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Author: Lammergeier40 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5084  
Subject: Re: How to finance your FIRE Date: 8/7/2003 1:24 AM
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One of the frequently discussed aspects of achieving FIRE is how to get there monetarily. As far as I can tell, there are several major methods used:

1. Real Estate: Investing in property that generates cash flow.
2. Index Investing: Vanguard vanguard vanguard
3. Actively managed investing: People who pick their own stocks/MF's


I'll answer this as if I was responding to someone who was totally new to investing, and I'll focus on choices 2 and 3 since I don't have anything to add about real estate (FoolMeOnce's linked post was excellent).

I think everyone should start by dollar-cost averaging into an appropriate mixture of stock and bond index funds. Establish an asset allocation plan through Vanguard (or the lowest expense mutual funds available through your employer) and stick with it come hell or high water. If you've never read "Bogle on Mutual Funds" or "Winning the Loser's Game", you should.

If you find investing difficult and onerous, you should stop after this step and instead spend your free time doing something you really enjoy (after all, isn't that what FIRE is all about?).

If you have the desire and think you have the aptitude to pursue active investing, then you should start a small active account, while continuing to contribute the lion's share of your savings to the passive indexing approach. For example, start a Roth IRA through a discount broker like Ameritrade, contributing up to $3,000 annually while continuing to plow 3-4 times that amount into your 401(k) index funds. You'll inevitably go through a learning curve, and there's no need to draw down your entire nest egg while you're learning.

I've done a ton of reading, and I don't know of anybody who's been able to add investment performance over the long-term who wouldn't be categorized as a value investor. So if you're not comfortable going against the flow and buying stuff when it's going down in price (and holding tight as it continues to go down in price), then I think you should go back to passive investing and stay there. Probably the worst thing that could happen to you when you're just starting out in active investing is to be wildly successful (a la your brother-in-law, the shoeshine, or just about any idiot with a pulse back in the internet boom of the late 90's). For reading at this stage, I'd recommend books about Warren Buffett, by Peter Lynch, and Ben Graham's "The Intelligent Investor."

If you're going to do active investing, it's absolutely imperative that you keep score. You need to measure your returns on a regular basis and compare them against your appropriate benchmark (i.e., the index funds from part 1). I'm absolutely amazed at the number of active investors who have no idea what their annual rate of return is, or how it compares to an appropriate benchmark like the S&P 500. And I'm not talking about your brother-in-law or the shoeshine here, I'm talking about seemingly intelligent people who have been picking their own stocks and posting on TMF for several years. I suspect that most individual investors, like most fund managers, are fooling themselves in terms of generating any sort of superior return from their investing activity. If after 5 years your experiment with active investing is seriously lagging the S&P, you should probably retreat to passive investing and stay there.

I've been investing actively since Nov 98 on a balance of $100,000 to $200,000. My annualized rate of return has been +17.7%, while the S&P has returned -1.2% annualized (or about flat with dividends thrown in). So it's worked for me (so far), and I'm a couple years closer to FIRE as a result.

But has it been worth it? I'm not sure. I've got enough statistical background so I can evaluate my performance to date, and it's not significantly better than chance (although my principal has doubled and that is worth more to me than being statistically proven to outperform the S&P).

Nevertheless, I'm at a juncture now where I find myself seriously considering passive investing--Vanguard funds for all new money and LTBH DRIP's for what I currently own, and unplugging from the market. I would guess that for the last 5 years I've easily devoted >2 hours per day each and every day to investing. And while I've enjoyed it as a hobby, my work has suffered, and my ability to do other things (family, personal growth, hobbies) has also suffered. I'm not sure an extra $100,000 in return over 5 years has been worth what it's cost me in terms of time. Sure, it might be worth it at some point in the future when I'm investing $1,000,000 instead of $100,000-200,000, but because I'm a believer in FIRE, I won't be putting $1,000,000 at risk trying to earn 20% per year. I'll be structuring it for a safe and reliable 4% per year so I can retire and go fishing.

My bottom line: even if you can consistently beat the market (and most of you cannot), I'm not sure it's worth the effort.

How's that for an answer?

Todd
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