You Need To Do These 6 Things To Get Out The 9-to-5

Time to time, I will receive messages of people who are stressed about their jobs and their work life, along these lines.

"It is a never-ending pile of work."

"I even have to work during weekends..."

"I am so sick and tired of what I do everyday."

It is not uncommon to have such thoughts, and I was lucky enough to experience these moments early in my life when I was just 21 years old and started working.

During then, I realised that there was absolutely no way that I was going to spend half my lifetime being stuck in a 9-to-5 - and therefore I went out and seek knowledge on how I can get out of it. Here's are six of the biggest lessons I learned, and hopefully you can learn from my mistakes.

Protect Your Downside

I cannot stress this enough.

Before we even try to invest our money, we need to identify the areas where it can potentially wipe out a big chunk of our net worth - i.e. medical expenses. 

Most people make the mistake thinking that they are young and healthy and therefore, they don't need to buy insurance. Huge mistake. It is precisely because you are young and healthy today that you should consider buying insurance. Because the older (and less healthy) you become, the more expensive your insurance policies are going to be.

However, with that said, it is important to get the appropriate amount of sum assured. Have a chat with a trusted financial advisor to work out what is the appropriate amount of sum assured for you.

For insurance companies, there are some products that are more investment/savings related. Personally, I don't touch those because they can charge as exorbitant fee for just managing your funds. A good example is unit trust. It makes very little sense to me why people would invest in unit trusts, when they could simply invest in a low cost index fund like the S&P 500.

If you have personally invested in unit trusts for some time, a good exercise to do is to look back and calculate the difference if you had invest in the S&P 500 instead. I once worked that out for one of my friends who have been investing in unit trust for 20 years and the difference were in the range of six-figures. That's why, I am very particular that when I buy an insurance policy, I don't want it to have any sort of investment component - because I am much better off investing on my own.

I have personally invested in unit trusts as well, and have since liquidated everything to invest in the stock market on my own. Even if you have zero knowledge on the stock market, investing in the S&P 500 index alone is likely better off then investing in a unit trust that charges you high management fees.

Guilt-Free Spending

When it comes to investing, there's no need to sacrifice your lifestyle, eating instant noodles everyday for the sake of having more money for investing. Yes, yes - this was me in the past as well - where I was guilty whenever I treat myself to something nice.

So a strategy that I used was this - pay yourself first, and enjoy the rest.

You see, I have two bank accounts - one is for spending and one is for investment. And every time my salary comes in every month, I will immediately set aside 40% of my income to my investment account.

This means that if I make $3,000 a month then $1,200 will immediately goes into my investment account. This investment account is strictly for investments purposes and cannot be withdrawn for spending. The remaining $1,800 - I can then spend it guilt free, knowing that I have already set aside $1200 for my investments.

We need to reward ourselves from time to time, treat your loved ones to something nice - don't let the journey to financial freedom be a miserable one - instead, let the journey be a fun and joyful one. That is how you build momentum in your financial freedom journey.

For those who are reading this, and you STILL have not been setting aside a portion of your income, I will highly encourage you to start doing this especially when you are still young. I personally started this the moment I started working, and have been making regularly contributions to my investments ever single month. This is how I always had money to take advantage of any market downturns and grow my wealth even further. Remember that money in the bank is as good as dead money. If you are using it then you just letting it decay due to inflation. 

In the past, I will feel a sense of security when I have an extra $10,000 in the bank account. But now, I feel terrified if I see too much money just lying in my bank account.

Don't Do Dividend Investing

Some people may hate me for this - but if you are just starting out in investing, don't make the same mistake that I did - investing for the sake of dividends.

At my early stage of my investing journey, I started with dividend investing with the idea that if I continued reinvesting my dividends, eventually I will use the power of compounding and grow my portfolio. Eventually, I will be able to live off my dividends!

That story sounds sexy but it is an incredibly long journey. You see, dividend companies tend to be more mature companies. And being mature companies, like Coca Cola or 3M - you will realise that they don't have much room to grow anymore.

Its kinda like if you had a child who is currently 1.8 meters tall, even if you fed him more food - he wouldn't magically grow to 3.6 meters tall. That is why, mature companies have lesser capital appreciation.

A concept that I later realised is called "Grow The Cow First, Before Milking The Cow."

You see, when people start to invest for dividend companies, their expectation is to live off their dividend yield. So let's say if the dividend yield is 5% - which is very decent.

If you had $100,000 - a 5% dividend return will only give you $5,000 a year. That's not enough to be financially free at all.

If you had $1,000,000 then that gives $50,000 a year and the story changes. $50,000 of cash every year, is a pretty decent amount of most people.

