ve missed here?
Written by Lilan Priyashantha