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I am a recent grad who just began working for a 'big 4' software engineering firm. I earn a good salary and I would like to invest 75% of it efficiently so that I can retire early at age 45.

Various sites that I have read suggest that investing provides a great long term return. I don't know much about stock trading but I want to learn various methods of investing. I'm learning as much as possible from googling terms but I think I need hell lot of time for this.

I do not want to invest in mutual funds and let someone work over my money. I do not plan to invest all my money in stocks. I also plan to put some percentage in fixed deposits and government bonds which are less risky and provide a lower return.

What should investment strategy be?

TLDR : Can anyone suggest effective methods or road-map beginners should follow from where one should start learning stock trading and basic market terminologies to feel confident for trading?

Bob Baerker
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Patel Parth
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    "However I do not want to invest in mutual funds and let someone work over my money." Why? You think you know how to invest better than they do? You think 1% is too much to pay for their expertise? – D Stanley Nov 14 '19 at 16:39
  • Sorry if the comment above comes across as condescending - my point is that mutual funds are widely accepted ways of letting experts help you diversify investments across many stocks (either passively or actively). I just want to make sure you don't think of them as scams. – D Stanley Nov 14 '19 at 16:42
  • @DStanley No need to feel sorry. But I kinda feel that they are scams. Because average returns in mutual funds are 8% only which is much less that returns we can get if we pick some good stocks by gaining some expertise. – Patel Parth Nov 14 '19 at 16:44
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    Here is what I would suggest, why don't you temporarily put your money in mutual funds, 8% is better than nothing, right. Then start learning and doing research while trading on paper, when you have a strategy that is consistently beating the market, then move your investments out of the mutual funds and into your picks. – Glen Yates Nov 14 '19 at 17:04
  • Nosjack provided a link to a lot of good info posted under a similar question. Now, some specifics applicable to you... You're not going to retire by 45 unless you have a very high salary, you lower your overhead to that of a homeless person and you invest really well. That's a lot of ifs. There's a disconnect in your mention of investing and trading. It takes a lot of financial literacy and years of experience to get anywhere with trading and you're nowhere near that (and may never be). The best road map for beginners is at the library. Good luck. – Bob Baerker Nov 14 '19 at 17:25
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    "But I kinda feel that they are scams." You're wrong. (Well, some are, but generalizing from "some MFs are poorly run" to "all MFs are scams" is akin to saying "all cars are lemons because this brand has a lot of lemons". – RonJohn Nov 14 '19 at 17:39
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    Kind of off-topic, but which of the big 5 do you exclude to choose the big 4? – Hart CO Nov 14 '19 at 17:42
  • Mutual funds aren't scams, they're just a package of funds. Some are good packages and some are bad. I would agree with the assertion that the vast majority of actively managed funds could be described as 'scams' since financial advisors are trying to convince people that they can achieve better returns than a passive index fund (which they almost never do), and are largely just enriching themselves. – Dugan Nov 14 '19 at 18:23
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    @Bob Baerker I vehemently disagree that OP won't be able to retire at 45 given the information he listed. FACTS: (1) He is saving 75% of his income which implies that he is comfortable living off the remaining 25%. (2) Even if he only sees 8% growth in his investments (slightly below what the long-term trend for index funds has been) it would only take him 6.5 years to save up to the point where he has 25 times his annual living expenses. (3) With 25 times his annual living expenses he can follow the 4% rule and draw down an amount equal to his annual living expenses indefinitely. – Dugan Nov 14 '19 at 18:27
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    Not all mutual funds are managed. Someone with a lot of money and little time might do well to invest in a broad index fund like Vanguard Total Stock Market Index that has an expense ratio of 0.14% for investor class shares. But that's actually an answer, not a comment. ;) – shoover Nov 14 '19 at 18:32
  • @Dugan - If only life was that simple. Be that as it may, you're entitled to your opinion. If he makes $100k, about 18% goes to taxes.If he's living on $20k, more power to him. What happens to your theory when you add taxation and perhaps buying a house, getting married, having kids which now cost nearly $250k to raise. OK, he remains a confirmed bachelor. 8% compounded for 6.5 years isn't going to get him anywhere. And 4% rule isn't monolithic - there are other considerations. It's just a starting point. Citing the 45% rule is an error. That applies to age 65. He's retiring at 45! Finis – Bob Baerker Nov 14 '19 at 18:49
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    @Bob Baerker in your example 100K-18K-20K = 62K (which is less than the 75% that OP said, but whatever). Investing 62K every year at a 8% return will leave him with ~505K after 6.5 years. which is more than 25 times his average annual living expenses, so not sure why you would consider that 'not getting him anywhere'. Citing the 4% rule is not an error-- Here's an article explaining why "above 30 years, the length of your retirement barely affects the safe withdrawal rate calculations.". – Dugan Nov 14 '19 at 19:29
  • I appreciate the thought that the OP has put into this question, and that even just starting out, OP is already planning and managing money. However, this does seem to be mostly a duplicate of the question that Nosjack linked above. Can we direct our efforts to improving that question and/or its answers? – shoover Nov 14 '19 at 19:36
  • Step one: move out of the Bay Area and work remotely from a LCOL area. – acpilot Nov 14 '19 at 19:39
  • @Bob Baerker: On the contrary, it's quite doable if you avoid expensive habits. Could have done it myself on 20-25 years income from a STEM career, if I'd had any interest in retiring. And for the OP, my investments were all in mutual funds after the first year or two. My experience is that brokers want you to make frequent trades, so they make commissions while you lose money. My advice is not to trade unless you like to spend a lot of time doing market research, and even then, treat it as a hobby rather than an investment. – jamesqf Nov 15 '19 at 17:11
  • @jamesqf - As I wrote above: "You're not going to retire by 45 unless you have a very high salary, you lower your overhead to that of a homeless person and you invest really well". And FWIW, been there, done that. I retired by 50 and have traded for nearly 20 years since then, having several years where I made more than any year in my primary occupation.. Spend a lot of time doing market research is a prerequisite to trading? Uh huh. Thanks for the suggestion to treat trading as a hobby. I'll keep it in mind if I commit to this. LOL. – Bob Baerker Nov 15 '19 at 17:47
  • @Bob Baerker: I assure you that I know what the lifestyle of a homeless person is like. (Been there, done that, but nobody gave me a T-shirt :-() And yes, I think a good deal of market research (or a good bit of luck) is a prerequsite for successful trading. – jamesqf Nov 16 '19 at 04:40
  • @jamesqf - There are types of trading where no research or luck is a prerequisite for success. Only number crunching. – Bob Baerker Nov 16 '19 at 05:22

