Author Topic: Best investing strategy for financial independence  (Read 16054 times)

MRJIM

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Best investing strategy for financial independence
« on: April 04, 2014, 04:13:05 AM »
I have been researching financial independence and investing for a few months now and Iím a bit overwhelmed with all of the information out there. I have been looking at blogs like Dividend mantra, Dividend monk, Early Retirement Extreme and Mr Money Mustache and these sites have introduced me to investing strategies like dividend growth investing and index investing. I would just like to know out of these or if there are any others that are the best for achieving financial independence within 10 years, I have read that dividend growth investing is too slow if you donít have a large sum of money to invest but Iím not sure if thatís true or not. Also it seems like the people who run these blogs are only focusing on how much only they spend and aiming for an income goal based on that, but for someone like me who wants to start a family I wonít be able to  have my investments just pay my expenses. So I mean really Iím looking for the best investing strategy that will be able to pay me enough annual income to support me and my future family within 10 years.  Iím 19 at the moment and looking to reach financial independence by the age of 30 (under 30 would be great if I could achieve that) as I feel that 30 is the right time to start a family and I donít want to rely on a job to support them.

If anyone whoís aiming for financial independence or has already achieved it could shed some light on this I would really appreciate it.

wannabfrugal

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Re: Best investing strategy for financial independence
« Reply #1 on: April 04, 2014, 04:55:21 AM »
I have been researching financial independence and investing for a few months now and Iím a bit overwhelmed with all of the information out there. I have been looking at blogs like Dividend mantra, Dividend monk, Early Retirement Extreme and Mr Money Mustache and these sites have introduced me to investing strategies like dividend growth investing and index investing. I would just like to know out of these or if there are any others that are the best for achieving financial independence within 10 years, I have read that dividend growth investing is too slow if you donít have a large sum of money to invest but Iím not sure if thatís true or not. Also it seems like the people who run these blogs are only focusing on how much only they spend and aiming for an income goal based on that, but for someone like me who wants to start a family I wonít be able to  have my investments just pay my expenses. So I mean really Iím looking for the best investing strategy that will be able to pay me enough annual income to support me and my future family within 10 years.  Iím 19 at the moment and looking to reach financial independence by the age of 30 (under 30 would be great if I could achieve that) as I feel that 30 is the right time to start a family and I donít want to rely on a job to support them.

If anyone whoís aiming for financial independence or has already achieved it could shed some light on this I would really appreciate it.

Your savings rate is going to have far more an impact than your investment strategy.  The dividend or index are going to return fairly similar results for your planning purposes at this time. 

The real math you need to do is how much you can save every month and how to grow that amount.  Especially given your 10 year goal. 

For example, if you're saving 500/month for 10 years, you're talking 60k saved (ignoring growth and compounding).  I'm ignoring growth and compounding... because at that savings rate... I don't care if you're earning 4, 5 or 15%, it's unlikely that is enough for you to retire on, given that you want to support a family.

Increasing that savings amount is what I would recommend focusing on. 

What I'd recommend you do with your savings while you grow your savings rate and figure out the approach to investing that you want to use...

Since you are overwhelmed by investing options... I would recommend putting your savings into a vanguard target date fund to handle the investing and allocation to give you time to learn more about the investing options and select the one you like.  https://investor.vanguard.com/mutual-funds/target-retirement/#/  They offer a balanced portfolio allocation.


arebelspy

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Re: Best investing strategy for financial independence
« Reply #2 on: April 04, 2014, 07:54:02 AM »
Asking what the best investing strategy is like asking what is the best diet.  Everyone has their own opinions, different people have different needs, preferences, etc.*

Everyone needs to develop their own investing strategy.  I'd suggest you start with these links:

http://www.bogleheads.org/wiki/Investment_policy_statement

http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit

I too am aiming for an FI budget much higher than my current one (currently spend ~20-25k, looking for income of about double that).  That doesn't really change anything, except how long it'll take you to get there.  You still want your expenses as low now as possible (to save as much as possible), even if you'll be spending more later.  So don't worry about the final budget.  Save as much as you can, invest the rest.

Two big things that will affect you most over the next decade of working:
1) Your savings rate (increase your income, decrease your expenses).
2) Your (future) spouse.  If they're not on board with the frugality thing, you won't become FI.  If they are, and you're both working, it's like lighter fluid on a FIRE plan.

*For example, I am not a fan of dividend investing, but am a big fan of income from rental real estate.  I could debate long and hard about that, and so could - from the opposite opinion - some of the writers of the blogs you mentioned.  You'll have to decide what is right for you.
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MRJIM

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Re: Best investing strategy for financial independence
« Reply #3 on: April 06, 2014, 10:43:14 AM »
Thanks for all of your replies, sorry I should have gone into more detail. Iím looking to make around £18,000-£20,000 ($29,840-$33,156) a year in passive income; this will cover my expenses and leave me £1,000 a month to keep invest. Would this be possible within 10 years? Iím assuming if I have a family my wife will be working so if she makes around £18,000-£20,000 a year then we will have around £36,000-£40,000 ($59,680-$66,312) a year which I think will be sufficient to raise a family but I could be wrong. So really what Iím trying to ask is how realistic is it for someone to make £18,000-£20,000 a year in passive income within 10 years with something like growth stocks, dividend stocks and bonds if they are able to save around £1,000-£1,500 ($1,657-$2,486) a month .
Thanks once again for your replies.

frugledoc

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Re: Best investing strategy for financial independence
« Reply #4 on: April 06, 2014, 11:02:50 AM »
I think you need to chill out a bit.  You are only 19 and shoud be enjoying life rather than obsessing about retiring at 30, getting married, having kids and wife working while you enjoy being FIRE.

