Question: 51y, would like to FIRE at 55. Contributing about 6500/month. Our FIRE goal is about 6 mil. Calculator says we can get there in 4 years with 7% rate of return. One reason why goal is high because we plan to move to a HCOL area after FIRE.
Debt – 430k on house (house is worth about 1 mil) not counting house equity in FIRE goal right now.
Retirement accounts – 1.600 mil (right now about 80/20 stock/bond)
Brokerage accounts – 2.8 mil
Cash (most in money market) – 100k
Heres the crux. More than 50% of brokerage is in 5 stocks Apple, amazon, google, chevron, microsoft. Apple by itself is about 25% of the total brokerage. Almost all are long term gains.
I know being heavily concentrated is risky. They have just performed so well.
What would you do to best maximize 7% gain for the next 4 years?
Answer:
Evaluating Your Investment Strategy to Achieve a 7% Annual Return Over the Next Four Years
Hello! Congratulations on your diligent saving and investment efforts. Reaching your financial independence goal is an admirable objective, and it's great that you're planning ahead. Let's discuss some general considerations that might help you maximize your potential for achieving a 7% annual return while managing risk appropriately.
Current Financial Snapshot
- Age: 51 years old
- Retirement Goal: Retire at 55 with \$6 million
- Contributions: Approximately \$6,500 per month
- Debt:
- Mortgage: \$430,000 remaining on a house valued at \$1 million
- Assets:
- Retirement Accounts: \$1.6 million (80% stocks / 20% bonds)
- Brokerage Accounts: \$2.8 million
- Concentration: Over 50% in five stocks (Apple, Amazon, Google, Chevron, Microsoft)
- Apple Stock Alone: Represents about 25% of the brokerage account
- Capital Gains: Almost all holdings are long-term gains
- Cash Reserves: \$100,000 in money market accounts
Considerations for Maximizing Returns While Managing Risk
1. Diversification
Importance of Diversification:
- Risk Reduction: Diversifying your investments across various asset classes, sectors, and geographies can reduce the impact of a poor performance by any single investment.
- Smoother Returns: A well-diversified portfolio may provide more consistent returns over time.
Current Concentration Risk:
- Having over 50% of your brokerage account in five stocks, with a significant portion in a single company, increases your exposure to company-specific risks.
- While these companies have performed well historically, future performance is uncertain.
2. Asset Allocation
Reviewing Your Asset Mix:
- Assess Alignment with Goals and Risk Tolerance: Ensure your current allocation aligns with your retirement timeline, financial goals, and comfort with market volatility.
- Rebalancing: Periodically adjusting your portfolio to maintain your desired asset allocation can help manage risk.
Considerations:
- As you approach retirement, you might evaluate whether shifting to a slightly more conservative allocation makes sense for you.
- Balancing growth objectives with capital preservation becomes increasingly important closer to retirement.
3. Managing Concentrated Positions
Potential Strategies:
- Gradual Reduction: Some investors choose to gradually reduce concentrated positions to mitigate market impact and potential tax liabilities.
- Use of Tax-Efficient Strategies:
- Tax-Loss Harvesting: Offsetting capital gains with losses from other investments.
- Donor-Advised Funds or Charitable Giving: Donating appreciated securities can provide tax benefits.
- Hedging: Certain financial instruments can hedge against downside risk in concentrated positions.
Tax Implications:
- Capital Gains Taxes: Selling appreciated assets may result in significant tax liabilities. Understanding the tax impact is crucial when considering adjustments.
- Consult a Tax Professional: To explore strategies that minimize tax consequences.
4. Expected Rate of Return
Understanding Market Expectations:
- Historical Performance: While the stock market has historically averaged around 7% annual returns after inflation, future returns may vary.
- Market Conditions: Current market valuations, interest rates, and economic outlook can influence future returns.
Risk vs. Return:
- Higher Returns Often Involve Higher Risk: Seeking a 7% return may require exposure to equities, which come with volatility.
- Assessing Risk Capacity: Consider how much risk you can afford to take given your retirement timeline.
5. Investment Vehicles and Strategies
Exploring Options:
- Index Funds and ETFs: Provide diversification across many sectors and companies at a low cost.
- Fixed-Income Securities: Bonds and other fixed-income investments can provide stability and income but may offer lower returns.
- Alternative Investments: Real estate, commodities, or other assets might offer diversification but come with their own risks and liquidity considerations.
Professional Management:
- Financial Advisor: Working with a professional can help tailor an investment strategy to your specific needs and goals.
- Regular Reviews: Periodic portfolio reviews can help ensure your investments remain aligned with your objectives.
Actionable Steps to Consider
Conduct a Portfolio Analysis:
- Evaluate the overall risk level of your current portfolio.
- Assess whether the concentration in certain stocks aligns with your risk tolerance.
Consider Diversification Strategies:
- Explore ways to diversify your holdings to reduce company-specific risk.
- Look into investment options that offer broad market exposure.
Understand Tax Implications:
- Before making significant changes, analyze the tax consequences of selling appreciated assets.
- Explore tax-efficient strategies to mitigate potential liabilities.
Revisit Your Financial Plan:
- Ensure your retirement goals, timeline, and investment strategy are cohesive.
- Adjust your plan as needed based on changes in your financial situation or market conditions.
Final Thoughts
Balancing the desire for growth with the need to protect your accumulated wealth is crucial, especially as you approach your retirement target. While aiming for a 7% annual return is reasonable, it's important to consider the risks associated with a concentrated portfolio.
Diversification does not guarantee against loss, but it can be an effective strategy to manage risk. By carefully evaluating your investment choices and possibly adjusting your portfolio to better align with your retirement objectives, you can work towards your financial goals with greater confidence.