What's A Strategy For Me To Realistically Have A $10M Net Worth By 40? originally appeared on Quora: The best answer to any question.
Answer by James Baker, Founder, Dragon Systems, on Quora.
The $10 Million Plan
To achieve $10 million from $100,000 in 19 years, you need to grow your wealth at a rate better than 27% per year compounded.
You can't do that with passive investments alone.
Suppose that at first you invest your net worth in a passive investment such as an index mutual fund or ETF, making about 8 to 10%. If you are working and saving more than 20% of your current net worth each year, then you are staying ahead of schedule. However, your salary will probably not grow as fast as 27%, so eventually you will not be able to keep up.
The $10 Million Plan - Part II
So by that time, you will need a more aggressive strategy. You will need to make riskier and/or more active investments. You have to limit the time you devote to these alternative investments until they can more than compensate for reduced income if you have cut back on the hours you spend on your regular job.
Alternative Investments
Alternative investments include commercial real estate, residential real estate, commodities, financial derivatives (options and futures), angel investment, private equity, venture capital funds, hedge funds, and entrepreneurship.
Of these, the ones that take up the least time are private equity, venture capital funds, and hedge funds. However, you pay a lot for this. All of these types of funds have high management fees (2% per year or higher) and a substantial carry (20% of profits or more) in addition. That would still meet your goal if you were sure that the net after expenses would be greater than 27%. However, in recent years the average hedge fund has done worse than the index funds, and some reports say that the average venture capital fund isn't even returning the original investment.
Leverage
Of the remaining alternatives, the one that may take the least time (once you have spent the not insignificant amount of time it takes to master the field) is financial derivatives. To increase your average rate of return, you will need to take on risk. The simplest and least time-consuming way to do this is to increase your leverage.
The simplest way to get leverage only uses financial derivatives indirectly. There are ETFs that use futures to track leveraged multiples of specified market indexes. For example, UPRO tracks triple the SP500 index, and TQQQ tracks triple the Nasdaq index. You don't need to know or manage the details. You can just buy the ETF. However, you need to be aware of the risks.
Unfortunately, most of what you read on-line about these leveraged ETFs is either just plain false or is misleading. In particular, the most common conclusion is that "Leveraged ETFs are only for short-term trading, not for long-term investment." The fact is that any form of leverage is dangerous. The proper long-term investment strategy, however, makes leveraged ETFs less risky, not more so.
There are reasons that the actual return is less than the nominal multiple of the index. I have never seen the correct analysis of this on-line. The on-line analysis generally incorrectly ties it in to the conclusion about short-term versus long-term. With my analysis, leveraged ETFs are risky, like any leverage, but not for the reasons usually given. I estimate the average long-term return from triple leveraged ETFs is about 20%, so not quite enough to meet your goal. The explanation is complicated, but if you are interested, ask a Quora question specifically about leveraged ETFs and I will try to explain.
Options and Leverage
Options are a very complicated subject, and you will find a mixture of good advice and statements that I think are wrong. The discussions on Quora, by the way, are significantly better than what I have seen elsewhere. Options can be used in many different ways: to imitate hedge funds, to be neutral to whether a stock goes up or down but to bet for or against the market's estimate of the volatility, to invest for a steady income even in a flat market, or to create leverage. If you are willing to take the risk, leverage is the simplest of these.
One way to get leverage with options, if you are willing to take the risk of leverage but not more speculative risk, is to buy in-the-money calls. You can make an even higher return with out-of-the-money calls, but that is a more speculative bet. That's a long discussion, so ask a question about that if you are interested.
Angel Investing and Entrepreneurship
If you are willing to take the time as well as the risk, you can get a higher return as an angel investor. I recommend David Rose's book Amazon.com: Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups (9781118858257): David S. Rose, Reid Hoffman: Books, or ask him a question here on Quora. Angel investing needs to wait until you have accumulated enough wealth to be a qualified investor.
The other strategy is to do it yourself. If and when you are ready to quit your regular job, you could become an entrepreneur. Your goal of $10 million is modest for a successful entrepreneur. You can take advantage of that to use a strategy that maximizes the probability of success rather than increasing the risk just for a small chance of a very great return.
With your frugality, you would be good at keeping the expenses of a startup low and thereby getting the startup to be self-sustaining. If you do this successfully, you might already be able to meet your goal of $10 million by selling your company at this stage, without going through all the risky stages of raising venture capital, growing the business at a super fast rate, and getting to a successful IPO.
If you only sell your company for a few million, become a serial entrepreneur and do it again until you get to your goal.
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