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Kiplinger’s Investor Profile: Dierdre Brazil, the Index Fund / Frugal Saver Strategy

2 August 2006

Kiplinger’s online has an excellent series of profiles of various different kinds of investors, using real people as examples of how smart savers are preparing for retirement. I recommend reading through them all – everyone has different personality traits and skills, and different investment strategies are better for different people. This post looks at the easiest set of strategies: saving a big chunk of your paycheck and putting it in index funds. Kiplinger’s profile of Dierdre Brazil here is a textbook example of how to do this properly without needing to understand much about money.

She already has a six-figure portfolio that is invested mainly in index funds. She also co-owns a rental home. Nope, she didn’t luck into a financial windfall. In fact, Brazil — whose family moved from Ireland to Far Rockaway, N.Y., when she was a toddler — grew up in a household with six siblings and few luxuries.

When she graduated from the State University of New York at Binghamton in 2002, Brazil had just $1,000 in savings and 15 times that in student loans. But within almost four years’ time, she’s accumulated $90,000 worth of mutual funds and $20,000 in cash.

So she must make hundreds of thousands a year, right? Wrong – she “lives rent-free with her parents. That allows her to invest 65% of her salary.” That savings amounts to about $1,000 a month put into index funds, which for the uninitiated are funds that are designed to closely track the stock market indexes (meaning they don’t charge much at all in management fees).

Kiplinger’s concludes that if she keeps up her strategy and “earns 10% a year, she’ll be sitting on nearly $9 million when she turns 65.

This is a simple, smart investment strategy that anyone can do on even a moderate income. Living with your parents might seem extreme – but so is retiring with $9 million. So how do you adopt this strategy? Easy:

1) Make a strict budget that gets you to at least $1,000 a month in savings. This is the hard part for most people – if you’re making under $50,000 or so gross, it will require some big cuts and some frugal living. This is a topic unto itself, and way too complicated to cover entirely in a single post. It’s up to you to decide if the payoff is worth it.

2) Put that money into a couple of different index funds. Use major companies, and read the fine print – make sure the fees are low, under .5 to .25 percent or so for management fees. Use a big, respected company like Fidelity or Vanguard. Do it every month, without fail.

3) Wait a long time. Index funds track the stock market closely – and over time, it nearly always averages 10-12% returns. Don’t panic if there’s a crash and stop putting money in. Don’t take your money out until you’re retiring. And if possible, don’t retire during a low period – retire when the market is high. It’s simple math – the economy always tends to go up overall in the long run. And if you wait it out, and keep putting money in, you’re going to end up on top. The fact is that there is no 20 year period in American history, starting from any date, in which the stock market has lost money. You can start right before the 1929 crash, at the highest point – and if you had an index fund then, 20 years later, you’d still have made some money. Time is on your side – and so is being responsible.

The best part of this strategy is it doesn’t take a financial genius or a big income to do it. All it takes is some basic responsibility and belt tightening, and a long term vision.

Discuss this on the Free the Drones Forums here.


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    One Response to “Kiplinger’s Investor Profile: Dierdre Brazil, the Index Fund / Frugal Saver Strategy”

  1. Get Rich Slowly » Carnival of Personal Finance #60 Says:

    [...] Investing Free the Drones looks at an investment strategy for frugal savers, a strategy that uses index funds. The entry describes a woman who, after graduating from college, lived at home with her parents and invested the bulk of her income. Within just a few years, she’d accumulated a six-figure portfolio! [...]