The decision to invest is a fairly simple one, of course we all want our money to grow! But actually starting out, well that’s a different story altogether. At every step we were accosted with so many daunting questions and choices, that we (read I, because let’s face it, I’m the lazy one) almost decided to give up. And I would have too, if Mr. Fireball, the go-getter that he is, hadn’t egged me on. Not exhaustive by any degree but below are some of the questions we had to wrestle with:
- Should we follow a DIY approach to investing or should we go with an advisor? To add to the complexity, there’s now a third option, a robo-advisor.
- If we do decide to go DIY, then should we invest directly in Shares or in Managed Funds? If it’s in Managed Funds, then should it be Actively Managed Funds or Passively Managed Funds?
- What sort of a portfolio do we want to build? Growth, Balanced, Conservative or something else altogether?
- Which Shares or Funds? What have their historical returns been like? Management Fees? Filing requirements?
- Which stock broker? A Full-service Broker or a Non-advisory Broker?
- This is too hard, do we really have to do this?
Luckily, by the time Mr. Fireball & I got down to making these choices, we had already been acquainted with the FIRE movement. We’d read up blogs by Mr. Money Mustache, Aussie Firebug and knew how they were managing their money.
What is FIRE?
Going back to the basics first, FIRE stands for Financial Independence/ Retire Early. The approach of the movement is to maximize the savings rate by (a) maximizing income, (b) minimizing expenses and (c) consistently investing the savings into assets that provide passive returns. We researched how the veterans were managing each of these three elements of their FIRE journeys with particular interest in their investment strategies.
Below were the overwhelming take-aways:
- Hoarding money in a Savings Account is a Cardinal Sin – The interest rates that Savings Accounts offer are generally in the range of 1.5% – 2%. That’s even less than inflation! Which means that money lying in the bank account is only decreasing in value over time. And to add insult to injury, Aussie banks find all sorts of ways to try and reduce their stated interest rate too. They are effectively saying to us, ‘We will give you a measly 1.75% on your money that’s lying with us, that we are using as we please to make profits from, if and only if you satisfy each of our conditions, otherwise, stay happy with an interest rate of 0.11%!
- Property Investing was the ‘IT’ thing, until it no longer was – A lot of FIRE veterans initially started out investing in property and relying on the rental income and the value increase from their properties for building their overall wealth. But later they found that they needed to put together a lot of funds before they could have the down payment ready, had to research the hell out of the real estate market & deal with banks to get credit. And then after all this, they even had to manage the tenant, the maintenance costs or else pay dearly to have a property agent manage it for them.
- ETFs are the holy grail (Even Warren Buffet swears by them!) – It turned out that after trying their hands at various different investment instruments, most of the FIRE veterans had concluded that ETFs were the way to go. ETFs, short for Equity Traded Funds, are funds that trade on the stock exchange and track a particular index such as a stock index, bond index, commodity index or a sectoral index. Because they track defined indices, they don’t need a lot of active management by fund managers so the management costs are much lower. Also ETFs are very liquid, meaning if you need funds urgently, you could sell your ETFs that very day and have the corpus available for whatever use you choose to put it to.
The irrefutable benefits of ETFs and the combined wisdom of the FIRE veterans sealed the deal for us and we decided to go with ETFs ourselves. Now, we realize that we’re starting to invest at a point when everything’s at its peak, stocks, bonds, gold, everything. Perhaps, if we had started investing at any other point in history, we would have felt the same way. It seems that the experts are always of the view that the markets are overvalued and that a recession is just around the corner. Perhaps it is truer now than it has ever been before, perhaps we’ll soon see another financial crisis like we saw in 2009 or perhaps we won’t. But that’s the nature of investing. You hope for the best and prepare for the worst. And like Mr. Fireball says to me every time I start getting jittery about the impending doom, ‘We’re investing for the long term!’
The Power of Averaging
Yes, Averaging is the superhero that will protect our investments in the long term.
- Dollar Cost Averaging – Regular investments will make sure that we get the benefits of buying at lower prices and minimize the losses from having bought at higher ones. This helps avoid the urge to time the market.
- Asset Diversification (Also eventually leads to averaging) – Our investment portfolio will contain various assets, some will give stellar returns and some will be damp squibs, but when put together they will all manage to pull together just fine!
Below is a detailed breakup of Mr. Fireball’s roboadvisor curated portfolio and my self-directed portfolio.
Self-directed Portfolio as on 3/12/2019
Roboadvisor Portfolio as on 3/12/2019
Both Portfolios Consolidated
May the odds of ‘Averaging’ always be in your favour!