At your stage I would just aim to save as much as you can in a stocks and shares isa as you can.  Just put it at into an ETF that tracks uk midcaps like MIDD.

If you do that you will come out miles ahead in the game, but don't forget to stop and smell the roses!

nereo

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Re: Best investing strategy for financial independence
« Reply #5 on: April 06, 2014, 11:13:39 AM »
Thanks for all of your replies, sorry I should have gone into more detail. Iím looking to make around £18,000-£20,000 ($29,840-$33,156) a year in passive income; this will cover my expenses and leave me £1,000 a month to keep invest. Would this be possible within 10 years?
Is it possible - sure. But to get there in 10 years you'll need to save a lot every month. For reasons I won't get into here, a good benchmark to reach your goal is to have 25x your future "passive income". That's 450,000-500,000 to meet your goal of 18k-20k per year.  As wannabfugal said, your relatively short time frame means that your rate of return will be less important (especially at first) than how much you are saving. Running some quick scenarios, you'll looking at a savings rate of about 3,000/month. 

If that number puts you into shock, the good news is that time is very much on your side.  At a savings rate of ~1,000 a month you can reach your goal in about 19 years, and with just 500/month you could get there in about 27 years.*

Here's a good article that will help explain this a bit:
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

*above scenarios assume a 7% annual return and equal monthly contributions. 

EDIT:  My cat walked across my computer while typing out my last post. Sorry~
« Last Edit: April 06, 2014, 11:22:05 AM by nereo »

Zamboni

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Re: Best investing strategy for financial independence
« Reply #6 on: April 06, 2014, 11:19:34 AM »
I've plotted every year of my portfolio growth at 4, 6, and 8% rates.  The difference isn't as big as you might think, even over a 10-15 year horizon. 

wannabfrugal is right:  focus on saving the max possible.  Also, focus on minimizing fees/loads/etc.  For market investing, the "magic formula" is save a lot, minimize tax burden, don't pay fees, spend very little.  At your age go with an aggressive portfolio (Vanguard age-based plan at your age is probably all stock indices), then leave the money in there, keep putting in more, and don't worry about it.

Other options, like real estate, take a lot more education and energy, so go for that if you are interested, but recognize that for now it will be work and you'll have A LOT to learn. 

arebelspy

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Re: Best investing strategy for financial independence
« Reply #8 on: April 06, 2014, 03:42:57 PM »
Also it seems like the people who run these blogs are only focusing on how much only they spend and aiming for an income goal based on that

There is good reasoning behind this.  If you look at this MMM article (http://www.mrmoneymustache.com/2011/04/26/why-hardcore-saving-is-much-more-powerful-than-masterful-investing/), he points out that your efforts to focus on reducing spending will get you the most impact.

The investing part is pretty simple and straight-forward, it requires little time or effort on your part, thus it is the "spending part" that takes most of our effort and time as mustachian's to master.

If you look at past data, mathematically a 100% stocks low cost index fund will get you the fastest to FI reliably.  In particular, a fund with the lowest fees.  The one with the lowest fees is Vanguard, so that is about all you need to know for the investing part.

Also, since speed is your main concern, take of note a huge eye-opening insight which was initially calculated by Jacob at ERE and then later also put in this MMM article: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
 
Thus, the nice thing is that the strategy of reaching FI has already been figured out, you just have to execute it.  The crazy point of article above is the speed to reach only depends upon one thing and only one thing: your savings rate, as a percentage of your take-home pay

That's it, it is nice yet mind boggling at first to consider, your income in absolute terms has nothing to do with it, all that matters is how much your income you can save and how much it takes for you to live off of.  Thus, reducing your expenses is the key to speeding up the time to get to FI fast.  In fact, if you found a way to live for free, you could retire right now.   If you can find a way to save 95% of your take home pay, you can retire in less than 2 years.


« Last Edit: April 06, 2014, 03:46:55 PM by George_PA »

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Re: Best investing strategy for financial independence
« Reply #9 on: April 06, 2014, 07:24:54 PM »
Thanks for all of your replies, sorry I should have gone into more detail. Iím looking to make around £18,000-£20,000 ($29,840-$33,156) a year in passive income; this will cover my expenses and leave me £1,000 a month to keep invest. Would this be possible within 10 years? Iím assuming if I have a family my wife will be working so if she makes around £18,000-£20,000 a year then we will have around £36,000-£40,000 ($59,680-$66,312) a year which I think will be sufficient to raise a family but I could be wrong. So really what Iím trying to ask is how realistic is it for someone to make £18,000-£20,000 a year in passive income within 10 years with something like growth stocks, dividend stocks and bonds if they are able to save around £1,000-£1,500 ($1,657-$2,486) a month .
Thanks once again for your replies.

