Hi RIP followers,
Today we have another post in The Principles series, where I:
- introduce fundamental philosophical/economical concepts.
- show my vision/interpretation of them.
- help you understand the subject from other points of view linking other online resources.
- describe my own strategies and other thoughts on the same topic.
Today’s post is about Investments. I like to take looong and dirty country roads to describe something so intuitive so – sorry friends that’s how I’m wired – fasten your seat belts and get ready. I hope this helps some of you 🙂
What does investing mean? As always, let me be helped by my guest star wikipedia:
To invest is to allocate money (or sometimes another resource, such as time) in the expectation of some benefit in the future.
Yeah, thanks wikipedia, that’s the kind of abstraction level I love! Investments are not just for bankers or for risk seeking rich guys. Everyone invests in one form or another.
A college degree? It’s an investment, where you seed your money (a lot if you’re in US, close to zero if you’re in Italy – but you get a close to zero quality degree) and your time (a lot, anywhere) in the hope to maximize your lifetime earning potential and to enjoy life more thanks to a higher understanding of how things work.
A gym membership? A nice pair of shoes? A ticket for a conference? A house? DIY repairing your own kitchen sink? Start a family? All are investments of some sort, where you give up some resource today or over time in order to get more in the future. Even frugality is an investment!
Investing is necessary in your life. You do it everyday and you know it’s the right way to do. So why when I switch to the topic of financial investing most of the people I chat with are scared?
Scared Friend: “RIP… you investing money? Aren’t you scared? Do you want to play the market??”
I: “I’m not ‘playing the market’, I’m simply investing my money. You are doing it too, but you don’t know.”
SF: “What?? No no no I don’t trust the stock market and all the sharks that populate it. I keep my (small amount of) money in a saving account at my bank. I get almost zero interest but I’ve seen too many people go broke with stocks. I’d buy a house, that’s something solid. And everybody knows that houses are always going to increase their value”
I: “You are investing. You’re investing all your money in a single currency. You’re playing the market in the worst way. What if hyperinflation hits your currency? I have a story to tell you: a friend of mine told me how his Ukrainian in laws become poor last year due to inflation rate above 50%. They were wealthy, they became poor. Weren’t they playing the market? Yes they were! Problem is that they didn’t know they were. Were they differentiating their wealth by currency, would they be better off today.”
SF: “but… there’s been a war there! European union is more stable…”
I: “Is it? Can you bet Euro will be a currency in 10 years? Are you so sure? Aren’t you playing the market?? Anyway, my imaginary friend, you’re playing the market: you’ve got a single bank account with a single bank. Banks may fail – especially in Italy – and you could lose everything overnight. You’re not trying to earn money from your investment, so you’re losing money due to inflation. The only long term investment you came up with is a house, that is ‘solid‘ you said. Well, personally I did the biggest mistake of my life with buying a house in 2010 – and my sister did the same mistake too. Was I unlucky? Well, maybe, but there are people way more expert than me that will tell you it’s not necessary a good investment. So? all your money, in a single currency, in a single bank, eaten by inflation, waiting to be thrown at a stack of bricks, along with a huge mortgage… and you’re telling me I’m being bold?”
SF: “RIP… what are those devil eyes? You’re scaring me…”
Ok, ok, let’s calm down. But the message I want to tell here is: if you are passive with your wealth management you’re not playing safe, you’re playing for someone else. You’re leaving opportunities on the table.
I realized it way too late. I did mistakes when I was young trusting bank’s financial advisers, buying high fees funds and selling them after 2 years of losses (just before the bull market of 2003). I didn’t want to play anymore since recently. Had I been adopting my current strategy since 2010, instead of buying the flat, I’d be at least 250k closer to FIRE. I didn’t play safe, I played stupid.
When thinking about living on my wealth, before my FIRE Epiphany, i measured opportunities by number of months of expenses saved. Ingenuous RIP: “Look, I’ve 30K in the bank! I can live cheap, 500 per month, so they’d last 5 years!” No inflation took into account, no interests neither. A static model. Now I know the missing piece: you shouldn’t plan to live on your principal, you should plan to live on the money your principal generates.
Let’s say it again out loud: investing is necessary if you want to be Financially Independent.
Now, what kind of financial investments are we talking about? There are several options:
Investing time (variable) in frugality.
Frugality means reducing costs on things that you don’t value, in order to save money for the things you value the most. It can be extreme or less extreme but the message is the same: cut unnecessary expenses and your life will benefit. Is it an investment strategy? Well, it is, of course. I’m a frugal person (even though spending 60-65K CHF per year would not classify me as such) and I consider frugality the single most important strategy to reach FI. Anyway, I’m not going deeper on frugality on this post, but friends, do expect a lot of rants on it in the future 😉
Investing time (a lot) & money (few) in your skills.
