FIRE – UNIVERSITY – Financial Independence Education

Giving your $$$ fertility treatments.

July 6, 2019 FIRE UNIVERSITYLeave a comment

Imagine you are a farmer and you have saved your money to buy a piece of land to begin your farming business. You must decide what you will produce to make money. First you think of crops such as corn, wheat, tomatoes, maybe even tobacco, but then you think about your friend Joe who spent weeks plowing the fields and sowing seeds. Joe Spent months praying for good weather in hopes that his investment would yield a good return. Fortunately for Joe his crop did produce but then he had a short window to sell before it all spoiled and became worthless. You think to yourself that seems like way to much work and way to much risk.

The next day your wife comes home from the market and is complaining about how high the price of milk is, that’s when it hits you. You will be a cattle farmer!!! After all cattle produce milk every day and better yet your friend Bob is a butcher, who would love to buy cattle from you to sell in his shop. So you save enough money to buy 2 cows and excitedly wait for them to produce milk. Unfortunately you soon realize that two cows won’t produce enough milk to cover your expenses, so you think I need more cows!!!

After saving for a couple months you have enough to buy another cow but on your way to the market you have an idea, “What if I bought a bull and let him make me more cows?” That’s it you say, I’ll buy a bull and let them make me more cows while I spend my time working on something else. So you buy the biggest and best looking bull you can find. It’s a year later and your 2 cows and 1 bull have become 4 cows and 1 bull, but better yet your income from milk has doubled!!! With Zero extra investment you have increased your net worth in cattle and doubled your passive income.

Since you are working and aren’t dependent on the milk revenue for income you decide to just keep re-investing it back into purchasing more cattle. So now at year three you have 5 cows and 1 bull that all reproduce and you end up with 9 cows and 2 bulls. This is amazing the cows keep compounding on each other and your income from milk increases each year with no extra work from you, only a small fee to the neighbor’s son to milk and feed to cattle. This year over year compounding continues until you have more cattle than you can imagine and the income from the sale of milk has far exceeded your regular income. It’s at this point you realize you no longer need to work, you can retire and live off of your milk sales. What’s even better is you can sell a couple cows every year to your buddy Bob the butcher for even extra income to travel. With so many cattle constantly reproducing even if you sell a few each year, you will still end every year with more than you started with and your milk income will still continue to grow!!!! Poor old Joe who had some good years with his crops but also had some years where everything got wiped out is still breaking his back plowing fields and planting seeds, hoping for one big pay day to be able to retire. Unfortunately for Joe he pays tax on all of his crops every year as he sells them to have income but you only paid tax on your milk sales, not on the cows that kept multiplying and increasing your net worth and passive income. This allowed you to grow your wealth much faster than Joe and while joe had some great years where he was able to buy new fancy tractors, you slowly but surely kept increasing your worth.

So what does this have to do with money and investing? Well you being the cattle farmer was like someone who slowly invest in income producing assets like stocks that pay dividends. It’s slow at first but eventually if you elect to reinvest those dividends, they begin to grow and purchase even more shares, that produce even more income, and so on and so on. Just like the cattle eventually you will have thousands of shares paying passive income, that continues to buy more shares and if you do this in a non-taxable account like an IRA, that dividend income isn’t taxed so it grows and compounds tax free.

The key is to START!!!!!! The earlier you begin saving and investing, the longer your money has to grow and compound. Even if you can only save a little each month, that is better than nothing and each dollar saved is one step closer to your goal.

Thanks for reading and remember FIRE University is not a licensed financial advisor or a certified tax professional. Everyone should seek professional help before making any financial decisions.

My favorite investing apps

June 13, 2019June 13, 2019 FIRE UNIVERSITYLeave a comment

It’s no secret that investing has gotten not only easier in the last decade but investors also have access to much better and up to date information that allows them to make better decisions. Today I want to talk about my favorite investing apps, all of which I use on my smart phone, to research, fund, and invest without having to get up. While I have retirement accounts with Fidelity and Vanguard, both of which I love. This post will focus on non-retirement or taxable accounts that I use and the apps that make them simple and fun to play with.

First up is Acorns. Acorn’s tag line is small acorns turn into mighty oaks and as we all know thanks to the power of compound interest this is very true. The Acorns app allows you to link your debit cards and every transaction you make is rounded up to the nearest dollar and the difference is deposited in your brokerage account. So for instance if I purchase something for $1.25 then $0.75 will be deposited into my brokerage account. Acorns has several pre-designed portfolios that you can choose from based on your risk tolerance and once your round-ups hit $5.00 they will automatically deposit it into your account which will purchase fractions of each investment in your portfolio. For someone that wants to just set it and forget it, this is a great app. In addition they offer educational articles to help novice investors learn more about what their money is doing.

