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Here’s How to Become a 401(k) Millionaire

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Here’s How to Become a 401(k) Millionaire

There’s nothing more definitive in the journey to financial freedom than hitting the $1 million mark in retirement savings.

A nest egg like that is a near-guarantee that you could surmount any curveball the world throws at you, whether it is an unexpected family emergency or anything else.

While $1 million certainly sounds like a lofty milestone to many, it’s actually quite a common achievement:

  • Millionaire households in the U.S.: 11.3 million (8.95%)
  • Total households in the U.S.: 126.2 million

And contrary to popular belief, to become a 401(k) millionaire, you don’t need to strike it rich with a lucky stock pick, or use a crystal ball to forecast the future of the market.

Your best bet is to simply focus only on the factors you can control.

What You Can Control

Today’s infographic is from Tony Robbins, and it covers key points from his #1 Best Selling book Unshakeable: Your Financial Freedom Playbook, which is now available on paperback.

It shows that the biggest winners in the financial game know that they can’t predict the future, and instead titans like Warren Buffett or Jack Bogle focus intently on the factors they can control, knowing that with the right approach they’ll thrive in almost any market.

What are these crucial factors?

FactorDescription
TimeThe force of compound interest is more powerful over longer periods of time.
DisciplineStaying calm and focused on the long term during periods of turmoil is key.
DiversificationProper asset allocation and frequent re-balancing can position you to weather any storm.
ExpensesExpenses and taxes are silent killers, and must be minimized strategically.

By diligently working to take control of these four factors, your odds of attaining financial freedom are extremely high. Here is each factor in more depth.

1. Time

The power of compound interest is extraordinary, making time your best friend when it comes to building a battle chest of retirement savings.

The current maximum contribution limit for 401(k)s is $18,500 per year, not including what is matched by your employer. If you maxed out on contributions and started investing early, you can hit $1 million before retirement even in sub-optimal market conditions:

Starting ageRequired returns for $1 million at age 65
302.20%
353.45%
405.40%
458.55%
5014.50%

Time can make up for a lack of investing acumen. Wait until later, and things get very difficult – by age 50, you need market beating returns!

2. Discipline

If you’re taking advantage of the power of compound interest over a long period of time, whether that is 20, 30, or 40 years, it is inevitable that there will be bumps in the road:

  • Stock market corrections happen once a year, on average
  • Bear markets happen once in every 3-5 years, on average
  • Bear markets vary in length, but on average last one year

Through decades of investing, the fact is you are going to see bear markets – it is how you handle them that counts.

Even when it’s the most tempting to sell, remember these facts:

  • Bear markets become bull markets
  • The first 12 months of a new bull market can see crucial market gains
  • Nobody can successfully time the market – not even the experts

In other words, having the discipline to hold through the turbulence can be the difference maker – and a key factor you can control in your journey to becoming a 401(k) millionaire.

3. Diversification

Another factor you control is portfolio diversification, and here are four ways diversification can minimize risk:

Diversification TechniqueExamples
AssetsStocks, bonds, and alternative assets like real estate or gold.
SectorsConsumer goods, tech, energy, financials, etc.
MarketsDomestic, international, emerging markets
TimeAdd to investments regularly, because there is never a “right” time to buy

A properly designed portfolio can weather any storm, and re-balancing it on a regular basis will force you to sell assets at market highs, while buying at low points.

4. Expenses

The fees on your 401(k) statement might not seem like much, but even 1% or 2% can make a big difference over the long term.

For example: the value of $1 compounding for 50 years at 5% will be worth $11.50, but if it averages 7% it will be worth $29.50. That’s almost three times more!

Expenses, both seen and hidden, can be a silent killer any portfolio, so keeping them to a necessary minimum can help you get to the promised land.

A Final Word

If becoming a 401(k) millionaire was easy, everyone could do it.

But to be successful, you need to take control over factors like time, diversification, discipline, and costs – ideally with a qualified and experienced financial advisor and partner. Then, you need to stick to the plan and let the market do its work.

Investing is a game of inches. If your returns improve by, say, 2 or 3 percentage points a year, the cumulative impact over decades is astounding, thanks to the power of compounding.

– Tony Robbins

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Mining

How to Avoid Common Mistakes With Mining Stocks (Part 3: Jurisdiction)

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Mining Jurisdictions

“Location, location, location…”

This famous real estate adage also matters in mining. After all, it’s an industry that is all about the geology—but beyond the physical aspects and the location of a mineral deposit, there are also social and environmental factors that create a mining jurisdiction.