Bear in mind you probably won't need that much money to retire!

Use your ISA, invest in a nice mix of FTSE 100, FTSE 250, and so on, and you'll be golden. Remember your wage will likely go up, so you'll be able to save more - get auto-contributions and investment happening so there is no temptation to spend it all.

Have a look at Simple Living in Suffolk, Monevator, etc for more of a UK focus than here.

Nords

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Re: Best investing strategy for financial independence
« Reply #10 on: April 06, 2014, 09:27:37 PM »
So I mean really Iím looking for the best investing strategy that will be able to pay me enough annual income to support me and my future family within 10 years.  Iím 19 at the moment and looking to reach financial independence by the age of 30 (under 30 would be great if I could achieve that) as I feel that 30 is the right time to start a family and I donít want to rely on a job to support them.
If anyone whoís aiming for financial independence or has already achieved it could shed some light on this I would really appreciate it.
Jacob Lund Fisker (ERE) has already shown you how to do it.  Figure out your retirement expenses, start living on them now, and then save 25x that amount by putting aside roughly 70%-80% of your income for the next decade.
http://the-military-guide.com/2011/01/03/how-many-years-does-it-take-to-become-financially-independent-2/
http://the-military-guide.com/2013/06/24/how-many-years-does-it-take-to-reach-financial-independence/

Taylor Larimore of the Bogleheads has been saying for years "There are many roads to Dublin", his metaphor for the many ways to save for ER.  You could
- put all of your savings into a diversified selection of low-cost passive index funds (http://www.bogleheads.org/wiki/Main_Page), or
- generate your ER income from buying rental properties, or
- invest in dividend-paying stocks or index funds that will cover your ER budget.

You could also start/grow your own business, either as a side hustle to your day job (recommended) or by working full-time for yourself as an entrepreneur. 

MRJIM

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Re: Best investing strategy for financial independence
« Reply #11 on: April 07, 2014, 06:09:54 AM »
Thanks for your reply's, How secure would the money be in stocks, I was thinking about investing in bonds as well because if I have a portfolio of just index funds and dividend stocks would I loose a large percentage of this if the market crashed like in 2008.

arebelspy

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Re: Best investing strategy for financial independence
« Reply #12 on: April 07, 2014, 06:13:40 AM »
Thanks for your reply's, How secure would the money be in stocks, I was thinking about investing in bonds as well because if I have a portfolio of just index funds and dividend stocks would I loose a large percentage of this if the market crashed like in 2008.

You need to start doing some reading about investing.

Right now, since you have a decade+ to retirement! you have time to research it, but you don't want that money not invested while you do so.  I'd recommend investing in a basic fund like Vanguard's Wellington and start learning!

To begin your education, I'd recommend you start with Jim Collins Stock Series: http://jlcollinsnh.com/stock-series/
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CarDude

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Re: Best investing strategy for financial independence
« Reply #13 on: April 07, 2014, 06:14:39 AM »
So I mean really Iím looking for the best investing strategy that will be able to pay me enough annual income to support me and my future family within 10 years.  Iím 19 at the moment and looking to reach financial independence by the age of 30 (under 30 would be great if I could achieve that) as I feel that 30 is the right time to start a family and I donít want to rely on a job to support them.
If anyone whoís aiming for financial independence or has already achieved it could shed some light on this I would really appreciate it.
Jacob Lund Fisker (ERE) has already shown you how to do it.  Figure out your retirement expenses, start living on them now, and then save 25x that amount by putting aside roughly 70%-80% of your income for the next decade.
http://the-military-guide.com/2011/01/03/how-many-years-does-it-take-to-become-financially-independent-2/
http://the-military-guide.com/2013/06/24/how-many-years-does-it-take-to-reach-financial-independence/

Taylor Larimore of the Bogleheads has been saying for years "There are many roads to Dublin", his metaphor for the many ways to save for ER.  You could
- put all of your savings into a diversified selection of low-cost passive index funds (http://www.bogleheads.org/wiki/Main_Page), or
- generate your ER income from buying rental properties, or
- invest in dividend-paying stocks or index funds that will cover your ER budget.

You could also start/grow your own business, either as a side hustle to your day job (recommended) or by working full-time for yourself as an entrepreneur.

Lots of good advice here. The most important thing to start out with is with the mindset that you're going to put the vast majority of your income to work for you (through savings -> investments), rather than to be spent on baubles and bangles that won't bring you any closer to retirement (e.g., newer, larger, and shinier toys).

warfreak2

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Re: Best investing strategy for financial independence
« Reply #14 on: April 07, 2014, 06:17:26 AM »
It's a good idea to have a mix of stocks and bonds (index funds, of course) - 75% stocks/25% bonds is safer than 100% stocks, according to the Trinity study which looked at safe withdrawal rates. Rebalancing between stocks and bonds in the accumulation phase is also a good way to buy most of your stocks and most of your bonds when they are relatively cheaper, and it also means you sell them when they are relatively more expensive.

