The Twenty Stock, Twenty Year Investment Plan

 “Hello Mr. McAleenan….[few paragraphs redacted]…I can’t help but feel that most of your advice is not going to be applicable to a majority of Americans. Getting a large estate is nice if you’re in the 1%, but what’s a realistic plan for the rest of us schlubs?… –Derek”

Hey Derek. When dealing with the emotional and seemingly impossible side of compounding/building wealth, I remind myself that it all comes down to three things: the amount of time that you have to invest, the amount that you invest, and the rate of return that you are able to return on what you invest. Those are the three numbers that you must manipulate in order to get what you want from an investment portfolio.

If you find yourself in a situation where the variable “amount of money” is going to be relatively scarce, then you have to rely on the other two variables to get to where you want to be. As far as returns you can get with common stocks, the general rule would be this: someone who buys and holds index funds for super long periods of time tend to get around 10%. Someone who owns a balanced fund, like you see with the Vanguard Wellington, tend to get around 8% or so. And it usually takes considerable skill to get anything over 12% annually for long periods of time.

Here is how I would work through a plan, starting from scratch, and with the understanding that the variable “amount of money” to invest will be limited to 11% of income. If I belonged to a household generating $50,000 per year in pre-tax income, my definition of a reasonable savings goal would be this: save $5,500 per year (why’d I choose 11% instead of the round number 10%? Because $5,500 is what you can put into a Roth IRA each year, and that figure would double to $11,000 if you combine both spouses).

Now, you can already feel it—we’re getting somewhere before we even started as we are about to combine the Holy Trinity of wealth creation that is (1) fresh contributions into (2) stocks that pay growing dividends which (3) get reinvested.

Look at the kind of results that are possible if you spend twenty years building a financial house in $5,500 annual brick increments.

Year 1. You buy $5,500 worth of Johnson & Johnson. That turns into $82,000 in 2034, if the past twenty years are any guide.

Year 2. You buy $5,500 worth of Procter & Gamble. That turns into $37,000 in 2034, if its past twenty years are any guide.

Year 3. You buy $5,500 worth of General Mills. That turns into $35,000, if its past 18 years are useful in predicting its future.

Year 4. You buy $5,500 worth of Exxon. That turns into $26,000, using the past seventeen years as a reference.

Year 5. The next year, you continue your oil kick, and add some Conoco. How does that work out? Really well if you include the Phillips 66 spinoff, as you’d be sitting on $42,000 between your shares of Conoco and Phillips 66.

Year 6. You pick up some Pepsi shares, which adds $19,000 to the value of your account.

Year 7. While you’re hanging out in the food sector, you add some General Mills to round out that segment of your portfolio, which sends another $20,900 your way.

Year 8. You decide to begin bank investing because a financial crisis is almost a decade away (oh no!) and so you add some Wells Fargo to your holdings. That, believe it or not, turns into $20,000 during the 12-13 years it gets to compound.

Year 9. You pick up some 3M, deciding to add an industrial component to your portfolio. This puts $17,000 in your portfolio.

Years 10 and 11. Deciding to round out the industrial components of your portfolio, you pick up General Electric and Emerson Electric. The Emerson shares grow to $19,000, and the General Electric shares grow to $6,900 hardly compounding at all due to an incipient financial crisis.

Years 12, 13, 14, and 15. You decide to spend these years picking up the missing gems that had not yet made it into your portfolio, adding Colgate-Palmolive, Coca-Cola, Clorox, and Chevron. The Colgate shares would grow to $18,000 (because that toothpaste giant is an absolute beast when it comes to creating wealth), the Coca-Cola shares would grow to $13,900, the Clorox shares would grow to $9,800 because we’re now on the eve of crisis, and the Chevron shares would grow to $8,800.

Years 16, 17, 18, 19, and 20. Now, for the finishing touches. We’re talking Disney, Brown Forman, Wal-Mart, Hershey, and IBM. The Disney shares would grow to $20,000 because they were bought during a time of crisis, the Brown Forman shares would grow to a ridiculous $18,000 in such a short period of time because it is the best company most people have never heard of, quickly building absurd amounts of wealth over the past few decades. The Wal-Mart shares would have grown to $8,800, the Hershey shares would have grown to $7,900, and the IBM shares would have grown to (or shrank to) $5,000 because its relatively fresh investment and stock market volatility is currently determining the stock price more than long-term profit growth given the infancy of the investment.

That’s what life can look like when you break it into discrete elements of $5,500 dedicated to a particular stock each year. Note, too, that usually the stock selections you make earliest in your life can make or break you, so you be sure that you choose your cash generator companions for life carefully. What would these twenty years of $5,500 investments for a total of $110,000 set aside be equal to? A portfolio equal to a little over $428,000 (note, as well, that some of those investments only had a year, two, or three to compound—this is the nature of dollar cost averaging—whereas a lump sum investment of $110,000 that compounded at 10% for twenty years would become $806,000).

In short, it is doable within the American capital markets to put together something approaching a half-million portfolio under an investment strategy that called for setting aside $5,500 annually for twenty years. More interestingly, you’d have Colgate, Disney, Hershey, and Brown Forman on your balance sheet, which should work out very, very well for you over long periods of time given their ability to earn high internal rates of return on their capital. In other words, those $8 sodas at Disney theme parks, those $5.00 bags of candy that cost $0.50 to manufacture, those $5 drinks at the bar that cost $0.30 to produce, and those mouthwashes selling for $6 that cost $0.40 are why those shareholders get extraordinarily reach over the long haul.

