In Part 1: The Secret Ingredients for Retiring, I spilled the beans and let out a “secret” that a billion people probably already knew. Just like when somebody else comes along and introduces yet another recipe for homemade apple pie, I wasn’t sharing anything new, or exciting.
Maybe Not So Easy?
But here’s something to ponder. If the secret’s out, and it really is possible to retire early using the stock market, then why do so few people actually succeed in doing so? Why do most Americans now feel like they have to work until the ripe young age of 80? Why do so many people who try investing, give up and quit?
The hard part isn’t knowing what to do. If that was the case, I wouldn’t even dare dream about investing in the stock market, let alone think about early retirement.
No, the secret ingredients to making that award winning apple pie (retiring early) are already at your disposal. Finding a way to cohesively blend and harmonize everything together to create a masterpiece, well, that’s part of the recipe. More specifically, you will need to master each of the following crucial steps:
“Unless commitment is made, there are only promises and hopes… but no plans.”
OK, so you’ve given the idea of reaching early financial independence some serious thought. You went from thinking about doing it on occasion, to something you think about doing almost everyday. It has become that itch that you just can’t scratch. Maybe it’s because you daydream about the freedom that it can buy you. Perhaps you’re just sick and tired of racing rats all day, everyday. Or maybe you’re fed up with all the corporate politics and would rather just go at it on your own. Whatever the reason, you’ve now reached a crossroad, and must make an important decision that will greatly impact your future.
If you are serious about achieving early financial independence, then you must make a full commitment to doing this. Put it down in writing. Create a mission statement. Do whatever you need to do to make sure the message gets imprinted into your skull, loud and clear. Total dedication is needed, because quite frankly, you will not succeed if you attempt this half-assed. If you aren’t ready to make the full pledge commitment, then turn around now.
Here is the mission statement I came up with in November 2011. During Thanksgiving weekend, I made a commitment to myself to reach early financial independence by 37.5.
“Slow and steady wins the race. So, paralyze resistance with persistence.”
We all want instant gratification. In this day and age, even waiting 2 minutes to microwave a TV dinner is considered too long. But the best things in life take time to mature. You won’t get good at guitar in a month. You won’t learn to speak fluent Spanish in a year. And you probably won’t build a large enough dividend portfolio even after a few years to allow yourself to retire early.
Incremental progress is slow. So, don’t get discouraged if you feel like you aren’t advancing fast enough. It takes time. Lots and lots of time. But, if you improve just a little bit each and every day, it will only be a matter of time before you reach the final destination, freedom. The most important thing is to be persistent, and stay the course.
My portfolio still isn’t worth much today. But I’m working on it. I try to make contributions each and every month (though I will temporarily hold off from buying if I feel the market is overpriced). Here’s the slow and steady progress for 2012:
April 30, 2012:
August 01, 2012:
November 30, 2012:
What does the total portfolio value tell me about my passive income stream? Not much, really. So, why do I keep track of it? The growth of the portfolio lets me know that I am sticking to the plan and making regular contributions. It also gives me a quick glance on total shares, which I always expect to be increasing (due to DRIP). Also, even when the market sours, I still expect the long-term trajectory of the portfolio value to keep on rising. Quality companies will find a way to keep growing revenue and earnings (in addition to the dividend growth). So, even though capital gains are not the main objective when building a passive income stream, in the long run, the share price should still be going up.
“Even when opportunity knocks, a person still has to get up off their seat and open the door.”
As mentioned above, building a dividend portfolio takes a lot of time. During the journey, the market will inherently swing up and down. Often. When the market is surging, most everyone gets greedy. This is right around the time you should start thinking about easing your foot off the gas pedal. Build up a cash reserve instead. Just remember, what goes around will eventually come back around again. The key is to seize the good opportunities when they present themselves. When the market heads in a downward spiral, you’ll know it. The news media will be all over it, trying to convince you that Armageddon is approaching. Many investors will panic and sell. This is our signal to swoop in and pick up all the discounts. Remember, passive income is the name of the game. If shares are cheaper, you’ll be able to buy more. More shares = more passive income. It’s that simple.
Here’s a lazy man’s approach to buying on the cheap.
“Patience is a virtue.”
The market is not only irrational at times, but also stubborn. I love pullbacks, but sometimes even the large market corrections aren’t enough to bring down the stock price of a quality company like Coca-Cola (KO), or Johnson and Johnson (JNJ). Both KO and JNJ belong in my Core Holdings, but at this moment in time, I own exactly zero shares of JNJ.
Am I worried, or anxious to make a move? No, because I know that the right opportunity will eventually present itself. Maybe not this year. Maybe not even next year. But eventually, JNJ will be right for the picking. Until then, I’ll focus on building up my portfolio around other highly regarded companies. That’s why it’s also a good idea to make a wishlist. This way, you won’t feel the pressure to overpay for any particular stock.
“Time is money.”
When it comes to dividend growth investing, time is money. Literally. As more time passes, more money will be returned to you. The growth is slow at first, but only until the compounding starts to pick up. If you simply stick to the plan and keep investing regularly, you can rest assured that your returns will eventually start to look exponential.
Dividend paying companies usually pay their dividends in regular intervals. Most pay quarterly, but some companies like Vodafone (VOD) pay out semi-annually. Some index funds, like Vanguard Total Retirement 2050 (VFIFX), only pay out once, annually.
Regardless of when distributions are made, the important thing is that you get paid! It’s kind of difficult to build a passive income stream without any income flowing in, right?
Just like with tracking the total portfolio value, it is also important to track the dividend progress. The fruits of your labor are in fact these dividend fruits that are returned to you. By investing in dividend growth stocks, you will also be rewarded with increasing dividend payments each year. Pretty sweet!
Here’s the progression of my dividend income stream for 2012 (organized by distribution cycle):
“The successful man/woman will profit from his/her mistakes and try again in a different way.”
Lastly, it’s important for a dividend growth investor to learn from their mistakes. No one is perfect, and we all make bad decisions from time to time. We must remember to always focus on the big picture! Don’t let emotions cloud your judgement and force your hand into holding onto a stock, or selling a stock prematurely. Do your research. Think it through. And most importantly, learn and adapt.
Now we have both the secret ingredients and recipe for “how to retire early” using the stock market. The rest is up to you. It’s as easy as pie.