That said, you only really "lose" if you actually sell after a crash. In the accumulation phase, when you are buying, lower stock prices is good for you. If the market crashes in the withdrawal phase, you can either trust your safe withdrawal rate (because market crashes are taken into account when this is calculated), or you could rely on a different source of income while you wait for the market to recover, and never have to sell any of your stocks at the bottom.

nereo

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Re: Best investing strategy for financial independence
« Reply #15 on: April 07, 2014, 06:36:06 AM »
Thanks for your reply's, How secure would the money be in stocks, I was thinking about investing in bonds as well because if I have a portfolio of just index funds and dividend stocks would I loose a large percentage of this if the market crashed like in 2008.
The stock market will have great years like 2012, or miserable years like 2008.  What's important is the you put money in every month (called "Dollar Cost Averaging" or DCA) and don't try to pull in and out of the market ("market timing"), and have the dividends automatically reinvested.  Over a long enough time frame the ups and downs get averaged out.  Historically, the market has returned 7-8%/year after inflation. 

Having some bonds (or bond funds) historically will reduce the ups and downs, but generally with slightly lower returns.  Over ten year periods, the SP500 has returned more than bonds over 90% of the time. Over 20 year periods the SP500 has always beaten bonds.

Everyone has to find their own path, but my own advice is that you open a Vanguard index account, contribute as much as you can every month (or bi-weekly if you prefer), avoid spending on things you don't need and use the next several years to read and learn about finances* while your 'stach grows to epic proportions.


*disclaimer: be careful what you read and who you listen to.  The talking-heads on financial talk-shows and the money market managers are not good sources.  There are a lot of recommendations on this blog, links to other good blogs and (best of all) for good books about how to build and maintain wealth.

frugledoc

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Re: Best investing strategy for financial independence
« Reply #16 on: April 07, 2014, 01:29:39 PM »
bonds are a waste of time for long term investors.

They may smooth out the volatility of stocks but that is purely a psychological benefit.  Just ignore the volatility and keep investing year on year,

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Re: Best investing strategy for financial independence
« Reply #17 on: April 07, 2014, 02:24:30 PM »
Thanks for your reply's, How secure would the money be in stocks, I was thinking about investing in bonds as well because if I have a portfolio of just index funds and dividend stocks would I loose a large percentage of this if the market crashed like in 2008.

You need to start doing some reading about investing.

Right now, since you have a decade+ to retirement! you have time to research it, but you don't want that money not invested while you do so.  I'd recommend investing in a basic fund like Vanguard's Wellington and start learning!

To begin your education, I'd recommend you start with Jim Collins Stock Series: http://jlcollinsnh.com/stock-series/

I'll do one of those posts where I basically repeat great advice I've already read:

Arebelspy is correct.  Read the stock series repeatedly until you've internalized the lessons.  It's well written and easy to understand.  You should not be worried about stock market crashes at your age.   Not only should you expect one to happen at any given moment and not be all that concerned, you should actually be rooting for an occurrence.

If you have money to invest right now and no debt, Vanguard's Wellington or VTSAX are great places to start.  But help yourself out and read full books on the subject as well.  I like Bogle's Common Sense on Mutual Funds.  (Bogle founded Vanguard and is an index-fund advocate.)  This knowledge will help you relax and enjoy the ride instead of being worried about stock market fluctuations.  Your savings rate is the most important variable at this point, as George_PA noted -- more important than a 1 or 2 percent difference in annual growth between various funds.  The funds you're picking matter a lot more once you have significant assets invested (1% of 10K = 100 bucks, 1% of 1 million = 10K) so it honestly doesn't matter all that much what you pick right now anyways.

If there's even a slight chance that you'd pull all of your money out of the market if it, say, dropped 40% tomorrow, you'd be better off keeping the money under your pillow.  That sort of behavior is what kills RE plans.

(Also, keeping that money under your pillow will kill RE plans.)


arebelspy

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Re: Best investing strategy for financial independence
« Reply #18 on: April 07, 2014, 02:39:55 PM »
bonds are a waste of time for long term investors.

They may smooth out the volatility of stocks but that is purely a psychological benefit.  Just ignore the volatility and keep investing year on year,

I wish that was the case, as volatility doesn't bother me, but it has been shown that some bond component actually leads to higher returns, through the magic of rebalancing to buy low, sell high.

I'm no fan of bonds, but for those that can stomach the volatility I'd recommend making your bond percent = half your age, and the rest in equities.
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Re: Best investing strategy for financial independence
« Reply #19 on: April 07, 2014, 02:46:44 PM »
Thanks for your reply's, How secure would the money be in stocks, I was thinking about investing in bonds as well because if I have a portfolio of just index funds and dividend stocks would I loose a large percentage of this if the market crashed like in 2008.

