How Much Do Moonshots Affect Your Chances of Retiring Early?

Opportunities pop up for everybody all of the time. It’s the way that we progress. It’s whether or not you’re in the right frame of mind or in the right stage of your life or if you’re even looking for them [that determines] whether or not you see them.
–Ben Brown

If you’ve been watching the news lately, it’s been hard to miss the stories of the run up in the price of GameStop’s stock, driven primarily by a Reddit user group called WallStreetBets. Some of the users, particularly one who calls himself Roaring Kitty on YouTube made some monster gains. As of February 3rd, he had turned roughly $54,000 into $22.4 million. Since that last posting, if he hasn’t sold, as of the close of trading on February 9, 2021, he would be at $18,245,067.62. That’s still a ton of money for almost anyone not named Bill Gates.

I’ve previously argued that, if you cannot withstand the allure of the siren song of trying to hit a home run, you should allocate no more than 5% of your investable capital into trying for a moonshot.

I’ve also argued that moonshots are more likely than not to derail your FIRE aspirations.

Since that media attention, the subgroup has had its membership increase 10 fold.

Even Mark Cuban pointed out that a very large group of small investors has the power to move the markets.

Therefore, it’s probably tempting to think…

If someone named Deep****ingValue can make tens of millions, so can I.

From nadir to peak, GameStop’s stock went up over 100 times in a period of months.

That’s an incredible rarity.

So, let’s talk about something that is a little less rare than, say, Halley’s Comet.

In 2020, 13 out of the 3,623 largest publicly traded U.S. companies were up 1000% between end of day trading on January 2, 2020 and end of day trading on December 31, 2020. 0.36% of those stocks were a 10 bagger in one year.

If you were to pick a stock at random every year for 40 years, you would have a 12.5% chance of finding a 10 bagger.

But, let’s say that you’re 8 times smarter than a dart throwing monkey, and you have a 100% probability of picking a 10 bagger at some point in your life.

Is it worth throwing the dart?

Do Moonshots Help You Reach FIRE Earlier?

To analyze this question, I took two different approaches to answering the question.

For basic assumptions, I assumed that an average couple starting at age 25, would earn an inflation adjusted national average of $68,400 annually and spend an inflation adjusted national average of $60,060 per year.

I also assumed that both spending and wages went in line with inflation.

Additionally, I assumed that this couple invested all left over money after spending.

Finally, I assumed that these moonshot investments were moon or bust. If the moonshot did not hit, the investment was lost. That probably wouldn’t happen in real life unless you were investing in options.

Furthermore, for the sake of simplicity in the model building, I assumed a 70/30 split of stocks and bonds.

Once the couple had enough in savings to hit their target safe withdrawal rate, that was the year they retired.

I ran historical stock and corporate bond returns (cited above) and ran simulations between 1928 and 1988 for this hypothetical couple’s starting year.

I also randomly assigned the year that they hit the moonshot – a 10x return on their moonshot investment. Once they hit the moonshot, they counted their lucky stars (no pun intended) and stopped trying for the moonshot.

For the first run, I assumed that this couple invested 5% of investable assets – their investment balance plus 5% of excess income – every year until getting a hit.

It turns out that such aggressive investments are quite deleterious to one’s FIRE health.

In only 55% of scenarios was this couple ever able to get their investments to a safe withdrawal rate.

The earliest that this couple could retire was in 5 different scenarios, which was after 48 years of work.

For the second run, I assumed that this couple invested 5% of excess income (e.g. income – spending).

This couple was marginally better, as they were able to accumulate enough assets to be above the safe withdrawal rate threshold 67% of the time.

However, the earliest retirement threshold was 49 years of work. That happened in 12 scenarios.

Comparatively, taking no moonshots did nothing to improve the earliest retirement age – 49 years of work – but it did increase the number of times that happened to 40 out of 2,400 scenarios. Also, the couple did reach a safe withdrawal rate balance 70% of the time.

I did notice a big trend for the scenario where the moonshots were 5% of investable assets.

After a while, continuing to take those shots hurt the couple. Sometimes badly, adding more than a decade to the expectation of retirement.

No successful moonshot after the 17th year of work lowered the retirement age.

Why?

Compounding.

Early moonshots had a double effect: they both stopped the continual contribution to the moonshot fund and increased the base of investments to allow compounding to take over.

With the 5% of excess income scenario, the moonshots helped until much later – some moonshots helped even after the 28th year.

Yes, you might think that you are Nassim Taleb. You are not.

It can be tempting to try to hit the moon with some speculative investments.

However, there are few times when it will pay off.

IF you absolutely MUST take moonshots, do them early in your investing life. Preferably, you stop aiming for the moon no later than 10 years into your career.

I think the better approach is to wait until you have retired and you know that you have more than sufficient assets to be able to try for moonshots. After all, someone who enters into FIRE with a 3.5% safe withdrawal rate has a 50% chance of ending up with 9x their starting principal left over. Therefore, assuming you’re not in the worst case of those sequence of risk scenarios, you’ll have some opportunities to take a crack at hitting the massive home run.

Even then, hitting a home run will probably not make much of an impact on your overall net worth, but maybe you can post some cool screenshots to WallStreetBets.

Disclosure: No diamond hands, apes, or rockets were harmed in the writing of this article.

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Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

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