Second on my list is M1 finance. M1 finance is an app that allows you to create your own portfolios and displays them as pies. You can make your pies up or choose from pre-existing pies designed to fit your investing desires. M1 also uses fractional shares so each investment can buy small slices of the whole pie to keep your asset allocation correct or you can purchase individual shares and the best part is there are no fees!!! M1 offers great educational articles to help investors make the best decisions.

The third app I’ve included is Robbin Hood. This is a full service brokerage account that charges zero fees for trades. You can purchase any type of stock, bond, index fund, or mutual fund but I like this app for purchasing single stocks. I believe in using low cost index funds as the core of my investment holdings but use a small amount of money to play with. This helps me to keep my hands off my long term retirement funds and gives me an outlet to play and speculate. Robbin Hood offers educational articles to better equip investors to make smart decisions.

The last app I chose to include is Ally bank. Ally is a full service bank that also offers full service brokerage accounts. The thing I like about Ally is they offer high yield savings accounts, currently my account is yielding 2.20% which is much more than most banks offer. Ally has a great app and it is easy to navigate and fund your accounts.

Thanks for reading and remember FIRE University is not a licensed investment or accounting company and everyone should consult a professional before making any financial decisions.

Do we take better care of other people’s money???

June 12, 2019June 12, 2019 FIRE UNIVERSITYLeave a comment

If you are working in corporate America, then you probably have to adhere to a strict budget. If you are like me you have to not only adhere to a budget but actually set budgets for others to live by. In our working lives we all have a boss that we answer to and it is that accountability that often forces us to track our spending very closely. In fact most of us plan and track our spending much better while at work then we do in our personal lives. I’ve had coworkers that can keep every receipt for reimbursement, track every mile traveled to claim mileage, run detailed weekly reports to ensure they hit their monthly budget, chase employees around to cut a few hours of labor, but never even glance at their personal bank statements or review their 401k investments to see what their personal money is doing, so what gives?

There are a couple factors that I believe explain this. First is the human desire to avoid pain and seek pleasure. We are incentivized to take good care of the company’s finances because we don’t want to get in trouble or look incapable and we often have monetary rewards in the form of bonuses or advancement opportunities for a job well done. Secondly we have bosses that hold us accountable and watch over us to ensure our success. So why don’t we place the same value on our personal finances? Well first we don’t have anyone holding us accountable and it is easy to allow ourselves to overspend. To solve this we assign students an accountability partner to hold each other accountable for their personal spending, I highly recommend you find someone in your life that can do the same. Secondly we don’t see the immediate reward for a job well done. This is where tracking spending and investing comes in. I recommend setting up a simple excel spreadsheet to track your expenses, investments, and overall net worth. This document will allow you to see where you are wasting money and set goals for savings. It will also help you to see the immediate rewards of putting more money into savings and once again allow you to see your progress. For added incentive run a couple scenarios in a retirement calculator to see what your current investments will be worth in 20-30 years. This should help to make a shift in your mindset, that by hitting your personal budget and savings goals, that you are effectively giving yourself a raise and promotion.

I believe that by using the same motivation and incentives in our personal lives that propel us to succeed at our jobs, that we can reward ourselves with wealth and freedom. Many in the FIRE (Financial Independence/Retire Early) community have Facebook groups you can join to be a part of a community of like minded people who can both help to hold you accountable and share ideas on how to speed up your progress towards financial goals. So give yourself a raise and start saving more today.

Thanks for reading.

FIRE University is not a licensed financial planner or accountant, please consult a professional before making and financial decisions.

Financial and Business lessons from The Game of Thrones.

June 9, 2019June 9, 2019 FIRE UNIVERSITYLeave a comment

Hello Class. Welcome back to Fire University. As many of you know I am a big fan of the Game of Thrones TV series and in today’s class we will discuss the financial and business lessons that can be learned from the show. Let’s start with the financial lessons.