I’m a big fan of skill development. I’m spending time every single day on building new skills. I’m not too much into physical skills like DIY and repairs, but I’m devouring the internet on topics like science, astronomy, space exploration, finance, whatever. Really, whatever. I could spend my entire life studying.
My approach to learning is always by self learning. I’m not anymore in paying someone, attend a course, “get a degree”. I’m a researcher. The only one wise advise that HurryUp gave to me, that I still speak out loud (in my head) every day is: “we are researchers. We can learn whatever we want, we can become experts in whatever we want. Whatever. Wanna be on the cutting edge of biology? Go there. Wanna be on top of Cure for Cancer? Go there. You just have to pick the field you want to be a master and go there“.
So yes, investing in your skills is amazing and is a key ingredient for FI. DIY skills will lower your needs, gardening will lower your needs, professional skills (like software engineering) will increase your earnings, astronomy… well, if you can’t make money out of a passion (which you should always be able to) at least it will enrich your life from so many other angles!
Investing time (a lot) & money (variable) in your company.
Yeah. Go solo. Create business. Don’t depend on your boss. This is an advise I’m giving to you, dear friend, but mainly to myself. I’ve been there and loved it. I’ll be there again as soon as possible. You don’t need a shitload of money though. One of the amazing book I devoured is “The 100$ Startup” (it’s available for free in PDF) by the unconventional writer Chris Guillebeau. Start with a side gig while working, see what happens. See things fail, don’t be scared, try again. Jump onboard full time when chances of success are high. That’s probably the investment that scares the most. You don’t have a guaranteed return proportional to what you invest and this is scary. But the riskier and investment is the greater its outcomes may be.
Investing time (not that much) & money (a lot) in material goods
Material goods are… things. Like for example real estates. What? RIP, you were spitting on real estates few lines above! Wait, let me explain. I’ve been hurt by this strategy in the past and I’m biased, I know. Experienced investors say that real estates is one of the worst investment ever, due to illiquidity, taxes, fees, repairs, aging, immobility,… go read the JL Collins article about it, it’s enlightening.
Having said that, my personal opinion is: I’d buy the house where I live, if I plan to live there more than X years. X varies depending on house cost, location, notary fees, taxes,… but if you plan to live in the same house forever it’s definitely a good choice to buy your house. Be careful not to fall in the opposite problem: “since I bought this house, I need to stay there forever“. That’s something that scares me. I still feel like I want to be free to move and willing to relocate in another country whenever I want. A house binds you to a single place.
Anyway, buying the house you live in is an (arguable, eventually) investment strategy. What I want to focus here is Rental Properties. Houses, apartments, flats you buy for their dividend. The web is full of FIRE seeking people that are exploiting Rental Properties as a strategy. It basically consists of buying estate properties for the sole goal of renting them out and collect rent money. The strategy may be leveraged by aggressive mortgages but then you’ll be too much dependent of appreciation/depreciation of your properties. It’s a strategy I’m not very fond due to its active nature (instead of passive) but I may need to take into account in case it would be financially more convenient in my target country for retirement.
Other forms of material investments are precious metals, art pieces, collectibles,… I’ve heard about people investing in Gold (and realizing a fortune in last year) or in Lithium (the white gold: think about the battery needs of devices, electric vehicles, Tesla Energy) or in art pieces but I’m not an expert here.
Investing time (very little) & money (a lot) in financial instruments.
That’s my favorite sector and I’ll devote next chapter of this series to financial instruments, even though one of my “mentor” says you should never own stocks and he has his points.
Financial instruments are stocks, bonds, funds and other more dangerous and more speculative assets like futures, options,… I’m not an expert here too. Anyway, financial instruments are liquid(able) assets that can be converted in cash with a click, that are usually traded in some stock market or sold directly by the state. One usually access to the market via a broker that sometimes can be a bank. We’re going to explore it more in depth in a future post.
I claimed in the section title you need to invest “very little” time in this area. Well, it’s not totally true. If you’re just a beginner and never invested before, the learning curve is quite steep. You don’t need to know everything, but I suggest to get to know at least the basics, and I’m going to provide most them in next posts. If you want to go very deep, you may take a look at JL Collins Stock series, which is biased toward US and the series is split in 30 posts.
Note that for every illiquid investment sector you can find a liquid equivalent one. You want to invest in real estates but don’t want to go shopping for houses? Buy a share of a fund that invests in that! You’re trading your mental energies for costs billed to you by the fund holder. Their costs may be way smaller than yours since they work with higher volume
Ok, cool, you convinced me RIP, I want to invest in something, somehow. How much? For how long? Following which strategy?
