May 30, 2020
The Financial Independence community is an open, helpful and generous bunch of people.
Folks share their savings ideas, lifestyle philosophy, and often every detail of their personal finances. They share tips for earning more, and where to find the best deals on pretty much everything!
The aim of all this is to nudge along their peers, or help curious newbies learn the ropes of this ‘retire early’ business. But if there’s one thing that’s asked more than anything else, it’s how to invest and what to invest in.
I’m sure I speak for my fellow bloggers when I say, we love sharing our thoughts and trying to help others. But, finance bloggers can’t actually give people the ultra-specific answer they’re often looking for.
And that’s for good reason. Today, I’ll explain exactly why that is. Don’t worry, a short post today after the monster from last week!
This is true. It’s typically illegal for finance bloggers to give people specific advice for several reasons. They’re not licensed professionals for one thing. They don’t know your unique circumstances or goals. And plenty more.
Just because your favourite blogger invests 100% in the sharemarket doesn’t mean you should. You might not be able to stomach the volatility. And this may cause you to freak out and sell at the worst possible time.
Maybe the only way you feel comfortable is with a large amount of cash, bonds or even property, alongside your share investments. And if that’s what it takes to help you sleep at night, then maybe that’s the right approach, regardless of what others do, or what is considered ‘optimal’.
Perhaps the people you follow have a strategy that seems great on paper, but is tricky to manage. Does it look a little complex, when deep down, you’d really prefer a simpler approach?
They might be shooting for high growth, when really you just want to preserve your money and are happy with a modest return.
Do you want to actively manage it yourself, or outsource? Do you want to pick stocks? Do you want yield, growth or a bit of both?
It might seem like we’re all shooting for Financial Independence, but there’s more to consider than this. Maybe you’ll be moving overseas when you’re able to retire, or have future kids to plan for.
Do you want to start your own business at some point? Perhaps you’re looking at buying a house in 5 years. There’s a million things that could affect how much and when you need cash, and therefore, the way you build an investment portfolio.
Not all risks are the same. Some people worry about the gyrations of the sharemarket more than others. Others can’t stand the thought of underperforming the market.
The focus for many investors is to achieve the highest possible return. But do you have the stomach for that? Is it even possible to know this in advance?
Many investors want a portfolio where very little decisions need to be made. While others care more about avoiding short term losses, and try to stay out of ‘overvalued’ markets. These folks like to make active decisions based on the changing environment.
Some people worry about the risk of their investments not keeping up with inflation and running out of money later in life. Only you know which risks concern you the most.
Hopefully you can see what I’m saying here. All of these things affect how you’ll invest, what you’ll invest in and what time-frame you’re investing for.
And that’s for everyone to figure out for themselves. This depends on your situation now and in the future, the type of person you are, how you see the world, what you want from your investments, your long term goals, and the approach you feel most comfortable with.
How can a finance blogger possibly have an easy answer for that? It sounds like a cop-out. But when we sit back for a minute, we realise the reality of it.
Now you might be wondering why you bother reading finance blogs at all 😉
Well, we can obviously share what we do personally, and explain the thinking behind it. That can be a useful reference when people are trying to figure out their own approach.
And there are a number of other things about investing that most of us bloggers will agree on. I’ve listed some of these below, though of course there are more (and this wasn’t the point of this post). These things are important, and in general, are true for most people wanting to reach Financial Independence:
A low-cost advisor or ‘robo-advisor’ (like Six Park or others) may make sense if you really want a simple and hands-off approach. It’s not free, but might be worth it in some cases.
But you definitely don’t need a self-interested ‘helper’ which scrapes 1% per year from your balance (regardless of performance or service), for a complex portfolio of ridiculous high-fee funds, which are near-certain to underperform a simple low-cost approach.
Sadly, from the emails I get, these leeches still exist, and apparently have no trouble sleeping at night. I guess they believe their own bullshit. To admit they add no value would be uncomfortable at best, and identity destroying at worst.
By the way, I’m not saying there aren’t good, honest advisors out there who charge fair fees for solid advice. There are undoubtedly plenty of them! But I’d wager the leeches comfortably outnumber the legends.
Related to the above, choosing low fee widely diversified funds is about the number one lever we can control when it comes to improving our investment returns.
In an odd phenomenon, the finance world is about the only line of industry where, when you pay more, you actually get less value in return.
Some people prefer active investing over index funds, for various reasons. If going down this route, just be aware: Studies have shown the best predictor of future returns is fees. Whether active or index, low fee funds typically perform better than high fee funds.
This can be seen with any compound interest calculator using a 10-15 year period. As you see below, the amount ‘deposited’ far exceeds returns. Especially over 10 years, but even over 15 years.
It doesn’t exist -simple as that. So quit trying to find it!
You certainly won’t make perfect choices (I don’t). Nor is there a perfect time to invest (post coming soon). Many of our purchases will turn out to be loss-making when looked at over a few years. That’s totally normal.
But considering we’ll own these investments for another 50-70 years, there’s plenty of time ahead for even the worst-timed purchase to become extremely profitable. And that’s another reason to relax – given the time-frames we’re working with, there is plenty of time to learn as we go!
Some people get stuck in the ‘research’ phase for far too long. But remember, getting started is more important than getting it right.
I better leave it there, before it turns into another 3,000 word beast! Hopefully you get where I’m coming from with this one.
The FIRE community loves to help each other, but what’s right for one person may not be right for another. Clearly, there are lots of factors to weigh up when it comes to investing – many of them unique to us.
So, next time you ask your favourite finance blogger a question like, “should I buy X?” or “what do you think of my portfolio,” and they’re a little shy or sheepish in answering… now you know the many reasons why! 🙂