It's a good idea to have a mix of stocks and bonds (index funds, of course) - 75% stocks/25% bonds is safer than 100% stocks

bonds are a waste of time for long term investors.

MRJIM,

You are correct to want to hold both bonds and stocks. You will have to decide on an Asset allocation that works for your risk tolerance. There are lots of rules on how to pick an asset allocation, but you will have to find what works for you. If you are worried about losing money, there is nothing wrong with having a more conservative asset allocation. Just realize you will have to save more to compensate. There is a discussion of some guidelines on how to choose your allocation here: http://www.mymoneyblog.com/choosing-an-asset-allocation-step-1-deciding-on-the-stocksbonds-ratio.html

I would suggest that it is a VERY good idea to hold some bonds, and to ignore advice that says to hold only stocks. Not only is it risky, there is good reason to believe it will lead to lower risk adjusted returns over the long run (see also http://www.efficientfrontier.com/t4poi/Ch1.htm for more advanced discussion)

MgoSam

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Re: Best investing strategy for financial independence
« Reply #20 on: April 07, 2014, 03:11:51 PM »
Why hold bonds? I mean I defer to many here that believe that a small portion of bonds is a better investment but I just am having trouble seeing the logic. That said, this is largely because I invested after the crash and so have only really been seeing massive stock market gains and low interest rates, I imagine those will end. Right now I have about 80% stocks/20% bonds. Looking to be able to retire in under 10 years though there are other factors at play.

Dr. Doom

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Re: Best investing strategy for financial independence
« Reply #21 on: April 07, 2014, 03:23:27 PM »
Also, something about your posts makes me think you might benefit from understanding human loss aversion   (link to nytimes article)




arebelspy

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Re: Best investing strategy for financial independence
« Reply #22 on: April 07, 2014, 03:40:48 PM »
Why hold bonds? I mean I defer to many here that believe that a small portion of bonds is a better investment but I just am having trouble seeing the logic. That said, this is largely because I invested after the crash and so have only really been seeing massive stock market gains and low interest rates, I imagine those will end. Right now I have about 80% stocks/20% bonds. Looking to be able to retire in under 10 years though there are other factors at play.

Like I said, rebalancing.  It gives you an okay return when stocks are good, and something to sell and by stocks with when stocks tank.  Rebalancing is the only acceptable form of market timing.
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warfreak2

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Re: Best investing strategy for financial independence
« Reply #23 on: April 07, 2014, 04:27:54 PM »
Why hold bonds? I mean I defer to many here that believe that a small portion of bonds is a better investment but I just am having trouble seeing the logic. That said, this is largely because I invested after the crash and so have only really been seeing massive stock market gains and low interest rates, I imagine those will end. Right now I have about 80% stocks/20% bonds. Looking to be able to retire in under 10 years though there are other factors at play.
It's true that if you just put 80% of your money in a stock index, and 20% in a bond index, and leave them alone, it will do worse than 100% stocks in the long term. The magic is in the rebalancing.

Here's a simplistic analysis: suppose the stock market crashes by 50% and then recovers, but the bond market is stable. (I know, I know.) Suppose also that you're investing $1600 in:

A) 100% stocks. Your investment just tanked, it's now worth only $800! Fortunately you're still in the accumulation phase, so you don't sell any of those stocks for peanuts. Soon enough your investment grows back to $1600.

B) 75% stocks, 25% bonds. Your stocks just tanked, they were $1200 but now they're $600! Fortunately, you're still in the accumulation phase, so you don't sell any of those stocks for peanuts.
But wait, it's time to rebalance; you have $400 in bonds, so you currently hold 60% stocks, 40% bonds. To maintain your asset allocation, you need to sell $150 of your bonds and buy $150 more in stocks. Your holdings are now $750 in stocks and $250 in bonds, perfect!
Now when the stock market recovers, your $750 doubles to $1500, and your holdings will be $1750 - you made an extra $150. That's over 9%, over a recession when stocks made 0% and bonds made 0% - with no supernatural market-timing powers - magic!

(If you had supernatural powers, of course, then you could have made 100%. But you don't.)

By rebalancing, you sold bonds when they were relatively high, and bought stocks when they were relatively low - buy low, sell high, like you heard in the movies.
  • When stocks fall more than bonds, as in this scenario, you make more than the guy with 100% stocks.
  • Something similar happens when bonds fall more than stocks (unusual, I know, but you profit here too).
  • If bonds rise more than stocks (not that unusual, it happened for a recent decade), then that's growth the 100% stock investor won't see, too.
  • The missing case is when stocks grow more than bonds, which admittedly is very common. In this case, you'll see a little lower return than the 100% stock investor. (You can't have your cake and eat it too.)
But making a bit of a loss in scenario 4, in exchange for profit in the other three scenarios - and lower volatility overall - could be a very good tradeoff, even for investments as long-term as 30-50 years. And you could hold 80%/20%, or 90%/10%, to make less off of market crashes, but perform better in the boom years, if it suited you.
« Last Edit: April 07, 2014, 04:31:31 PM by warfreak2 »

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Re: Best investing strategy for financial independence
« Reply #24 on: April 07, 2014, 06:09:26 PM »
Quote
It's true that if you just put 80% of your money in a stock index, and 20% in a bond index, and leave them alone, it will do worse than 100% stocks in the long term. The magic is in the rebalancing.

