I have US$50,000 now. I want to invest in US stocks for 20 years. Which stocks will you recommend? How much would I have at that time?

Friend, I am glad that you are thinking of a 20 year investment horizon. None can suggest you a single stock that you can invest and forget about for 20 years. Of course there are stock of great corporations but at what price are they available in the market? If you buy the stock of an excellent company at a very high price, you as an investor will not benefit. Under the circumstances, You have two options before you, as follows:

1. You may learn ‘Value Investing’, in which case please buy the best book, ‘The Intelligent Investor’ by Benjamin Graham and get started immediately. You may visit my blog atValue Investing.

2. If you do not want to spend a lot of time on investing, you may simply invest your corpus in an ‘Exchange Traded Fund (ETF)’ that mirrors a popular index like DAX, Dow Jones, etcetera or any good mutual fund.

Now the most important aspect of investing begins. You simply forget about the investment till 20 years.

Following table shows what your investment could be if it is able to generate a compounded annual growth rate (CAGR) of 15% per annum or 1.25% per month, which is very much possible.

Future Value of Investment

I have assumed an annual inflation rate of 9.96%, which is probable in India, where I live, but in the US it is very unlikely. So, if the inflation rate is 2% per annum, you will end up with a net future value of US$ 911,208, quite a significant sum.

How to Attain Financial Freedom?

Ability to maintain a simple lifestyle without having to work is financial freedom. A majority of people has no option but work to make a living. Only a minuscule proportion of the population can afford to live without the necessity for earning a living. One may wish to call this segment of people rich but this term is actually not correct. They have certainly attained financial freedom but they need not necessarily be rich. While all the rich certainly enjoy financial freedom, all those financially free may not be rich. Financial freedom is an important milestone on the way to richness.

Financial Freedom

What does financial freedom mean, technically?

We have already understood that financial freedom means a person need not necessarily work for a living. It means one should earn incomes that are not directly dependent on the persons labor. These incomes are called passive ncomes. Examples of passive incomes are:

• Rent
• Interest
• Dividend

On the other hand, income earned out of efforts like salary, fees earned by professionals like doctors, solicitors, brokers, profits earned out of business are all active incomes. Active incomes stop the moment the earner stops working – they are totally and directly dependent on the skills, knowledge, competence and efforts of the person.

Every person will surely be earning some passive income in the form of interest from the bank on the savings and fixed deposit accounts. A few must already be earning rent from real estate like residential homes, shops, industrial sheds they own. In the case of a majority of ordinary folks, the passive incomes are not significant. They simply constitute a very small part of their total income. The passive income is just not sufficient to maintain the person’s present lifestyle without the need for that person to work.

When the proportion of passive income becomes significantly large and becomes able to sustain the person without he or she having to work, then that person is said to have attained financial freedom.

We will examine the income, expense and investment patterns of two individuals. One is already financially free and the other is not yet.

Passive Incomes per month	Not Free, Yet ($)	Financially Free ($)
Interest	100	2000
Dividends	0	1000
Royalty	0	3500
Rent	550	0
Active, occupational income	4000	1500
Total monthly  Income	4650	8000
Present monthly lifestyle expenses	4500	4500
Surplus	150	3500
Investment for generation of passive incomes in future	0	3000
Surplus Income lying in savings account in bank yielding low interest	150	500

When we study the financial information of the two individuals we find that the financially free individual has passive income of $6500 as against his monthly lifestyle expenses of $4,500, leaving a surplus of $2,500 for investment and consequent creation of additional passive income. Please also note that despite having total income of $8,000, far in excess of present cost of living, the person has wisely not increased the lifestyle expenses. Also noteworthy is the fact that even though this individual has already attained financial freedom, is still having active income, indicating active pursuit of a career. On the other hand the other person has little investible surplus. This person has to increase the active income as well as reduce the living costs and has a long way to go before becoming financially free.