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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

Many people do some combination of the three and there are other methods I am sure. These are the big three, though. What I think will lead to the earliest success at FI is 1 & 3. I also think they are the most common. When it comes down to it, people who intelligently practice both methods will achieve index beating returns in the long run, IMHO.

Both real estate and active investing give you the opportunity to apply time, experience, and education to improve your return. I guess the question becomes is it worth your time to choose one of these methods rather than 2? Well, obviously it is if you enjoy it.

What about diverting time away from your day job? Will it pay off in the long run to spend 5 more hours per week managing your RE or Stock investments rather than working your 9-5? I think it will once you establish some savings to leverage towards the cause.

What do you all think? How do you invest your money? How do you plan on financing your FIRE?

st
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SloanT writes:

What do you all think? How do you invest your money? How do you plan on financing your FIRE?

Well put. This old post of mine addresses my take on many of the issues you raise:

http://boards.fool.com/Message.asp?mid=16313664&sort=username

Regards,
FMO

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FMO:Well put. This old post of mine addresses my take on many of the issues you raise:

I thought your post was very well written, and I have some questions that I never made the effort to post when I read it the first time way back when...

Ok, I am not good with my hands. I don't have any desire to improve houses on my spare time. Is real estate still a good option for me? I also don't like dealing with people, especially strangers. Wouldn't I have to do the leg work of finding tenants, etc? I know that you say that your properties don't take much time to maintain, but I don't know if you understand my lack of desire to do these things...

Thanks for taking the time to discuss!

st
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SloanT writes:

Ok, I am not good with my hands. I don't have any desire to improve houses on my spare time.

My thoughts on property management and work are at the following link. For investors in small income properties the work aspect has, in my mind, been way overblown. I spend less time managing my properties than I do reading the morning paper. http://boards.fool.com/Message.asp?mid=17492715&sort=username

I know that you say that your properties don't take much time to maintain, but I don't know if you understand my lack of desire to do these things...

Real estate investing isn't for everybody. Before I started, I didn't think it was for me. I was wrong. It's possible to hire out most all management chores but it will hurt your return-on-investment. I personally think it is neither justified nor necessary for small properties.

Regards,
FMO


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Ok, I am not good with my hands. I don't have any desire to improve houses on my spare time. Is real estate still a good option for me? I also don't like dealing with people, especially strangers. Wouldn't I have to do the leg work of finding tenants, etc?

I can't say whether real estate is a good option for you or not. Basically, it depends on how quickly you want to see returns and what rate of return you're looking for.

I can tell you that there are management companies that will do these things that you don't like... for a fee. Paying the fee will probably mean that your property will not immediately cash flow, but you'll still reap the rewards from the tax benefits and appreciation. Eventually it should cash flow, too, once rents have increased sufficiently.

You may even find a fellow landlord (like me) who enjoys doing these things that you don't and might be willing to do an "equity participation" deal with you - basically, you put up the cash equity, they put up the sweat equity, and you agree in advance what percentage of the rewards each of you will be entitled to.

As far as the legwork of finding tenants goes, my experience has been that there's not much legwork at all. Finding houses requires a lot of legwork, but tenants can be convinced to come to you. When I had a unit to rent, I placed an ad and had open houses. This method was very successful for me. In a couple weeks I had a handful of qualified tenants and then faced the difficult decision of choosing one of them.

Then again, I've only had to rent one unit this way. The first unit rented by word of mouth before I'd even finished the renovations. The second one is the one I had the open house for. Except for a friend of mine who occupied the place while I was working on it, I've had the same tenants since I rented the place (about 3 months after I bought it), and they've shown no indications of a desire to move.

I think I'm pretty lucky - I like almost everything about being a landlord... except plumbing and roofing.

SS
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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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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 hate to be a party-pooper, but I take umbrage to this statement. Index funds are not only for people who think investing is "boring" or "difficult." I'd spell out what I think, but I've already posted it on another board, so I'll just include the link:

http://boards.fool.com/Message.asp?mid=19410765

-tdx

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tdx:I hate to be a party-pooper, but I take umbrage to this statement. Index funds are not only for people who think investing is "boring" or "difficult." I'd spell out what I think, but I've already posted it on another board, so I'll just include the link:

A while back on REHP there was some discussion over the ability of people to beat the market and someone posted a link to a study that found that on average a bunch of people at a certain brokerage over a certain time period had underperformed the market. Here's what I found: In the report, on page 19, there is a very interesting table that reveals that 43.4% of accounts beat the market over the reviewed time period and 25% of accounts beat the market by more than 6% annually, all net of transaction costs. Furthermore, the top 10% of accounts beat the market by over 18% annually, again, net of transaction costs. (From: http://boards.fool.com/Message.asp?mid=18900682&sort=username)

I know that you are a student at UVA, one of the top public Universities in the nation. I imagine that you are a pretty good student as well. Why would you settle for average if you have an interest in investing and you have shown that you are certainly in the top half or top quarter or top 10% everywhere else?

My whole life all I hear is how hard the next step is: Calculus is impossible...Mechanical Engineering is so hard...Physics 2 is too hard, take it at CC...Watch out for the Sr. Design class, it's killer...the CFA is impossible, you'll never pass...don't invest actively, you have to be Warren Buffett to beat the market...