Thanks warfreak2 - I think that's the best explanation I've gotten of why I should hold some bonds during my accumulation stage.  I've long gravitated towards the simplistic story of "stocks have always beaten bonds over long time frames".  Now I have to consider adding some bonds. Pity - I've liked the "set biweekly contibutions to an index fund and forget it" approach.
Question: how often do you think someone should rebalance?  Quarterly?  Yearly?  Whenever it gets more than 5% out of whack?

CanuckExpat: thanks for the link. 

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Re: Best investing strategy for financial independence
« Reply #25 on: April 07, 2014, 06:57:05 PM »
Thanks for your reply's, How secure would the money be in stocks, I was thinking about investing in bonds as well because if I have a portfolio of just index funds and dividend stocks would I loose a large percentage of this if the market crashed like in 2008.

Hint: Bond markets can crash too.

If you want "secure" - you won't get any return on your money. If you can put up with volatility, you will (over the long haul) get a really good return from a good, low cost, diversified stock index fund. Asset allocation with a small fraction of bonds is probably better. See other posts.

Real Estate can also be an awesome way to go. That market can crash too.
« Last Edit: April 07, 2014, 07:01:11 PM by TomTX »

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Re: Best investing strategy for financial independence
« Reply #26 on: April 07, 2014, 11:52:20 PM »
Thanks for your reply's, How secure would the money be in stocks, I was thinking about investing in bonds as well because if I have a portfolio of just index funds and dividend stocks would I loose a large percentage of this if the market crashed like in 2008.
If you'd read the links like http://www.bogleheads.org/wiki/Main_Page then you'd have those answers to your questions.

We enjoy answering questions from posters who are just starting their research, but you could help us keep the momentum going by doing some of the reading before you ask more questions.

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Re: Best investing strategy for financial independence
« Reply #27 on: April 07, 2014, 11:58:18 PM »
Well, despite it already was said that the kind of investing is not as important as minimizing spending, i would like to point you in this direction. You really need to learn how to separate your needs from your wants. Think long and hard about your spending habits. Analyze how much life value you get from the things you want to buy before doing so.
Learn about things like hedonic adaption and out this to use every day. Research costless hobbys and so on.

arebelspy

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Re: Best investing strategy for financial independence
« Reply #28 on: April 08, 2014, 12:19:32 AM »
Thanks for your reply's, How secure would the money be in stocks, I was thinking about investing in bonds as well because if I have a portfolio of just index funds and dividend stocks would I loose a large percentage of this if the market crashed like in 2008.
If you'd read the links like http://www.bogleheads.org/wiki/Main_Page then you'd have those answers to your questions.

We enjoy answering questions from posters who are just starting their research, but you could help us keep the momentum going by doing some of the reading before you ask more questions.

That sounds much harder than outsourcing your thinking to forum members!

I saw he posted this exact same question (and the followup "I should have given more details" post) on E-R.org, and someone in that thread mentioned they saw it on Reddit as well.

So OP should have no shortage of advice by now.  The next step is to start learning and educating yourself so that you can evaluate the validity of that advice.

Good luck!
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Re: Best investing strategy for financial independence
« Reply #29 on: April 08, 2014, 05:09:58 AM »
Just to piggy-back on this thread and not start my own....  In regards to asset allocation, does it matter which investments are in bonds and which are in stocks? Or is it just of your total investments?  Meaning, does it matter whether the bonds are in your 401K, 457b, tIRA, Roth, taxable investment, etc... so long as they total whatever % you allocate to bonds?

This has been a fantastic thread, even though I've already read most of what's been linked to already.  Thanks to everyone for their insight!

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Re: Best investing strategy for financial independence
« Reply #30 on: April 08, 2014, 07:12:28 AM »
Just to piggy-back on this thread and not start my own....  In regards to asset allocation, does it matter which investments are in bonds and which are in stocks? Or is it just of your total investments?  Meaning, does it matter whether the bonds are in your 401K, 457b, tIRA, Roth, taxable investment, etc... so long as they total whatever % you allocate to bonds?

This has been a fantastic thread, even though I've already read most of what's been linked to already.  Thanks to everyone for their insight!

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

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Re: Best investing strategy for financial independence
« Reply #31 on: April 08, 2014, 10:54:24 AM »
Is it safe to "ass"ume that this translates pretty well no matter which country you live in? Some of the terms may change slightly but the math behind the types of investments would remain the same?

(In Canada) :) ... and yes yes yes ... I am reading reading reading ...my head is exploding with facts, figures and hypotheses lol... but eventually it will all sink in (I hope)

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Re: Best investing strategy for financial independence
« Reply #32 on: April 08, 2014, 11:09:29 AM »
Is it safe to "ass"ume that this translates pretty well no matter which country you live in? Some of the terms may change slightly but the math behind the types of investments would remain the same?

