Picking the right investments for early retirement: Recent early retirees’ thoughts...
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| Picking the right investments for early retirement! |
My wife and I are adherents of the FIRE (financial independence retire early) movement. Concepts of FIRE movement (saving up 25 times your yearly expenses), allowed us to retire early at ages 51 and 48.
In this post, I’d like to share with you my experiences with different investment options as well as make some recommendations. Please use these recommendations for informational purposes only. Use what works for you, discard what doesn’t. Gather as many resources as you can to make an informed decision.
Let’s jump right in!
When I started out with a retirement account, a 401k, I had no clue what each investment options were. I passed on my first job’s 401k plan as it totally overwhelmed me. Those investment options may have been in Greek!
At my second workplace, I signed up for 401k, but only at my colleagues’ behest. They explained the importance of a retirement account and how investment options worked. Most of these went right over my head, but I did manage to pick 3-4 investment options for my first 401k.
It would take me few months to figure out what I had selected. There were prospectus (document showing information about an investment) that were 20-30 pages long. Frankly, it was just too much information to take all of them in. I read maybe the first page or two that told me the most important facts about an investment.
That habit carried over to current day. These days, instead of reading a paper version of a prospectus, I look at few pertinent facts about an investment online. These are: rate of return, expenses, fund rating, and fund inception (how long the fund has been in existence).
In the above example, look at the 4 things circled. This is what I look at before deciding on an investment option.
Here are my reasons for selecting these four things:
- Rate of Return: A fund that has beat the S&P 500 index (this index will typically return about 10% yearly) for past 10 years is a good indicator the fund is a good one. Although past performance is not an indicator of future performance, I tend to think this matters. You can assume basketball player LeBron James will continue to do well based on his past performances. Same line of thinking for picking investment options.
- Expenses: Lower the expense, the more money YOU keep. Generally, an actively managed fund (a fund manager buys and sells different investment options; you’re paying for their expertise) expense will be higher than a passively managed fund (follows an index without any person managing the fund). An expense ratio of under 1% like in this example above for an actively managed fund is good. Note this one has .83%. For a passively managed fund, the expense ratio should be much lower, like .05%.
- Fund Rating: Generally, the higher the overall rating, the better the fund. Morningstar is one of handful of companies that rate/analyze funds. It’s a good idea to use these ratings as a guideline when picking a fund. Pick a fund that is rated at 4 stars or better.
- Fund Inception: How long a fund has been in existence matters to me. This longevity demonstrates stability and good management. The longer it’s been around, the better...The average life of a fund is around 9 years. Note this fund has been around since 1983!
After you look at these facts about a fund, the next step is figuring out what type of investor you are. You need to figure out if you’re a risk taker, not a risk taker, or someone in between the two.
If you’re a risk taker, then you should invest mostly into stock mutual funds.
If you’re not a risk taker, then you should invest mostly into bond mutual funds.
If you’re somewhere in between, you should invest in a mix of investments like a mix of stock mutual funds and bond mutual funds.
Age also plays a huge role in picking the investment options. If you’re under 30 years old or younger, you should invest mostly in stock mutual funds. If you’re close to 60 years old or older, you should invest more in bond mutual funds.
When I started investing, the formula for figuring out how much stocks vs bonds to hold was by taking a number 100 then subtracting your current age. This means if you’re 40 years old, then you should hold 60% in stocks and 40% in bonds.
Nowadays, this number has become 110% or even 120%. Whether you use one or the other number, more stocks is what it calls for...
So, how do all these help ME pick the right investment options? Let me lay out how I would pick my ideal investments so you can get an idea. You should consider this recommendation as informational purposes only. Always seek different sources before deciding! Seek professional help as needed.
- Invest mostly in stock mutual funds, as much as you can handle. Some FIRE movement people have bought ONLY stock mutual funds with an emergency fund. Personally, I like a bit of bond mutual funds to balance stocks. Why bonds? When stock market is down, bonds typically will stay fairly steady. Best of all, it’ll still pay out a monthly interest. My ideal mix: Figure 80% to 90% stock mutual funds, and 10% to 20% bond mutual funds. Most people under the age of 50 should take this route. If over 50, you should still do 60% to 80% on stock mutual funds with the rest in bond mutual funds.
- The 80% to 90% stock mutual funds should be broken down this way: Half or more on S&P 500 index fund (Google ‘S&P500 index fund’ for options); whatever remains, buy combination of mid-cap index fund (Google ‘mid cap index fund’), small-cap index fund (Google ‘small cap index fund’), and international fund (Google ‘international stock mutual fund’).
Conclusion:
Remember to take all the facts of a fund (rate of return, expenses, fund rating, fund inception) as well as your risk tolerance and age into consideration. Take in various resources and learn about investments as much as you can. I recommend changing your investments on a regular basis to make sure they still fit your life goals. Don’t think what you select in the beginning is the final selection. You’ll have winners but you’ll have losers in this journey. As long as you’re constantly learning, you’ll be on your way to becoming better at choosing investments.
Embrace the slow and boring method of investing. Don’t be lured by promise of an incredible return on an individual stock. Think mutual funds and not individual stocks. Most FIRE (financial independence retire early) adherents achieved financial independence by this method. It may not be fancy or headline grabbing, but it’s a proven method of achieving financial independence.
Personally, I like index funds because they have low expenses and are easy to understand, for those first learning about investing. Since index funds buy every stock in an index, you’re guaranteed to own few winning stocks that typically boost an index.
It’s well known in the industry that index funds typically outperform actively managed funds over time. Start with index funds, track how they’re doing over time. You can modify your investments as needed. Once you get more comfortable, you can look at actively managed funds for example...
Thank you all for reading! I really hope this post can help someone in their path to financial independence.
Jake
Wandering Money Pig
Disclaimer: All advice should be for informational purposes only. Please do your own research and gather information from various sources.
Please check out our YouTube channel ‘Wandering Money Pig’ showcasing our travels and our Pomeranian dog! https://www.youtube.com/channel/UC3kl9f4W9sfNG5h1l-x6nH