Common Mistakes With Jurisdiction

We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.

Part 3 of the series focuses on six signals investors can use to gauge a company’s preparedness for the jurisdictions they operate in.

jurisdictions

View the two other parts of this series so far, covering mistakes made in choosing the team as well as those made with a company’s business plan.

#1: Geological Potential: Methodical Prospecting or Wild Goose Chase?

It all starts with a great drill result, but even these can be “one-off” anomalies.

Mineral exploration is a methodical process of drawing a subsurface picture with the tip of a drill bit. A mineral discovery is the cumulative effort of years of research and drilling.

The key to reducing this geological risk is to find a setting that has shown previous potential and committing to it. Typically, a region is known to have hosted other great discoveries or shares a geology similar to other mining districts.

Signs of Methodical Prospecting:

  • Lots of geological indicators
  • Potential for further discovery
  • Sound science

#2: Legal Environment: Well-Paved Path or Minotaur’s Maze?

Now that you have identified a region with the prospective geology you think could host a discovery, a company will have to secure the permits to explore and operate any further.

However, a management team that cannot navigate a country’s bureaucracy will face delays and obstacles, costing investors both time and money.

Without clear laws and competent management, a mining company’s best laid plans become lost in a maze with legal monsters around every legal corner.

Signs of a Well-Paved Highway:

  • Existing laws encourage mining investment
  • Relatively low bureaucracy
  • Well-established permitting process
  • Legacy of mining contributing to economy

#3: Politics: Professional Politics or Banana Republics?

A good legal framework is often the outcome of politics and stable governance—however so is a difficult legal framework.

The political stability of a nation can turn on one election and so can the prospects for developing a mine. An anti-mining leader can halt a mining project, or a pro-mining leader can usher forward one.

A positive national viewpoint on mining may be enough to lure investment dollars, but local politics may determine the success of a mining company.

Signs of Professional Politics:

  • Positive history with mining companies
  • Politically stable jurisdiction
  • Rule of law respected
  • Changes in government have little effect on the mining industry

#4: Infrastructure & Labor: Modern or Medieval

Sometimes it is the discovery of valuable minerals that spurs national development, but this can also happen the other way around, in which development can encourage mineral discovery.

A mining company looking to build a new mine in a country with a tradition of mining will have an easier time. Access or lack thereof to modern machinery and trained employees will determine how much money will be needed.

That said, if a company is looking to develop a mining project in a new mining region, they must be ready to help create the skills and infrastructure it needs to mine.

Signs of a Modern Jurisdiction:

  • Developed roads to access and support operations
  • Trained labor for staffing and development
  • Well-established grid lines and back-up power systems

#5: Community: Fostering Friendship or Sowing Enemies

Mining operations have a significant impact on the local community. Good companies look to make mutually beneficial partnerships of equals with local communities.

Ignoring or failing to respect the local community will jeopardize a mining project at every stage of its mine life. A local community that does not want mining to occur will oppose even the best laid plans.

Signs of a Friendly Relations:

  • Operations bring community together
  • Local history shows support for mining
  • Understanding of local concerns and regional variety
  • Company contributes to economic growth and health of the community

#6: Environment: Clean Campsite or One Night Party

There is no way around it: mining impacts the environment and local ecosystems. But, mining operations are a blip on the radar when it comes to Earth’s timeline.

Mine sites can again become productive ecosystems, if a company has the capacity and plan to mitigate mining’s impacts at every stage of the life of a mine—even beyond the life of a mine.

Signs of a Clean Campsite:

  • Development plan mitigates environmental damage
  • Well-planned closure and remediation
  • Understand how communities use their environment

Bringing it together: ESG Investing

These six points outlined above point towards a more complete picture of the impacts of a mining project. Currently, this falls under what is labeled as Environmental, Social and Governance “ESG” standards.

Mining companies are the forefront of a big push to adopt these types of considerations into their business, because they directly affect natural and human environments.

ESG is no longer green wash, especially for the mining industry. Companies that understand and apply these concepts in their business will have better outcomes in the jurisdictions they operate within, hopefully offering investors a more successful venture.

Geology does not change on the human time scale, but bad management can quickly lose a good project and investor’s money if they do not pay attention to the other attributes of a jurisdiction.

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Technology

By the Numbers: Are Tech IPOs Worth the Hype?

Technology IPOs draw massive investor and media attention, sometimes raising billions of dollars. But do tech IPO returns match up with the hype?