These are all valid questions to ask. Things here get a little bit personal. There are few general rules though, let’s dig into some of them:
- Always invest toward a goal. Invest is a tool to reach your goals, a means to an end, not a goal itself. Define your goals. Define the path to your success. If goals change so should your plan and then your investment strategy. Define the time span of your investments. Different strategies work better for short term, mid term or long term investments.
- Define an investment strategy and stick with it. Write a plan. Write your values and your rules. Write down your investment strategy. An amazing idea i’ve found on physicianonfire that you should take time to write your Investor Policy Statement (or IPS). This is a detailed plan that contains goals, philosophy, asset allocation, exit strategy and detailed mechanics. I strongly suggest you write your IPS and review it every 6 months at least. “Cool RIP, where’s yours?” Ok, you got me. I’m a very bad “example” here, a bad master. My IPS is very long overdue. I keep telling myself I should stop and make a concrete plan before end of the year but I’m a master class procrastinator and since this is a quadrant 2 issue on the Eisenhower Matrix, I keep delegating it to my future self. I commit myself here that if I won’t write my IPS by end of year 2016 I’d shut down this blog and go flipping burgers.
- Know what you’re investing on. Don’t follow advices you don’t understand. Don’t follow a trend because everyone does that (like buying a Million dollar house or getting 2-300K USD student loan). If you want to invest on something do your research and understand costs, risks and expectations. Be sure to shop around for better alternatives (less risks, better expectations) in your field, don’t just jump on the first option you’ve found.
- If you need help, be sure to understand what the helper is interested in. I’m not a priori against financial advisers, estate agents, career’s tutors and any possible professional that could potentially help you. The problem is that those people have their own interests and they don’t necessary care about your success. Be sure to understand what a potential helper goal in your exchange is before trusting them. For example, in the field of financial investments, be sure you do a good screening and select fee only professional instead of a commission based one. Those whose goal is to make you buy something have their goal conflicting with yours. What if the product they want to sell is crap? Their individual goal is to sell it to you anyway, which conflicts with your goal of investing in something good.
- Don’t be emotional. Investing should be 99% rationality and 1% feelings. If you have an IPS, stick with it. Don’t change strategy based on transient facts or feelings. Stick with the plan. The stock market crashes? Don’t sell. You got a bad professor? Don’t leave your college. Your mom told you need to buy a house because renting is a waste of money? Don’t rush to please her. Always make your self assessment and analyze the situation from a 3rd person point of view. Zoom out.
- Invest in something you believe. Being speculative may lead to bigger returns, but be sure you want to live in the world you’re contributing to build. In your IPS you should mention your investment philosophy and ethical concerns. Do you want to finance weapon industry? Alcohol and Tobacco? Banks? Do invest in what you believe would be successful in the future and aligned with your values. Yes, surgeons make good salaries, but if you’re like me and you faint when you see blood, you’re better off getting a degree in computer science! Do invest in the market you value, but be sure you don’t fall into too much Home Bias. Speaking about it, next point is…
- Diversify your investments. Don’t put all your eggs in the same basket. Diversification reduce risks. Diversification means also try to not invest in a market close to your profession. If the market falls, you lose twice: both your investments and your skills lose their value. I’m a software engineer and I make a good salary in the IT world. I should limit my investments in tech companies or funds based on tech. If we get another dot com bubble I may lose both my money and my job. Your job is an income generating asset, it should be on the table when taking into account diversification.
- Know (very deeply) all the costs and fees associated with your investment. Fees compound over time and an apparently small difference in the order of percentage points or even decimals matters a lot. Take a look at this article by Trent Hamm for some math explorations. Know and evaluate all financial implications of your investments. Are there purchase fees? Maintenance fees? Deposit fees? Sell fees? other financial obligations? When calculating the Return of Investment (ROI) take all costs into account.
- Know the tax implications of your investments. Taxes are other fees, but more subdole. They are not explicit, you need to discover tax implications among a jungle of laws. International investments add more complexity to the problem. International investments sold by an international financial institution and purchased via an international broker make things waaaay more complex. Taxes change over time. Taxes may screw your strategy up. Invest time to understand all aspects of it.
Invest. Don’t be scared. Saw your seeds for a better tomorrow. Whatever path or combination of them you chose (skills, company, material goods, financial tools), whatever goals you have, be aggressive and invest. The younger you are, the more aggressive you should be. Define your values, your strategy, your plan and stick with them. Get help if you want, but be prepared to question the helper. Diversify for the win.
Are you investing? No? What are you waiting for??
Next article: financial investments