No, that is not a safe assumption.
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Re: Best investing strategy for financial independence
« Reply #33 on: April 08, 2014, 11:18:49 AM »
Just to piggy-back on this thread and not start my own....  In regards to asset allocation, does it matter which investments are in bonds and which are in stocks? Or is it just of your total investments?  Meaning, does it matter whether the bonds are in your 401K, 457b, tIRA, Roth, taxable investment, etc... so long as they total whatever % you allocate to bonds?

This has been a fantastic thread, even though I've already read most of what's been linked to already.  Thanks to everyone for their insight!

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement
Thanks!

warfreak2

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Re: Best investing strategy for financial independence
« Reply #34 on: April 08, 2014, 12:34:21 PM »
Now I have to consider adding some bonds. Pity - I've liked the "set biweekly contibutions to an index fund and forget it" approach.
Question: how often do you think someone should rebalance?  Quarterly?  Yearly?  Whenever it gets more than 5% out of whack?
Urk! I don't know about the real world because I'm a mathematician. I have three suggestions:

  • If you want to set-and-forget, you could just choose a balanced fund which maintains your preferred stock/bond ratio. I don't know which ones are the best, or what the expense ratio is likely to be.
  • If you are paying in biweekly, you could direct that money towards whichever asset class you need more of; you'd still need to rebalance more on big swings.
  • Someone else has surely written better advice about this than I can.

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Re: Best investing strategy for financial independence
« Reply #35 on: April 08, 2014, 12:57:20 PM »
Lots of good 'bread and butter' advice above.  In the back of my mind though, starting all over again, I think those early years with hopefully lots of earnings ahead is a golden opportunity to take on a little more risk.  Real Estate might be tricky because it implicitly involves leverage, I never went that route.  I made a killing in investing in individual tech stocks.  Didn't end well because I got greedy in my 20's, but I had plenty of time to recover.  I don't know how different my result would have been I was the OP in this thread, but good advice when you are closer to FI is different from good advice at the start.

Just want to put that out there, don't be afraid to at least put a little money into a few stocks, or a really great Real Estate deal (maybe), or try and fail a few times at a side hustle - getting hands on experience is worth the price of admission.  Frugality is easy, but has diminishing returns if you start frugal, whereas establishing a good side business or buying and holding a GOOG, AAPL, ACT (my first IRA purchase, formerly Watson Pharma) 10 years ago really propels that FI.  Once the family comes along, or your portfolio is a few multiples of your income, that's when you start in with the good advice above (e.g. 75/25 index fund/cash, CD, bond fund)...

Good luck! 
« Last Edit: April 08, 2014, 01:06:11 PM by EscapeVelocity2020 »

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Re: Best investing strategy for financial independence
« Reply #36 on: April 08, 2014, 01:27:30 PM »
Is it safe to "ass"ume that this translates pretty well no matter which country you live in? Some of the terms may change slightly but the math behind the types of investments would remain the same?

(In Canada) :) ... and yes yes yes ... I am reading reading reading ...my head is exploding with facts, figures and hypotheses lol... but eventually it will all sink in (I hope)

More or less it is the same between the US and Canada. I think there's a Canada thread somewhere around here that might help you.

arebelspy

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Re: Best investing strategy for financial independence
« Reply #37 on: April 08, 2014, 01:30:36 PM »
I favor the hybrid rebalancing bands and time approach - once or twice/yr., check if you're more than 10% out of whack.  Rebalance if necessary.  It gives you two solid criteria that need to be met, so you aren't doing things willy-nilly.

YMMV, of course.

Real Estate might be tricky because it implicitly involves leverage, I never went that route. 

Huh?  Why do you say that?  I own a number of rentals bought with cash.
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Re: Best investing strategy for financial independence
« Reply #38 on: April 08, 2014, 04:41:59 PM »
Thanks, arebelspy, for all the Bogleheads links! I've been going through it and it's fantastic stuff. It's certainly changed the way I'm going to handle my investments.

One thing I'm still confused about is maintaining the asset allocation proportions.

1 - On one hand, Bogle seems to be advocating the "buy and hold" approach. On the other, he says investors should rebalance regularly. It seems a bit contradictory. Doesn't that mean I'd be buying and selling regularly and thus incurring brokerage costs each time?

2 - Should I really keep track of all investments across ALL accounts and make sure the total percentages are as planned, or should I just group like accounts together (i.e., retirement accounts which I can't access until I'm 60, and other accounts that I can access now) and handle percentages that way? I did read that some investments are more suitable for certain kinds of accounts (like bonds in tax-advantaged accounts), but am I the only one having difficulty calculating percentages for everything? I have some retirement money in managed funds that have their own proportions of assets as well.

3 - Like a previous poster on this thread, I also really like the "Contribute x every month" method of investing. But having to check to see which investment needs it seems like a logistical nightmare--if I need more of bonds, which is in my superannuation (Australian retirement fund), I'd have to arrange with my employer to salary sacrifice into it, but only for that month because next month the percentages might be spot on. Or should I just contribute to a certain investment and then worry about rebalancing once a year?