Winter is coming

In the show the Stark family is famous for saying “Winter is coming” and I take that to mean that winter both literally and figuratively is coming, whether we are ready or not. In life we experience good and bad financial times. During the good times it is easy to forget about planning for the bad times and just have fun. Examples of this are not budgeting for car maintenance or home repairs. Logically we all know that it is a part of life for things to break or need repairs but often times we fail to plan or save for them. Many of you are aware of my advocacy for having a large financial emergency fund. I advocate for four months of total expenses as well as a separate account for future home repairs, car purchases, and just the unexpected things life throws at us. Many people will say that I am being to cautious but I’d rather be safe than sorry. In the game of thrones we see in the recent episode that Sanza say’s they didn’t budget for having to feed hundreds of extra troops let alone two dragons. Then she says “What do dragons eat anyways” to which Dany replies “anything they want.” I love that exchange but it is also a good example that not planning and preparing for the winter could mean certain death. During the harvest time food is plentiful but the leaders of Winterfell know that they must budget and allocate some of the excess for winter rations.

A Lanister always pays their debt

As you all know I despise debt. I believe that debt creates bondage but do acknowledge that debt leveraged wisely can yield large returns. Some debt is okay if it is used to purchase cash flowing assets or to buy a home that locks in a low interest rate on an appreciating asset, now I know some are saying but a house barely keeps us with inflation and that it has overhead maintenance cost to keep up and that you could get a much better return in the market. I agree with most of those statements but studies show that home ownership is one of the leading indicators of wealth accumulation and it locks in your monthly housing cost. The point of this is that if you have debt, pay it off and do it as quickly as possible. Your credit score is a reflection of your credit worthiness and measured by your ability to pay back loans as well as your income versus the amount of debt you have. In the Game of Thrones show we see that a person or family’s reputation is vital to their survival as it can make access to both capital and alliances with other houses.

Choose your partner or spouse carefully

One of the best gifts we were given was our ability to choose who we love and who we spend our time with. We should take this decision seriously because choosing the right or wrong person has the ability to not only make us happy or sad but also the power to greatly affect our wealth. In the time of GOT most people made marital choices based on their standing in society and what would best serve their family fortune. However in today’s times, we have the luxury to choose based purely off love. While love is arguably the most important part, it is also important to make sure our partner has the same views and desires when it comes to handling finances.

Now it’s time for the business lessons.

It is better to be loved than feared

Throughout the TV series we saw many rulers gain power through force and attempt to lead by fear. While this may work for a while, it is only a matter of time before the followers will either rebel or switch their allegiance to someone else. We saw Daenerys rise to power and build a following based off of her compassion for those that were enslaved. The former slaves followed her because they believed in her vision of the future. Later in the show we saw the people gravitate towards John who was a fair and honorable leader. In today’s business world a new leadership style called “servant leadership” has emerged and is gaining widespread popularity as well as yielding great results. The basis of it is that the leader is there to serve the employees, it is the bosses job to provide the resources necessary for the employees to succeed in their current roles and prepare them to advance in their careers. This is a stark contrast to the former style of autocratic leadership, in which managers made the decisions and forced the employees to comply.

S.W.O.T

One of the first things we learn in business school is how to perform a SWOT analysis. The word SWOT is an acronym for Strengths, Weaknesses, opportunities, Threats. This is a strategic way of thinking, that helps to design long term goals and strategies. Warren Buffet often talks about the businesses he invest in have a moat around them, by this he means they have a strategic advantage over their competitors. This may be in the form of technology, distribution systems, or being first to market. In GOT we saw many examples of this, from the Night King being able to raise the dead, to the moat of fire around Winterfell, to Daenerys fire breathing dragons. Each of these gave them an advantage that they could exercise over their competitors. In business, whether for your company, department, or for yourself it is best to define your strengths and work to make them as strong as possible, while finding others that are strong at your weaknesses. When you have time perform a SWOT analysis on yourself and use the results to know where to focus your time and attention.

FIRE University is not a licensed or registered financial planner or accountant, please speak to a professional before making any investment decisions.

Thanks,

Balance. Enjoying today and planning for tomorrow.

