Investing at 40: the exact plan to reach one million

0:00Most people think starting investing at 40 is too late. I'm here to tell you that's not true. In fact, with the right plan, you can still build massive wealth and become financially free. And I'm here to show you exactly how I'd do that if I was starting my investment journey at 40 years.

0:16If you don't know who I am, my name is Felix and my mission is to help 1 million people become financially independent. After quitting my corporate jobs and retiring from my business, I've replaced both those income streams with my investing and trading. And I've helped over 20,000 people in their quest to achieve their goal to become financially free.

0:37Here's what most people think. If you start with $500 at age 20, this is dollars and this is 20 years old. Most people think that by age 40 that $500 becomes $2,000. Here is 40. And they think that by age 60 that $500 would have become about $25,000.

1:10That's what most people think. But the reality of investing is much more exciting. Compounding takes time, yes. If you notice at age 30, the following happens. What actually happens is we need to extend our line way, way, way higher. And the reality is that if you start with $500 down here at age 20, what actually happens at age 40 is that we are already up here at $4,000.

1:41Our line is actually starting to do this. And then the real magic kicks in between 40 and 60, which means that that $4,000 actually becomes $26,500, which means this line basically goes, well, not quite vertically up, but you get the idea. It goes up way, way, way, way faster than you think. And this growth path here is assuming only a 10% return on your investing, which is about the average of the last 30 years of the stock market.

2:11Now, you can't retire on $26,000, obviously. So how do you get to $1 million? If you started investing at age zero, you would need to save only $13 a month to have a million at age 65. Say you're 20, maybe that isn't you, maybe that's one of your children. Well, tell them about this. You only need to invest $188.33 per month to get to a million.

2:44Now let's say you are 40 years old, which is the title of this video. How much do you need to invest? Here's the really interesting question. It is $1,044.33 per month. That'll get you to a million. Now if you're a little bit later to the party, say you're at 50, I know some of our viewers are 50, $2,870. If you're at age 60, you can get this on the piece of paper here, then you need $13,519 per month.

3:21So starting out at 40 years old versus 20 or versus zero, it's harder because the time value of money is so great. But it's still possible. With a large enough income and dedication, most people can actually invest $1,000 a month if they really put their mind to it. And waiting to figure out until you're 50, well, it makes it 2.8 times harder. And waiting until you're 60 is going to be impossible for most except for very high income earners.

4:03So now we know how much money we need. The second step is therefore where do we put that money? You want to put your money into tax advantaged accounts. You want to start off with your 401k if you're employed. What do you want to do with that? You want to max out your 401k up to, and this is really important, write this down, only up to the point to which your employer matches your contributions.

4:36The reason for that is your employer is giving you free money. You don't want to turn that away. But 401ks are also not great instruments. Most of your money is going to go into some high fee mutual fund or a certain selection of pretty high fee ETFs. So it's not the greatest place to invest your money. You've got very little control over it. But there is free money to be had here and we don't turn away free money. And once you've maxed out the employer matching contribution, you go to the next level.

5:06The next level is going to be your Roth IRA. What's the beauty of a Roth IRA? Let me tell you this. Dividend taxes in a Roth IRA are zero. Capital gains taxes in a Roth IRA are zero. And what that means is that compounding chart we looked at the beginning, well, we grow that much faster because we don't lose any of the gains that we get to start with.

5:48Now you know how much money. Now you know where to put it. The next question is what stocks do we put it in? Starting point is a low cost index fund, also known as ETFs. They will typically mirror an index like the S&P 500 which will give you, at least judging by the last 30 years, that 10% a year. You can buy one on the NASDAQ and so on. And there are also smaller ones on individual sectors. I would stay with the big boys because you're actually doing this for just broad market performance rather than betting on individual stocks.

6:28How about individual stocks though? The question you got to ask yourself is, are you willing to put in a little bit of work to learn what makes a good stock? If the answer to that is, I've got zero interest in this, I'd much rather scrub the kitchen floor, then you go 100% into ETFs.

6:54I personally think it is much easier than people think to actually pick great stocks. We're going into a little bit more detail on that. So yes, you could buy individual stocks. Now the risky thing with individual stocks is that they move a lot more than index funds and they could therefore hit you pretty hard.

7:11Now what I see most people doing, especially people who watch social media like what you're watching here right now, they don't just buy individual stocks, they buy growth stocks because you want to catch up right now. What's the problem with that? Well, growth stocks are risky. I could give you a whole long list of stocks that are still down 60, 70% from the COVID highs and a lot of people are still holding on to them and they're delaying their retirement.

7:36What I do instead is I do focus quite a bit on growth stocks and we look at the split in just a second. But I don't care about the growth part. I just care about where is the money flowing. So what I look at is money, where is institutional money flowing. My best performing stocks so far this year are things like Avis. Avis isn't particularly exciting as a stock, but it's made me 90% returns. It's things like gold miners. Exactly, boring businesses, but again they've made us very outsized returns.