EscapeVelocity2020

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Re: Best investing strategy for financial independence
« Reply #39 on: April 08, 2014, 06:01:48 PM »


Real Estate might be tricky because it implicitly involves leverage, I never went that route. 

Huh?  Why do you say that?  I own a number of rentals bought with cash.

Sounded like OP was starting from square one, and Real Estate involves saving up (usually 20%, which implies getting a loan which implies leverage).  Most big gains I hear from 20 something's involve flipping.  That's all.  FWIW, did you start with equities or real estate, just curious?

arebelspy

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Re: Best investing strategy for financial independence
« Reply #40 on: April 08, 2014, 06:34:28 PM »


Real Estate might be tricky because it implicitly involves leverage, I never went that route. 

Huh?  Why do you say that?  I own a number of rentals bought with cash.

Sounded like OP was starting from square one, and Real Estate involves saving up (usually 20%, which implies getting a loan which implies leverage).  Most big gains I hear from 20 something's involve flipping.  That's all.  FWIW, did you start with equities or real estate, just curious?

It can involve leverage, yes, or flipping, but it doesn't "inherently" involve either of those.

I personally invested first in a self-run business (with a partner), then later in equities, then later real estate.  All were successful (aside from a big market timing mistake), but real estate wildly so, mainly because it's the one I enjoy most and know the most about - knowledge really lets you make smart investing decisions and enthusiasm/passion make it not seem like work.
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arebelspy

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Re: Best investing strategy for financial independence
« Reply #41 on: April 09, 2014, 05:42:26 PM »
1 - On one hand, Bogle seems to be advocating the "buy and hold" approach. On the other, he says investors should rebalance regularly. It seems a bit contradictory. Doesn't that mean I'd be buying and selling regularly and thus incurring brokerage costs each time?

2 - Should I really keep track of all investments across ALL accounts and make sure the total percentages are as planned, or should I just group like accounts together (i.e., retirement accounts which I can't access until I'm 60, and other accounts that I can access now) and handle percentages that way? I did read that some investments are more suitable for certain kinds of accounts (like bonds in tax-advantaged accounts), but am I the only one having difficulty calculating percentages for everything? I have some retirement money in managed funds that have their own proportions of assets as well.

3 - Like a previous poster on this thread, I also really like the "Contribute x every month" method of investing. But having to check to see which investment needs it seems like a logistical nightmare--if I need more of bonds, which is in my superannuation (Australian retirement fund), I'd have to arrange with my employer to salary sacrifice into it, but only for that month because next month the percentages might be spot on. Or should I just contribute to a certain investment and then worry about rebalancing once a year?

1. No, it's buy and hold, you just rebalance when things are too far out of whack from your asset allocation.  You'll only sell maybe once/year or if things go way out of a rebalancing band.  It isn't a constant selling and buying.

2.  Use the tax efficiency link above to find which should be held where, but have all your investments together hit your AA - one might have only bonds (100% bonds in it), as long as it's the proportion of your overall portfolio that you want to be bonds you're fine.

3. One solution is to have your contributions sent directly to a money market account within your retirement account, then when the deposit is posted allocate it however fits your AA.  Another is to hold funds that auto-rebalance.  Another is to just rebalance every once in awhile (change your contributions every 6 months or a year or whatever).  It's not a huge deal in the grand scheme of things, just figure out what works best for you.
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kaetana

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Re: Best investing strategy for financial independence
« Reply #42 on: April 09, 2014, 06:07:27 PM »
1. No, it's buy and hold, you just rebalance when things are too far out of whack from your asset allocation.  You'll only sell maybe once/year or if things go way out of a rebalancing band.  It isn't a constant selling and buying.

2.  Use the tax efficiency link above to find which should be held where, but have all your investments together hit your AA - one might have only bonds (100% bonds in it), as long as it's the proportion of your overall portfolio that you want to be bonds you're fine.

3. One solution is to have your contributions sent directly to a money market account within your retirement account, then when the deposit is posted allocate it however fits your AA.  Another is to hold funds that auto-rebalance.  Another is to just rebalance every once in awhile (change your contributions every 6 months or a year or whatever).  It's not a huge deal in the grand scheme of things, just figure out what works best for you.

Thanks for this. I've been going through the Bogleheads wiki and the videos as well, and there's a wealth of information there. It's all explained so clearly!! I've learned that I want to allocate bonds according to my age - so 28% bonds (at least for my superannuation fund - my joint savings with my husband will have to be tweaked) but how do people just choose what percentage they want of local vs international total market index funds? There are some examples on the wiki of "lazy portfolios", but they are in the US context. Does it matter? Should I hold Australian, US, AND global index funds?

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Re: Best investing strategy for financial independence
« Reply #43 on: April 09, 2014, 06:21:47 PM »
My preferential investment advice: http://jlcollinsnh.com/stock-series/

That being said, you'll need to tweak for being international.  But yes, find a mix you are comfortable with. (For example, I am more aggressive.  I like to put half my age in bonds.  Some like their age. Some do their age minus 20.)
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