April 14, 2019 FIRE UNIVERSITYLeave a comment

Hello class and welcome back to Fire Univesity. Today I want to talk about something that is very personal to me and Mrs. FU. Recently my family received some bad news in the form of a health diagnosis. In light of dealing with the eventual death of someone we love and being forced to acknowledge our own mortality, it has caused us to reflect on finding the right balance between enjoying the present moment and saving for the future. Our family member is fairly young and faces a reality of not living much longer, having spoken to them they have regrets about waiting to do things until retirement as well as fears of not having saved enough to care for their spouse and kids. This created an interesting question about the reality of postponing spending money and having instant gratification versus saving and waiting to spend money until later in life. When speaking to older people that are near death, I don’t recall ever hearing one say they wish they had saved more or spent less, never a single person, their regrets are usually centered around the things they didn’t do. Things like staying in a job they didn’t like instead of pursing a dream job, or never having the courage to sell everything and move to a new place to live a life they dreamed of. However I have never met an older person nearing retirement or in retirement that hasn’t said they wish they had started saving and investing sooner. That’s a weird combination isn’t it. When you think you have health and time, you wish for more money but when you are out of health and time you wish for more of both and could care less about how much money you have. I try to be mindful of this and live in a way that will not create regret later in life but it is so hard, there are so many things that pull at us for attention and time continues to pass, whether we like it or not. Kids grow up and become adults, parents grow old, and spouses both have different demands that seem to battle for attention. I wonder how many rich old people would trade it all to be a teenager again?

Personally Mrs. FU and I are very frugal but because we have always lived that way we do not feel like we are sacrificing anything. Also as the parents of four kids we both prioritize saving to ensure their futures as well as ours. This is where the FIRE journey comes into play and why it is such a powerful lever for us to pull. Pursuing FIRE does take a lot of discipline and sacrifice, we could easily afford much nicer cars and a much larger house, however I am not convinced that either would provide more enjoyment or happiness. In fact I think that by learning to be present in the moment and by practicing gratefulness for the simple things in life it actually makes us happier and more thankful for the things we have. Since we have a simpler live style we are able to save a larger percentage of our incomes and therefor hope to hit retirement earlier than the average person. By not locking ourselves into large mortgages or ridiculously expensive car loans, we are able to not only save more but we are also able to enjoy more disposable income. So we are enjoying the present, while also saving for the future. Our shared goal or purpose is for Mrs. FU to retire before 50 years old and both of us spend time traveling and enjoying life doing the things we have always dreamed about doing. I think retiring any earlier than 50 would harm our long term financial goals such as paying for our kid’s college and saving enough to withdrawal 3% of our nest egg to live off of, which will give us the peace of mind to know our money will last as long as we do.

There is peace in having a plan and knowing the math behind the plan, however when you see a life cut short it makes you rethink the why behind the plan. So is sacrificing in the present worth saving for something that you may never get to enjoy? Well in our opinion YES. For us the satisfaction of knowing that we can not only provide for ourselves in retirement, when we need our money to work for us, instead of us work for our money. Add to this the fact that our children will have a strong foundation to build on for their financial lives and we are confident that we are making the right decisions.

Another way of looking at this is that being financially independent would allow us to know that even in the absence of one of us, the other surviving spouse would not be destitute and unable to maintain the same quality of life. The thought of knowing that you would not only be unable to physically protect someone but that you would also be leaving them in financial ruin would make being sick even worse. The age old saying that money doesn’t buy happiness is true, however it does provide peace of mind and comfort knowing that your loved ones will be okay no matter what.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

Personal Vision and Mission Statements and why you need them.

March 24, 2019 FIRE UNIVERSITYLeave a comment

Hello Class. Welcome back to FIRE University, in today’s class we will be discussing the importance of creating personal vision and mission statements. Most of us are probably familiar with mission statements from seeing or hearing them at companies you’ve worked for. So to start lets define what they are.

A vision statement is what you would like to see yourself doing in the future. A great example might be “To have a job I enjoy that both pays a quality salary and offers a great work/life balance.” Another example might be “To live in an area I love and to have plenty of money to spend time with the people I love and doing the things I enjoy.” These examples are simple but profound enough to add clarity to where you would like to be someday. Once you have defined your vision statement it is easier to set short and long term goals that are designed to propel you towards that vision. Examples of these goals might be to start saving 25% of your annual salary, another might be to have a $100,000 saved by the age of 30. Yet another might be to travel and find an area that you really enjoy and then work on finding employment there.

A mission statement is a little more complex than the vision statement. A mission statement is a short statement defining what you are passionate about and usually includes something that is very important to you on a personal level. Some examples of personal mission statements are, “To create financial independence for me and my family. To use my talents and resources to enrich the lives of those around me and to help others reach their financial goals.” Another example might be, “To eliminate all debt in my life and prevent myself or others from falling into debt bondage. To improve the lives of those I love and care about through educating them about the dangers of consumer debt.” As you can see a personal mission statement is a short but sweet statement that sums up your main purpose and goal in life.

Of course there is so much more to life than money, so your vision and mission statement don’t have to include anything about money, but since money is how we facilitate trade both locally and internationally, we should be realistic enough to realize that like it or not it plays a major role in us being able to truly enjoy our lives. Financial Independence allows all of us to be able to make the decisions that affect our long term happiness, such as what part of the world we want to live, the types of creature comforts we choose to enjoy, and most importantly how we choose to spend our time.