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Tech IPOs Shareable

Tech IPOs — Hype vs. Reality

Initial Public Offerings (IPOs) generate massive amounts of attention from investors and media alike, especially for new and fast-rising companies in the technology sector.

On the surface, the attention is warranted. Some of the most well-known tech companies have built their profile by going public, including Facebook by raising $16 billion in 2012.

But when you peel away the hype and examine investor returns from tech IPOs more closely, the reality can leave a lot to be desired.

The Hype in Numbers

When it comes to the IPOs of companies beginning to sell shares on public stock exchanges, tech offerings have become synonymous with billion-dollar launches.

Given the sheer magnitude of IPOs based in the technology sector, it’s easy to understand why. Globally, the technology sector has regularly generated the most IPOs and highest proceeds, as shown in a recent report by Ernst & Young.

In 2019 alone, the world’s public markets saw 263 IPOs in the tech sector with total proceeds of $62.8 billion. That’s far ahead of the second-place healthcare sector, which saw 174 IPOs generate proceeds of $22.5 billion.

The discrepancy is more apparent in the U.S., according to data from Renaissance Capital. In fact, over the last five years, the tech sector has accounted for 23% of total U.S. IPOs and 34% of proceeds generated by U.S. IPOs.

tech-IPOs-Supplemental

The prevalence of tech is even more apparent when examining history’s largest IPOs. Of the 25 largest IPOs in U.S. history, 60% come from the technology and communication services sectors.

That list includes last year’s well-publicized IPOs for Uber ($8.1 billion) and Lyft ($2.3 billion), as well as a direct public offering from Slack ($7.4 billion). Soon the list might include Airbnb, which plans to list within the communication services sector instead of tech.

The Reality in Returns

But the proof, as they say, is in the pudding.

Uber and Lyft were two of 2019’s largest U.S. IPOs, but they also saw some of the poorest returns. Uber fell 33.4% from its IPO price at year end, while Lyft was down 35.7%.

And they were far from isolated incidents. Tech IPOs averaged a return of -4.6% last year, far behind the top sectors of consumer staples (led by Beyond Meat) and healthcare.

SectorAvg. IPO Return (2019)
Consumer Staples103.0%
Healthcare35.9%
Financials30.8%
Materials30.4%
Consumer Discretionary14.6%
Industrials6.1%
Energy-0.4%
Technology-4.6%
Utilities-7.8%
Real Estate-9.4%
Communication Services-66.4%

While last year was the first time tech IPOs have averaged a negative return in four years, analysis of the last 10 years confirms that tech IPOs have underperformed over the last decade.

A decade-long analysis from investment firm Janus Henderson demonstrated that U.S. tech IPOs start underperforming compared to the broad tech sector about 5-6 months after launching.

This dip likely corresponds to the expiry of an IPO’s lock-up period—the time that a company’s pre-IPO investors are able to sell their stock. By cashing in on strong early performance, investors flood the market and bring share prices down.

Interestingly, most gains for these IPOs tend to happen within the first day of trading. The median first-day performance for tech IPOs was a 21% increase over the offer price. That’s why the median first-year return for a tech IPO, excluding the first day of trading, is -19% when compared with the broader tech sector.

How to Make Money from Tech IPOs

So does that mean that investors should avoid tech IPOs? Not necessarily.

Longer-term analysis from the University of Florida’s Warrington College of Business shows that U.S. tech IPOs offer better returns than other sectors as long as investors get in at the offer price.

U.S. Tech IPO Returns from Offer Price

SectorAvg. Three-Year Return Market-adjusted Return
Tech77.0%28.3%
Non-Tech34.6%-11.4%

Even when adjusting for the broader market performance, tech IPOs have been solid in comparison to the offer price.

The challenge is that if investors are buying stock after that first day market bump, they may have already missed out on meaningful gains:

U.S. Tech IPO Returns from First Closing Price

SectorAvg. Three-Year Return Market-adjusted Return
Tech46.1%-2.7%
Non-Tech23.7%-22.2%

So should investors shy away from tech IPOs unless they’re able to get in early?

Generally speaking, the analysis holds that new tech companies perform relatively well, but not better than the broader market once they’ve started trading.

However, in a world of billion-dollar unicorns, there are always exceptions to the rule. The University of Florida study found that tech companies with a base of over $100 million in sales before going public saw a market-adjusted three-year return of 24.4% from the first closing price.

If you can sift through the hype and properly analyze the right tech IPO to support, the reality can be rewarding.

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