Two Paths to Financial Independence – What We Invest In

Similar to the popular mantra “personal finance is personal”, there is no one “right way” to achieve Financial Independence. In fact, there are an almost infinite number of ways to achieve FI (well, technically probably not infinite, but there are a lot).

The many different paths to FI include both the HOW (i.e. real estate, entrepreneurship, index fund investing, etc) as well as the speed of the journey.

Note: In this post we’ll focus on the specific methods & techniques we’ve each chosen to employ and in the next post we’ll dive into how fast we’ve been going.

Scout

Although I’ve thought about many different ways of building wealth, my main method for pursuing Financial Independence has been through stock market investing, mostly via index funds. I’ve actually been investing this way for over 18 years now – a full decade before I even found the FI community in 2018!

Discovering Wealth Beyond A W-2

Already disillusioned with work as an engineer just a couple years into my career, I thought about other ways of making a living, but nothing really stood out to me or came to mind at the time. One day at work I overheard some co-workers discussing the book “Rich Dad Poor Dad” and the concepts sounded interesting, so I decided to pick up a copy for myself.

All I can say is that my mind was blown and it fundamentally changed my view of money & investing forever! I learned that a W-2 paycheck alone wouldn’t lead to wealth creation, but instead the rich have assets that work for them to produce additional money. Probably THE single most impactful quote in the book for me was: “The poor and the middle class work for money. The rich have money work for them.”

With my curiosity piqued, my next step was to determine the best way to have money work for me. Although I knew there were many methods available, I initially thought about real estate, entrepreneurship, and stock market investing since these were the prevalent options discussed in the book.

Making A Choice…

For anyone who has read “Rich Dad Poor Dad”, you already know that this book contains only broad, high-level concepts with no specific steps for implementation. Because of this I started my self-education in personal finance & investing shamelessly with the most obvious set of books designed for a novice like me: “Personal Finance for Dummies” and “Investing for Dummies”. Both of these books explained the basics of stock market investing and it really caught my attention.

After the Dummies books, I forgot exactly what books and/or what authors I read next but I continued to learn more and more about stock market investing. And across many resources I even started coming across the term “index funds”, which were passive investments that held a collection of stocks that mirrored specific stock market indexes, with the goal of not trying TO BEAT the market, but instead trying TO BE the market.

I dove head-first down the rabbit hole to further research index funds and came across classic books such as “A Random Walk Down Wall Street” and “Stocks for the Long Run”, both of which I highly recommend. But what really sold me on this concept was the book “The Only Guide to a Winning Investment Strategy You’ll Ever Need” by Larry Swedroe.

Of course the title sounds very gimmicky and I was highly skeptical at first, but the book turned out to be a great mix of knowledge – the first half was a primer on general stock market investing while the second half made the case specifically for index investing. My absolute favorite part was when Larry actually demonstrates this concept by starting with one asset class and adding new types of assets one at a time to the sample portfolio, while showing how this impacts both historic returns and volatility. Spoiler alert: adding a range of diverse asset classes tends to increase returns while also lowering volatility.

…Then Taking The Leap

All of my continued research into stock market/index fund investing further & further solidified my thought that this was the approach I wanted to take in order to build wealth. It seemed like the perfect mix of low(er) effort while providing decent historic returns. This was something that I could do in parallel while also continuing to earn & save from my regular W-2 job. The only downsides I saw at the time were the lack of direct control over my investments (compared to more of a hands-on approach with both real estate & entrepreneurship) and that it might be a slower path since it would take a while for invested money to compound.

Because investing was so new to me, it took me over a year to actually commit and contribute my first dollar to it. The entire time I kept researching, reading, and studying more & more and even put together sample portfolios (in Yahoo Finance) of what I would be buying so that I could track its performance. Over the course of that year the market continued to steadily climb and volatility was extremely low (at least from what I remember).

So with everything in place and confidence high, I finally decided to contribute my first dollars to stock market investing in February 2007. Over a weekend I opened an account at Vanguard, transferred money from my bank, and placed a buy order which was executed the following Monday afternoon. I was now AN INVESTOR (woohoo!) and everything felt right with the world… until the market suddenly dropped by 2-3% a couple days later (of course).

This was definitely a bummer, but my belief in this type of investing was not deterred. All of the effort & research I had put in up to this point built my confidence and I knew this sort of volatility just came with the territory. I quickly shook it off, vowed to move forward & trust in the long-term process, and knew that one day in the future (actually today to be exact!), this would make for a great story.

Indexing Only?

While the majority of my stock market investing has been focused on the use of index funds, like most who are new to this asset class, I was also lured by the appeal of choosing individual stocks. This fascination was driven by much of the financial media I consumed at the time including various personal finance magazines and shows on CNBC, in particular Jim Cramer. I mean, who wouldn’t want the opportunity to make a killing by choosing the right stock and having it immediately go to the moon? This is exactly what most people brag to others about; there usually isn’t much discussion around “boring” index funds that slowly grow over the long-run.

I dabbled with picking individual stocks for a while, but quickly came to the realization that I was no market wizard and I had no inherent ability to pick good stocks, regardless of how many books I had read on the subject. Another mistake I made was buying with little prior research of my own – instead I followed “hot tips” from friends, co-workers, and investment magazines. I sold most of my individual stocks within a few years and actually haven’t bought any new ones in over 15 years!

I wouldn’t rule out owning individual stocks in the future, however I acknowledge that I would need to perform much more research and constantly stay up-to-date with any new information in order to have a higher probability of success. But not having the time or interest to do this, along with my own mixed results in the past (some of my stocks did better & some did worse than the S&P 500), this further solidified my belief in the simplicity of investing in index funds.