8:14It hasn't been the Nvidia or the Tesla or the Palantir or any of those. It's been businesses that I find based on rules that I've actually learned from my time in banking and then my mentors over the last 10 years. You want to learn that exact strategy, by the way, it's a 3 step system, it's pretty easy to learn. There was a free masterclass I put out for you, gives you a lot more detail about what we're talking about here. And if you want me to show you that 3 step system for selecting those stocks, just watch that free 15 minute masterclass at felixprehn.org/getfree because it's our mission to make you get free.

8:48Now the most important part to all of this, particularly as you're thinking about retirement, particularly as you get closer to retirement, is to protect your portfolio and your money. You want to be protected from the crazy ups and downs in the market. Tariffs, COVID, 2008 housing crisis, there's always something you didn't see coming. And if you want to retire at a certain age, well, risk management becomes your primary concern.

9:15In addition, you want to have an emergency fund. And the whole purpose of the emergency fund is that say another 2008 happens, the market tanks, and exactly that moment you need unexpected money for something. You don't want to be selling your stocks at that point because you're going to be destroying a lot of wealth.

9:41Generally speaking, a good measure of that is 6 months of your expenses. And you don't have to have that sitting there in cash because cash will just go to zero in terms of value. You can put it into a high interest savings account. They won't pay you that much, but they still pay better than nothing. You could also put it, if you're a little bit more into this, into short term government bonds. So again, they're going to pay you just a little bit more than perhaps the bank does.

10:17But your real question is probably, how do we split up this pie? This is your money pie. How do you split that up? Well, I'll tell you how I split it up. And you might be surprised by the outcome. What I do, I take half of the money and I put it into a couple of ETFs. Why do I do that? Makes my family sleep better at night because I'm not actively managing all my money. That's the simple answer. I think I could do better than the ETFs, but I'd rather be happy. The second thing is you're going to want to have a little bit of that emergency cash down here. And then for me, the rest of it sits in individual stocks.

10:56Now I want to tell you a little bit more about how I pick those individual stocks because I think that's the real value add here. Stop thinking about stocks. What you want to be thinking about is money. You can see where the money is flowing in the market. Let me give you an example. Let me give you two stock charts.

11:18Crudely here for you. One looks something like this. And the second one looks something like this. Which one would you rather buy, A or B?

11:31This is A. This is B. Put in the comments down below. I'll tell you what they are. This here is semiconductors. The ticker symbol for the ETF I'm looking at here is SMH, and you can check my drawing skills. And the one on the right here is the very, very sexy sector of homebuilders.

11:51Nobody looks at homebuilders. Everybody wants to buy some tech thing. Ticker symbol for this is XHB. What do you see? Well, money flowed into this sector here. The money went in here, and then money went in here. Money went in there, money went in there, money went in here. A lot of money is poured into that already.

12:11What about over here? Well, we've just started. So to me, I like to follow the money flows. And I believe the money is going to basically be flowing in that direction because this here on the right, our homebuilders, is a new opportunity. Falling interest rates and so on are a factor to that.

12:30Now, this isn't actually about homebuilders and semiconductors. It's just about everyone's in the latest sector. Everyone's talking about all the headlines are about, but nobody knows how to find the next sector. And there are plenty of these. At the moment it's homebuilders. I'm buying oil services companies. All these random sectors that nobody really looks at and that's where I get my actual returns from.

12:51Now you're thinking, yeah, but what stocks do I buy? Do I buy the ETFs? No, I don't. What I do next is I look for the best stocks in that sector. Now, let me just give you two metrics that basically tell you what the best stock is.

13:10The first is something called gross margin. What's a gross margin? Just how much money they're making when they sell something. And if you have a very high margin, it means that it's very difficult to replace you as a supplier. So the guys who make these pens, well, I can tell you their margin is going to be pretty low because I can buy these kind of pens from 10 brands. But if you're making something, say your Visa card, it's very hard to replace Visa card because to set that up would be almost impossible. So that's a company with a high gross margin. Their margin is something like 98%.

13:43And the second thing we look at is return on capital invested. You can see I'm running out of paper because I wanted to give you more value than I had paper for. And return on capital invested, ROIC is often the acronym. What does it tell you? Well, it tells you if the company invests $1,000, how much money do they have one year later?

14:05Now a good company will have maybe a 20% or higher return on capital employed invested. And what does it mean is, well, say it's 20%, say they make 20% on that, well next year that investment means it is now $1,200. And if they keep doing it, well in the year after it's going to be how much? It's going to be hard for me to do the maths here. That's another $240 on top, so that's $1,440.

14:32So that this is year 3. So in year 3, they've almost made 50% gains on that money and you keep going with a compound and you can see why those companies make a lot of money. If you want to learn this in a bit more detail, I give you the 3 actual steps and walkthroughs and rules, including the risk management, then jump into the free masterclass I prepared for you. It's only 15 minutes long at felix.org/getfree.

14:57And also check out all the news and all the nuggets and all the stocks that I find that I look at that I share with you guys on this channel. So just hit the subscribe button to that and I hope you got some value out of this and you're going to continue to learn and expose yourself to more information, more knowledge, focus on the strategies and your retirement is going to come along much faster than you think. Thank you for watching.