Your homework for tonight is to create your own personal vision and mission statement. I can’t wait to see what all of you come up with and look forward to reading them.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

How missing my goal helped me find my purpose.

March 17, 2019 FIRE UNIVERSITYLeave a comment

Hello class. Welcome back to FIRE University, In today’s class I want to talk about the importance of setting financial goals. They say that the measure of a good goal it should be realistic, achievable, tied to a time frame, and motivating. For many of us, especially those of us in the FIRE community our financial independence goals are highly motivating and if we can tie them to a realistic and achievable time frame then we just may have a recipe for success. Now I want to share with you my own experience with setting financial goals. As a young man I set a goal of being independently wealthy or financially independent by the age of 35, that seemed old at the time. I am now 36 and have changed my goal to fit my current life. I decided to extend my FIRE age from 35 to 45, which is a little more realistic. So to define financial independence, it is when I have accumulated enough assets to completely retire and not be dependent on outside sources of income. The goal is to acquire enough income producing assets to cover my monthly expenditures, however at 20 years old I didn’t have a good grasp of what life would bring or what type of income I would require later in life. My original goal was to hit a million dollars in net worth, which at the time seemed like a a lot of money and a good round number. Originally I thought I would do this by starting a small business but later decided to achieve it through traditional earned income. Around the time I hit 30 years old I began changing my goal and moved back the age and the net worth. I decided on creating passive income since I wasn’t going to have access to a pension and then build up a nice investment portfolio of stocks and bonds. I decided to do this by investing in rental homes which allow for both monthly income from the renter as well as the renter paying down the mortgage, which creates forced equity. So we have income and equity as well as a host of taxable savings such as depreciation that I can claim. The next goal was to accumulate $1,500,000 spread between my 401K, ROTH IRA, traditional IRA and brokerage accounts. I figured that would allow me to safely withdraw 3% of my account value to live off of without ever exhausting the principle and in fact adding to it with a conservative return of 5%. So I’d be withdrawing 3% but earning 5% annually over time. At $1,500,000 a 3% withdrawal would equal about $45,000 in income, which is actually enough to cover my basic expenses but coupled with the rental income and the elimination of my personal debt obligations, it would all be a great amount of disposable income. At 45 years old I would use that income to leave corporate America and bridge to age 67 where I would begin taking Social Security income and be eligible for Medicare.

So did I fail at my goal, yes and no. I did achieve a level of wealth accumulation that would have allowed me to leave work but the income I needed in my twenties isn’t what I need now as a father of four children. I have changed my goal because now I am in a job I love and instead of selfishly leaving work, I plan to focus more on creating a lifestyle I enjoy and leaving a legacy to my four children. I feel that even though I abandoned my original goal that it was instrumental in allowing me to position myself for future success and to create a sense of strength from which I am able to make decisions.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

The Best Investing Strategy

March 10, 2019 FIRE UNIVERSITYLeave a comment

In this class we will discuss the best investment strategy for everyone. Now this is sort of a loaded statement as it’s probably obvious that there isn’t one investment strategy that is perfect for everyone but there are many basics that will ring true for all investors. If you haven’t read our post FIRE 101, which talks about the basics of becoming financially independent and thus having the option to retire early, please check it out. There are as many different investing strategies as there are investment managers but this class is meant to focus on the basics of portfolio design within the constructs of the FIRE lifestyle and community, which is mostly based on low cost index fund investing.

First let’s explore the different types of accounts available to hold our investments in.

401K – Usually provided by an employer but can be for business owners. 401K accounts are employer sponsored accounts where the company will usually offer a matching program where they invest dollar for dollar in your account, matching your contributions up to a certain percentage. 401K contributions are pre-tax, meaning they are not taxed going in and are allowed to grow tax free within the account. Income and asset appreciation are not taxed.

Traditional IRA – Similar to the 401K but with smaller contribution limits and instead of contributions coming out pre-tax they are able to be claimed on tax returns to reduce your taxable income.

Roth IRA – Retirement account where contributions are taxed going in but allowed to grow tax free and be withdrawn tax free. Income and asset appreciation are not taxed.

Brokerage account – Individual account where contributions are taxed going in and when withdrawn. All earnings in the account are taxable but not asset appreciation until sold.

Now that we have discussed the various types of accounts to hold our investments in let’s explore the different types of investments we can use.