I just don't buy it. The reason why most people do poorly at investing is that they treat it like some parlor game where you can set up an account, watch some CNBC, and go for it. If people approached the stock market like they would a career in law or medicine, they would do a whole lot better. In fact, some people do just that and they are the 25% who beat the market by 6% and the 10% who beat the market by 18%.

st
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My whole life all I hear is how hard the next step is: Calculus is impossible...Mechanical Engineering is so hard...Physics 2 is too hard, take it at CC...Watch out for the Sr. Design class, it's killer...the CFA is impossible, you'll never pass...don't invest actively, you have to be Warren Buffett to beat the market...

SloanT,

Thanks for your well-thought post. And, for the record, I completely agree with you about people saying how impossible the next step is. In fact, this has been something I've been thinking about lately, and it annoys me when people say things are so tough. I'm still waiting to get to the "impossible" part of the finance classes I took this past year.

I know that you are a student at UVA, one of the top public Universities in the nation. I imagine that you are a pretty good student as well. Why would you settle for average if you have an interest in investing and you have shown that you are certainly in the top half or top quarter or top 10% everywhere else?

I do have an interest in investing- I enjoy reading about different schools of thought, and, of course, chatting it up here on TMF with everyone. The problem is, I just don't have the dedication to want to beat the market.

Now let me clarify that statement. Is beating the market possible? Of course. Is it difficult? Of course. Do I think that if I applied myself I could beat the market? I'm not sure- but I'm sure that I have just as good of a chance as Reginald Constance Huffington III, the new junior analyst at Goldman Sachs. My problem is that I really don't have the enthusiasm or the patience to want to beat the market.

I'm a gambler by nature. I love the thrill of letting it ride, chasing losses, and placing big bets. Fortunately, I'm smart enough to realize that this type of behavior doens't translate into good investing behavior. Furthermore, I just spent the past 2 years of school learning how to break down financial statements, do DCF valutions, value IPOs, etc. And, frankly, that stuff really doesn't interest me.

While I can work with numbers, I placed out of both college calculus and statistics, I just don't find them interesting. Furthermore, I recognize that with my type of behavior, I'd be inclined to drift towards day-trading rather than Buffett-like investing. Also, I want to eventually start my own business. Once I get that rolling, I'm not going to have time to sit around brwkaing down financials to see if I should sell, buy, or hold.

I recognize my own limitations, and accept that fact that I may not be Warren Buffett. Now let me once again state that I agree with you about things not being impossible, but there's a fine line between not backing down to people and being irrationaly stupid (I think you're on thr right side of this line, but the majority of Americans are not). I believe that many people will use your line of thinking to say "hey, I can beat the market" and then procede to flush their retirement savings down the toilet.

This brings me back to the point of my original post, which is that indexing isn't for the less-intelligent. It's for those who have the strength, and I daresay, and the intelligence to recognize their own inherent limitations. I'll say once again that averages are created b/c most people are below that average. I'd rather spend my time on things that matter more to me, like building relationships and building a business (once I graduate). And, I think someone's life savings is too high a price to pay to learn that they should have stuck to indexing.

-tdx

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tdx speaks the truth:I recognize my own limitations, and accept that fact that I may not be Warren Buffett. Now let me once again state that I agree with you about things not being impossible, but there's a fine line between not backing down to people and being irrationaly stupid (I think you're on thr right side of this line, but the majority of Americans are not). I believe that many people will use your line of thinking to say "hey, I can beat the market" and then procede to flush their retirement savings down the toilet.

This brings me back to the point of my original post, which is that indexing isn't for the less-intelligent. It's for those who have the strength, and I daresay, and the intelligence to recognize their own inherent limitations.


I think you have done an excellent job of analyzing yourself and your abilities and it is very impressive. It seems that most people go through their whole lives without making a similar evaluation.

I believe it is important to approach investing as you would any other business venture. You must know and believe you will succeed but you must also be willing and able to put in the hard work to get there. However, it's is not right for everyone, and if you have other priorities or interests or whatever and you can't give investing your full attention then I think index funds are the next best thing.

Good luck with your business, what are you thinking of doing?

st
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Thanks Sloan!

As for the business, I'm still not sure about what I want to do. I've begun to learn that I prefer to do more marketing/management related jobs as opposed to financial ones.

What I try to do (although sometimes I forget) is to keep a notepad with me at all times, and scribble down whatever pops into my head. Then everyday I'll review it and see what I can decipher.

I've realized that the real first-movers in business are the ones who had the strength to try an idea that, at the time, others thought was ludicrous (see: EBAY). And I've also realized that while it is cliche, this does require some "thinking outside the box."

I love market research, so I've been looking into some things there that haven't "blown up" yet. One thing I've come across is ethnography, which is market research that uses anthropologists instead of business school grads. This has piqued my interest, but again I'm still trying to figure things out.

Fortunately I'm still young, so I've got time to figure it out. I'd love to hear about what anyone else is doing, or even how other people organize their thoughts and ideas.

-tdx
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SloanT, I agree with you 99%. I think I can certainly beat the average.

nmckay
but Physics 2 WAS too hard
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