If you don’t have a lot to invest, then most likely, time is the element that you must rely on to do the heavy lifting. From there, it’s important to get the companies right. Take the time to study companies that are very good at producing high internal returns on capital. My person research leads me towards Visa, Mastercard, Coca-Cola, Colgate-Palmolive, Hershey, and Brown-Forman, and to a lesser extent, Johnson & Johnson and Nestle. Your studies might lead you to entirely different companies. That’s not a big deal, there are so many different strategies that can enable you to make it in America. But when the funds you are working with are a few hundred per month, the key to getting somewhere significant is to make sure you choose the companies correctly and give them the time that is necessary to grow. Those are the two ingredients that ensure progress. $5,500 x 20 into conservative dividend stocks = $428k.

 

 

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7 thoughts on “The Twenty Stock, Twenty Year Investment Plan

  1. ConstanceQuigley says:

    Brilliant advice! As someone who has tucked away a lot of retirement savings and made some poor investment decisions along the way, I can testify that recovering from those losses is possible too.  You just need to select good, solid companies and keep investing in them. The  dividend income reinvestment method works great!

  2. ddh81 says:

    Tim,

    I absolutely agree with your major points here. The problem with most Americans is your starting point of saving $5500 on a $50,000 per year income. I would argue that is the major exception rather than the rule. I have no idea what the entirety of Derek’s letter to you says, but the comments you did publish somewhat indicate a defeatist attitude right from the start. The whole idea of “I’m not in the 1%, so I have no chance” needs an attitude readjustment. I’m 57, and I can assure him I’ve seen plenty of people who’ve made a good living for a long time and really don’t have much saved…..too much spending, bad investing, etc.
    The key is to have a plan like you’ve laid out and stick to it. Most people just don’t have the discipline over a multi-decade time frame. I have a good friend who works in wealth management at a major Wall Street firm. Back on August 5 he sent me the following email:

    “I was just looking at a client’s cost basis that practices what we believe in, he runs a machine shop, cost basis GE 3.02, MRK, 3.19, PG 3.32, XOM 14.43, machine shop guys get it. He’s added about 25 other names through the years with the dividends and savings, the market being down 168 doesn’t bother him, he just buys a little more….”

    There you go. It can be done. It’s not easy and the mistakes you can make along the way are many, but make a budget, save money and invest in a disciplined manner and 30 years later you’ll be shocked.

  3. sloshkong says:

    Thanks, Tim I have been following your website for a about a year now and read every article. When I has first started to invest in 2012 at age 24 I bought some really stupid stocks that I did no research on. With the run up in the market since then, I was extremely fortunate to escape with a profit with my stock picks. But that was just blind dumb luck.
    My investment strategy is now very similar to what you have described in this article:
    Max out 401k contributions to company match.
    Max out Roth IRA at $5,500 annually.
    Drip it
    Retire
    Play golf.

  4. Joe_G from Seeking Alpha says:

    Tim,

    This is unrelated to this particular article but relevant to investing in ExxonMobil, BP, Shell or any of the other oil majors.  I came across this interview (see the link below) that talks about a possible “carbon asset bubble” with regards to oil/gas/coal companies and the issue of their proven reserves.  There are two possible scenarios that could play out:

    Scenario #1 – The oil majors extract and sell all or most of their current proven reserves of oil and gas.  The resulting damage done to the planet’s climate from burning these fuels would be catastrophic and likely result in the extinction of the human species.

    Scenario #2 – The oil majors don’t recover all of their current proven reserves because government action forces them to leave their oil and gas reserves in the ground to prevent the worst effects of scenario #1.  The oil majors suffer a massive asset write-down due to the unrecoverable nature of their stranded assets resulting in a massive and permanent decline in shareholder wealth.

    Assuming that the human race isn’t willing to commit collective suicide and chooses to go with Scenario #2, what does this mean for shareholders of XOM, BP, RDS and the other oil companies that you’ve frequently held up as stocks to hold forever?  Is this something you’ve factored into your analyses of these companies?  Certainly food for thought.

    Here is the link to the interview I was talking about:

    Thanks,
    Joe

  5. ddh81 says:

    Joe_G,

    So the website link is “bestoftheleft.com”. Hmmmmmm…..

    Certainly people should stick with their beliefs, morals, etc.

    However, investing is full of conflicts like this if you think about all the stocks you own. For example, I happen to be a shareholder of Walmart. A few weeks ago I was in the checkout line and noticed the couple in front of me. They were probably mid-30’s in age. Their combined weight was easily 550-600 pounds. He was in a motorized cart (until they got outside). Their total expenditures exceeded $250. Virtually every item was processed food….soda pop, chips, tater tots, white bread….I saw no fruits or vegetables. Should I not invest in Walmart (or Pepsi for that matter given all the Frito Lay products) because the company is purposely adding to health problems in the United States? 
    Similarly, Tim has written many times (again today!) about the financial wealth created by long term investing in cigarette companies. Yet everyone has known for decades that cigarettes are horrible for your health. On the flip side, look at all the criticism the major drug companies have received over the years regarding testing on animals or hooking people on drugs instead of promoting a healthy lifestyle. You could even make a case that the wonderful products Apple has created lead to technological addiction and other negative societal impacts.

    Yes, none of the above examples are as bad as “extinction of the human species”, but hopefully you get the basic idea. Seems there is always an issue hiding somewhere in almost every investment. 

    Just one man’s opinion. Thanks

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