Large Cap, Mid Cap, Small Cap – Each category of Large, Mid, and small cap refers to the actual capitalization of the companies in the fund. So large cal would be the 500 largest companies based off market capitalization and small cap would be the smallest companies based off market capitalization

Total Market – Basically what it says, fund that tracks the whole stock market

Foreign stock index fund – Can be Large, Mid, or small cap just like above or total market also. It tracks foreign stocks outside of the USA.

R.E.I.T index fund – Real estate investment trust are investments in commercial properties. A REIT index fund will track either certain sectors or the whole market

Bond index fund – A bond index fund will track the bond market or a specific segment of the market depending on the fund.

Now that we know what type of accounts we can use and a broad understanding of the types of index funds available to invest in, let’s look at how we can actually build a portfolio. It has long been said that you can do this simple math equation to determine you allocation of stocks/equities to bonds (100 – current age = Amount of stock in portfolio) So for me it would be 100 – 36 = 64. So according to traditional wisdom I should have 64% of my portfolio in stocks and 36% in bonds. While this is a simple and time tested method let’s look at what some other famous people suggest.

JL Collins author of The Simple Path to Wealth and well known blogger, suggest using only two funds VTSAX (total stock market) and VBTLX (total bond market) over at his blog at https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/

Paul Merriman a famous investor and long time champion for index funds shares the same philosophy of Mr. Collins but suggest adding in small cap plus foreign and emerging market funds, which he shows will yield a slightly better return over time. You can check out his material at https://paulmerriman.com/the-ultimate-buy-and-hold-strategy-2017/.

Scott Burns the person who created the Couch Potato portfolio shares Mr. Collins approach and suggest holding only two similar funds VFINX (total stock) and VBMFX (total bond) You can see more at https://couchpotatoinvesting.com/

Dave Ramsey who is world famous for his debt snowball system and for helping thousands of people to rid their lives of debt recommend a four fund portfolio. Growth and income. Growth, Aggressive Growth, and International. It should be pointed out that Mr. Ramsey is a big advocate of mutual funds and most FIRE investors are not, but it is interesting to see the similarities in his portfolio investments and you can find them at https://www.daveramsey.com/blog/how-to-invest-in-right-mix-mutual-funds.

Ray Dalio is a billionaire investor who runs one of the world’s largest hedge funds and the main character in Tony Robbins’ book Money Master the Game suggest what he call the all weather portfolio, which consist of stocks, long term bonds, intermediate term bonds, commodities, and gold. As you can see his portfolio is probably what we would consider the outlier in the group but he obviously knows what he is doing. To learn more check out his Bridgewater website

In closing as I said earlier there is no one size fits all when it comes to portfolio design but there is one big secret that I will tell you. The best investment strategy is the one you can stick to, yep that’s right, after all this the best piece of advice is to pick a simple strategy that you can stick with for the long term and just keep plowing money into it. Jack Bogle was famous for saying to just keep investing and not even look at your account until you are ready to retire but make sure you have a cardiologist present because you are going to be shocked at how much money you have. The truth is that most of the losses the average investor suffers is what we call self inflicted wounds, meaning it is not due to the market but due to their own irrational fears or desire to try to time the market. While some in the FIRE community dislike Dave Ramsey, he is correct when he says that it isn’t as much about whether you use mutual funds or index funds, rather it’s about actually getting started saving and investing and leaving it alone to let compound interest work it’s magic.

There is one more piece that is worth mentioning. The reason for holding stocks and bonds in an account is because they are non-correlated or basically they tend to move or react differently to economic fluctuations. Historically stocks have yielded a much higher return than bonds but bonds tend to be more stable and prevent large losses in the account value, which may cause many investors to lose their grit and sell at the wrong time, thereby locking in big losses. So as we age they say to move more into bonds because we are getting closer to retirement where we will be more dependent on our savings rather than our ability to earn income. So here is the question, since we need stocks to participate in the growth and appreciation but need to lessen our exposure to them the closer we get to retirement but need to keep some to ensure we don’t run out of funds and at least keep pace with inflation, then how does someone who is planning on retiring early need to allocate their portfolio? Well if you are 30 and want to retire by 40 then you are only 10 years away from retirement, so by normal wisdom you would have a very small exposure to stocks, however because you plan to have a much longer retirement than traditional, in my opinion you will need to actually have more stock exposure to ensure you money last for 40 year. I am currently 36 and plan to retire from full time work by 45, by then we hope to have enough rental income and business income to live off, as we will have retired all of our mortgage debt and only have basic food, insurance, utilities, and fun money to worry about. We do have four kids but we have been saving for their college in 529 accounts. So this is my current allocations in my various accounts.

