Financial Physics

Path to Financial Freedom

Rule of 20

Pay Yourself First: Investment Account

Pay yourself first from your pay check and then adjust your living expenses with the remaining amount from your salary.

Amount: 20% of your salary each month

How Much:

This 20% of your salary each month should be deposited in to your investment account.

Investment Methodology:

In terms of stock investment, one needs to know three things:

  1. What to buy
  2. When to buy
  3. How many and how much to buy

What Stocks: Identify companies with the following fundamentals:

Sales & Earning Growth:
20%
Return on Equity (ROE):
20%
Net Profit Margins (NM):
20%
P/E + Inflation:
20

When to buy:

When the stock is down by:
20%

How Many Stocks in a Portfolio:

Number of Stocks in a portfolio:
≈ 20 stocks in diverse industry

How much to invest in each stock:

Follow Kelly Criterion: It says, if odds are in your favor:

Invest in each stock:
≈ 20% of your capital.

Minimum Holding Period:

 

Holding Period:
20 Months

If you follow these "Rule of 20" – you are on your way to the Financial Freedom. You may still chose to work for intellectual pursuit – but it would be your choice.