However, if you want to get to $1,000,000 through dividend investing, you are going to wait a long long time. Because as I said, dividend investors don't see much capital appreciation, especially since they are investing in mature companies.

The better approach is to forget about dividends first, and focus on growing your portfolio to a $1,000,000. That is by investing in quality companies that have an increasing earnings trend. This way, you are able to compound your money much faster. And when you reach the $1,000,000 portfolio, then you could consider investing in dividend stocks for cash flow.

Invest in Foreign Markets

When it comes to investing, most people will tend to invest only in their own local markets. For example, if you are from Hong Kong, then you would look at Hang Seng. If you are from Malaysia, you would look at KLSE, etc. If you are from Singapore, then you would invest in SGX, etc.

However, if we are truly serious about building our wealth - we need to be comfortable investing in the markets that we would get the best returns on our cash. To me, that country is the US stock market.

In the above image, I compared the various common stock market index returns, and they are ranked the following:

1. United States (222.41%)
2. Korea (53.19%)
3. Hang Seng (28.35%)
4. Europe (21.04%)
5. United Kingdom (19.57%)
6. China (7.55%)
7. Malaysia (2.60%)
8. Singapore (-1.06%)

As you can see, investing in the United States will have yield the greatest return. And if you think about it, it makes plenty of sense. Look at the large international companies around you - most of them comes from the United States such as Amazon, Facebook, Google, Adobe, Microsoft, Apple, Intel, Nvidia, AMD, etc.

A large international companies means they have a larger customer pool. Having a large customer pool naturally means that their revenues are going to be much higher, and hence the capital gains.

And this is the reason why I only invest in the US stock markets - and the added benefit is that it offers stock options to boost portfolio performance.

Don't Overdiversify

When we diversify our portfolio into many companies, our portfolio will become less volatile. And the lower the volatility, then naturally the lower the potential returns. So, don't make the mistake of trying to collect many companies - for the sake of diversification. The worse thing that you can do is to diversify into companies that you don't even understand.

As a guideline, I would think that having invested into more than 10 companies would be overdiversifying, and you would be much better off just investing in an index. Investing in an index gives you the diversification that you need, and it requires much less effort as well.

Another rule is that when your portfolio is smaller, it might be worth concentrating your portfolio. The more concentrated your portfolio, the higher the volatility, the higher the potential profits. As a guideline, here's the portfolio sizing rules that I created for my students depending on their portfolio size:

The reason why I allocated a higher percentage per company with a smaller portfolio is because you can much better manage the stock market fluctuations with a smaller portfolio. For example, if a $10,000 portfolio falls by 2% in a day, that's only $200 - which is a manageable amount that our emotions can take.

However, as your portfolio gets bigger, then it is worth thinking about reducing the percentage per company.

In short, when you are small - focus on concentrating and growing.

And as you get bigger - focus on protection but without over-diversifying.

Get Free First Then Get Rich

In my perspective, there are three levels of financial freedom.

1. Necessity-based freedom - where your cash flow is able to pay for your expenses

2. Income-based freedom - where your cash flow is able to replace your income

3. 10x freedom - where your cash flow is 10 times your income and more.

The first milestone that anyone should aim for is a necessity-based financial freedom, which is quite achievable for most people who live a simple lifestyle. For example, if you only need $1,000 to live every month - then you only need $1,000 of cash flow every month to achieve a necessity-based financial freedom. This means that at this point, even if you stop working for income, you are still able to get by your life. Sure, you may not live a luxurious life - but you will still survive.

Now, there's actually more to it when you achieve a necessity-based income. You will start to think in the mindset of abundance, because you know that you can survive even if you choose not to exchange your eight hours of your everyday for money.

Because of the mindset of abundance, that's where you can afford to take up more volatility in your portfolio and not even worried about stock market fluctuations anymore. Why? Because you know that even if there is a market downturn, you will still be able to meet your necessity expenses. And that is really how you start to build serious wealth and become rich. Remember that higher volatility means higher potential profits.

One of the main reasons why many are unable to use any high volatility strategies is precisely because they have yet to achieve their necessity-based freedom, and they are looking to use these high volatility strategies to "get-rich-quick". And that is when a simple market correction will force them to chicken out and sell their shares.

In the meantime, the person who have already achieved their necessity-based won't worry as much since they did not bet their entire nest egg on a volatile portfolio. This is what I mean by getting free first, then getting rich.

Once you achieve your necessity-based freedom, you can choose to use more volatile strategy without feeling overwhelmed. Now, bear in mind that a more volatile strategy does not mean it is more risky. Always remember that volatility is not risk. Risk comes from the lack of knowledge.

Till date, this last point of "Get free first, then get rich" is one of the biggest gamechanger - so I hope that my readers can first strive to achieve their first necessity-based freedom milestone.