401K

60% – large cap S&P 500 index fund

20% – International non-US

20% – Total bond index fund

Traditional IRA

60% – VOO

20% – VEU

10% – BND

10% – VNQ

Roth IRA

50% – VTI

20% – VYM

20% – VEU

10% – VNQ

Brokerage account

70% – VTI

30% – VEU

This is important to mention. This is PERSONAL finance and this is our personal asset allocations. Ms. FU and I are both employed and have what we consider stable jobs, plus we could easily live off either of either of our incomes alone. Our goal is to live off of the 401K and slowly convert the RMDs from the IRA to the Roth account as the Roth is basically an inheritance to our kids along with a couple brokerage accounts to help cover the tax cost of the tangible assets they will receive. I should also mention that these are my accounts and Mrs. FU has her own similar accounts as I do but they are not included nor their holdings.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

The Nifty Fifty

February 16, 2019 FIRE UNIVERSITYLeave a comment

Before we begin class I would like to say that the statements made in this lecture are mine and only represent my personal opinions, they in no way are meant to represent any company or share of said companies as good or bad purchases, nor to make any attempt to insinuate that the individual companies aren’t good investments, instead they are to help shed light on how I attempt to use past performance and investor behavior to analyze and predict future market fluctuations. Also for complete transparency I need to say that while I am predominately an index fund investor, I do own shares of several companies that we will talk about in this lecture. These shares represent a small portion of my overall portfolio and are held in taxable accounts and a Roth ira. I took positions in these companies because I like analyzing them and reading their 10q and 10k reports, yes I’m a dork.

During the 1960’s and 1970’s the Nifty Fifty referred to 50 massively popular large cap stocks listed on the New York Stock Exchange. These companies were all regarded as buy and hold bets that were thought to be not only safe but almost certain bets, much in the same way that many young investors are beginning to view index funds. Many great and highly recognizable companies such as Anheuser-Busch, IBM, Johnson & Johnson, Black and Decker, Coca-Cola, Gillette, McDonalds, PepsiCo, Disney, Walmart, and Xerox were on the Nifty Fifty list. So in many ways buying into the “Nifty Fifty” was similar to buying an S&P index fund. Interestingly enough over a long period the best performer of the Nifty Fifty seems to be Walmart which had a return of 15,854% when last calculated about 5 years ago. If only we could go back in time and go all in on Walmart Stock, we would be very very well off.

In my opinion we can draw many similarities to today’s current market with the popularity of the FANG (Facebook, Amazon, Netflix, Google) Stocks. In fact those stocks coupled with Apple and Microsoft account for over 70% of the S&P 500’s recent gains and tech stocks as a whole account for almost a quarter of the S&P index, of course the silver lining is that unlike the dot.com bubble where almost anything with .com behind it had a huge valuation, today’s top tech companies are actual businesses that provide amazing products, are profitable, improve or simplify lives, and are highly innovative companies. So what does this all mean? Well looking back at the Nifty Fifty stocks that investors fell in love with during the bull market of the late 60″s and 70’s, where investor’s over confidence in the Nifty Fifty stocks that were supposed to be sure bets drove the share prices above sustainable levels and it was that speculation and overconfidence that subsequently led investors to continue to pour money into them even though their prices were becoming way over valued and eventually led to a major bear market where prices fell by almost 50% and lasted for several years. So in my opinion we can draw a correlation between the Nifty Fifty and the large cap index funds of today. So if we know that in 2017 and 2018 the S&P had the highest market valuation ever and that just a handful of companies are accounting for a very large portion of the valuation, coupled with massive over confidence of the average investor, historically low interest rates, and the longest running Bull market in history, then it is in my opinion that we need to begin to draw comparisons to the past and take steps to avoid similar results, or pick one and go all in, I’m kidding, please don’t do that. Now don’t get me wrong all the FANG stocks as well as Apple and Microsoft are all great companies with amazing business plans, strong balance sheets, loyal customers, and great products offered the world over. Each of these individual companies could continue to see increases in their share price as well as index investors could continue to see the market climb and climb. It is worth noting that it usually isn’t the businesses that cause the problem with the share prices, it’s actually the investors that get greedy and instead of investing based off of actual company earnings, they begin to speculate and believe/hope prices will just continue to rise, in the hopes that someone else will come along and be willing to pay them more for the share than they paid. We discussed in a recent article that Mrs. Fu and Myself have very different views on how to handle market fluctuations and I would recommend checking it out to gain insight into our opposing views. It is my opinion that even though we have a strong economy, low unemployment, and almost historically low interest rates that we should be amassing a large cash position to take advantage of the eventual market downturn. I mean just imagine a national clearance day sale, where all major companies were selling their goods for 20%-50% off!!! Well when the eventual bear market does take place that is essentially what will happen, except instead of consumer goods it will be shares of the actual companies that will be on clearance.