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I'd suggest you read JL Collin's stock series. This will give you a good primer on the pros and cons of stocks and bonds and (most importantly) teach you how to think about your investments. His main recommendation would be to invest in index funds which have been shown to beat the vast majority of actively managed funds over the long-term. I highly recommend reading these articles as it also explains why You Can't Pick winning Stocks since your comments imply that you think that you can beat the index (spoiler alert- there's a 95% chance you can't-- largely because the the distribution of winners and losers is not uniform-- i.e. there are a tiny number of very big winners and a lot of losers).

Aside from building your base of knowledge I would also recommend avoiding bonds and GICs at this point in your life since I infer that you're quite young, and your retirement date of 45 is not a 'hard date' i.e. you could conceivably push your retirement date to 50 if the market experienced a 2008 style economic meltdown. Equities will always beat bonds over any long time frame, so you're better off staying highly invested in Equities when you start out and gradually transitioning to bonds and GICs as you get older when stability is more important to you.

Congrats on the excellent savings rate and the journey towards financial independence/early retirement.

Dugan
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Think about the income produced by the portfolio at retirement. Then a $75,000 income requires a $2,142,857 portfolio at 3.5% return.

To produce the portfolio requires $75,000 a year put-in for twenty years at 3.5% return with monthly compounding to reach $2,209,253 . Or even yearly compounding reaches $2,195,210 .

The first problem is taxes and so taxes can be minimized by realizing the 3.5% return as qualified dividends. The second problem is inflation but dividend-paying stocks are likely to keep up with inflation. Also, capital gains taxes are avoided by having to the same portfolio before retirement and after retirement. After retirement the dividends are spent as income while the portfolio is held. Before retirement the dividends go into a dividend re-investment feature to build-up the portfolio.

Now an index fund is not going to pay 3.5% dividends and so a custom portfolio is needed.

S Spring
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  • 75K seems like a high retirement income to shoot for given OP's frugality if he's living on 25% of his salary (unless he makes 300K) 2. Why would you assume a 3.5% return on investments? Long-term stock market trend is 10% 3. You still pay taxes on dividends, setting up a DRIP will offset this but you could also just have low-dividend paying funds. 4. "capital gains taxes are avoided by having to the same portfolio before retirement and after retirement." -- this doesn't make any sense.
    • – Dugan Nov 18 '19 at 20:31
  • The number wrote it itself in the calculation. As I said begin by calculating the income that the portfolio produces at retirement. Also, the goal is to retire in twenty years. The calculation is based on 3.5% stock dividends. Taxes are reasonable because of the system of qualified dividends. And as I said, stock gains in addition to the dividends is what keeps everything up with inflation. The stock portfolio never changes from its beginning and therefor there are never any capital gains taxes. Make the given number or don't make retirement in twenty years is the point. – S Spring Nov 18 '19 at 21:31
  • Furthermore, anyone who is planning on getting 10% investment returns in worldwide deflationary economies is not going to make it with stock market averages. A current trend of successful government market support is only 11 years recent history. Also, investment returns are mostly relative to inflation they don't just print a number. – S Spring Nov 18 '19 at 21:40