As you all know I am a part of the FIRE community and an index fund investor and believe that the best course of action is to minimize expenses as much as possible, increase income as much as possible, and save the difference to invest. I believe that over time index funds will offer not only the best long term return but do so with the least amount of stress and worry. I say this because of all the amazing companies in the Nifty Fifty, how could anyone have guessed that Walmart would offer the best returns? I mean I love Walmart and I’m always amazed at how Sam Walton was able to build such an amazing company that offers it’s customers items from all over the world at such low prices but you would have to be one lucky person to pick it over every other company. So this leads me to what in my opinion is the best course of action, I think that at least 20% of your current contributions to your retirement accounts should currently be going to a money market account to be held for the chance to take advantage of the average investors current overconfidence in today’s market. Let them buy HIGH and sell LOW.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

Mr. FU vs Mrs. FU – Reacting to a bear market

February 3, 2019 FIRE UNIVERSITYLeave a comment

Yesterday in a class discussion the topic of preparing for a bear market came up and it was interesting to see that my wife and I have different views and plans to handle a drop in the market. What is a bear market? A bear market is a drop of 20% or more in the stock market. It is worth mentioning that bear markets are very normal and should be expected every so often, in fact on average they happen about every 4 years and last for about a year, interestingly bear markets are usually followed by a bull market which is an increase of 20% or more and the best part is that bull markets usually last for several years or 4-5 times as long as bear markets. So the question was if we know that we are due for a bear market or a drop in prices what should we do to prepare ourselves?

Mrs. FU was the first to field this question and her stance was to do NOTHING, absolutely NOTHING!!!! Her advice is that she believes in the investing plan and the asset allocation she has and that it will be successful over the long term, so she will continue to dollar cost average regardless of what the market is doing. She plans to have her asset allocation set and only readjust it once per year to realign her holdings to match her desired allocations. It is worth mentioning that Mrs. FU is usually right and I get in to the most trouble when I don’t listen to her:)

I Mr. FU decided to add my stance on the question next. I believe that we are overdue for a significant drop in the market but must add that markets don’t go up or down based on the length of a bull or bear market, they rise and fall based off of a number of factors. A significant drop is usually due to a bubble caused by mass speculation that artificially drove up the prices. This was seen in the tech bubble where companies were being traded for unreal prices, especially considering most didn’t even have any earnings just lots of hype. I would like to also mention that every single share of a company listed on a secondary market is owned by someone, so to buy a share someone else has to decide to sell it, this means that someone has to have an opposing view of the value of the share as the one you have. My personal plan and what I am currently implementing is to continue to invest the same amount in all my tax advantaged accounts but to allocate a large percentage of those funds to a money market account, basically holding them in CASH until I see a good buying opportunity. When I see a significant drop I will first change my future contributions back to domestic and foreign equities and slowly start using the cash reserves to buy shares at a nice discount, the plan is to spend 25% of cash reserves at a time to see if the price will keep falling. I have not and do not plan to liquidate or sell any of my current holdings, just to use the cash reserves to buy shares at a significant discount.

So who is right? I would say that Mrs. Fu has the safest plan and that in 40 years it may not make that big of a difference what exactly we paid per share as they will be worth much more anyway. The main thing is that we are both fully funding our tax advantaged retirement accounts as well as using our taxable accounts. We both practice paying ourselves first or as we call it “forced scarcity” by having the funds taken out automatically before we even have a chance to spend them and we have aggressively paid down our debts to free up cash flow to invest. My kids who all have ROTH IRAs and each follow the same investment strategy of 60% large cap index fund, 30% foreign non-US index fund, and 10% REIT index fund, have all decided to follow their mother’s advice and just dollar cost average regardless of the market conditions. For the kids who have a 50+ year time horizon saving 20-30% on several shares now will make almost no difference at all.

What do you think? Should we follow Mrs. FU and stick to a set plan or should we listen to Mr. FU and try to wait for the market to go on sale? I’d love to hear your opinion.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.