Interest In Other Investment Methods

Over the years I’ve heard so many people in the FI community talk about how great real estate is and it’s sometimes made me wonder if I was ever missing out. I’ve read some books on the subject over the years and while it does seem mildly interesting, I’ve also never been “bitten by the real estate bug” for a variety of reasons:

I had negative experiences with real estate growing up. My parents owned rental properties and it seemed like I was constantly helping my dad work on them. I would assist him when a tenant needed a repair and would also help clean and prepare properties when the units were vacant. The problem was that my dad treated each unit like it was our personal residence, so we would spend weeks or even months meticulously turning-over each property since it had to be “perfect” – I dreaded helping my dad seemingly each and every weekend with this. From my perspective this was how “everyone” managed rental real estate and I didn’t like it one bit. (Of course I found out much later in life that perhaps my dad was too extreme and should’ve treated each rental unit like a business instead – only putting in the bare amount of effort to get it ready for the next tenant).
Real estate takes too much effort. Contrary to what many people think (and some people even say out loud), real estate is not passive, at least not upfront. It takes a lot of work to identify properties, purchase them, renovate as needed, then rent out each unit. In addition there is usually ongoing maintenance and repairs. I would rather not be a landlord and receive the proverbial “call in the middle of the night to fix a broken toilet”. There is always the option to hire a property management company, but it still takes work to vet someone and obviously fees would eat into profits.
I don’t want to deal with people. I’d prefer to not deal with tenants, property managers, real estate agents, contractors, and the entire list of people who come along with a rental property. I’m an introvert; enough said.
Lack of diversification. Although there are many types of real estate investments available, the majority of investors own single-family homes or multi-family units. Even if someone owns multiple dwellings it’s still hard to achieve very much diversification without having an enormous real estate portfolio. And building such a large portfolio is tough due to the high price of each transaction. On the other hand, buying a single mutual fund or index fund can provide instant diversification for little cost.
I’d already traveled too far on my financial journey. By the time I started to seriously think about real estate I was already pretty far along in my financial journey (not to mention how educated & experienced I had become in stock market investing) and had already done well. It kind of felt like it wasn’t worth my time & effort to learn a whole new field of wealth creation, especially since I didn’t have a burning passion for it.

Not many other types of investing really appealed to me either. Similar to my thoughts about real estate, I think my biggest barriers to entry were the time it would take to educate myself on an entirely new investing method and how much more active most of these methods were (at least in comparison to the “set it and forget it” nature of index funds).

The Future

So what does my investing future look like? At the moment it honestly looks the exact same as the past. While I may experiment with other types of investing methods & techniques, for the foreseeable future I intend to stick with stock market investing since that’s what I know and it has served me well up until this point so far.

The Squire

I would not say I started my journey toward Financial Independence early. However, when I finally did make the decision to invest in my future, diversified index funds was my method of choice.

Not Sure What To Do

I knew in the back of my mind that my future was something I should plan for, but it just wasn’t something I paid much attention to. It wasn’t like I was looking for somewhere to put my extra money. I had no problem spending everything I made.

I was fortunate to have resources at work, family, and of course my good friend Scout available to ask finance questions over the years, although I didn’t take advantage of them for quite awhile. After eventually reading several books recommended by Scout about basic finances, I finally started to feel comfortable about the idea of investing in my future.

Real Estate

The idea of owning a place and renting it out was and is still of no interest to me. Having rented with several roommates and then several years by myself, I saw so many people around me treat their living space with less respect than I thought was right, and being a landlord has always sounded like too much stress to deal with. Of course, this is a great way to invest for many, especially with the right tenants. I highly respect those that can take this on, but it’s a pass for me.

After getting married and having our first kid, my wife and I did end up purchasing a home and there is a little bit of our funds invested in Real Estate Investment Trusts (REITs). So we do have money in real estate… just not not on the rental side.

The Stock Market

When I finally started talking with Scout about investing, he mentioned several books to get me going, including “Personal Finance for Dummies”, which I checked out from the library. This really helped me to understand the basics. As I read more and chatted more with Scout, I realized the importance of investing as soon as possible, and how fast investments can grow.

I decided that this was the way to invest. I would start putting money into the stock market. All I had to do was figure out how to actually do this.

Index Funds

The concept of index funds was fortunately prevalent in the books I was reading, and reinforced by Scout. Finding that these had lower costs than the other investments was strange, but was reinforced through everything I read. I learned how to log into my 401k and look at all of the investment options available to me. I saw that I was by default invested in a fund that referenced a year around when I would turn 65, which turned out to be a target date fund. I looked at other mutual funds available, and saw things like “Mid Cap” and “International” and additional “Target Date Funds”. There were “Expense Ratios” attached to each mutual fund, and I saw how those that mentioned “Index funds” had lower expense ratios.

So I had finally figured out what index funds were, and saw that they cost a bit less to invest, but I needed to decide how to distribute money in my 401k amongst available index funds.

After checking out several additional books, I focused on advice on investing in index funds, and got some helpful hints. What really got me to take the concept and put it into practice was when I saw sample portfolios that could be created using mutual funds by actual companies like Vanguard and Fidelity, such as in the books by Daniel Solin like “The Smartest Portfolio You’ll Ever Own”. There were “portfolios” set up to represent different risk profiles. Lower risk portfolios had a higher percent of bond index funds, and higher risk portfolios had less bonds, and more stocks. Although my options in my 401k didn’t have these exact funds, I was able to find parallel funds to come close to matching. I finally logged in and changed the funds that I was contributing to.

My next step was to start increasing the amount I put into my retirement funds. Although I was interested in saving a lot, during the next several years, I also got married, changed jobs, had a baby, saved up for a down payment for a larger place, and eventually did move into a house. During this time, we also opened up and contributed toward ROTH accounts, and started contributing more toward our work retirement accounts as well. We also had a second child, opened 529 accounts, and contributed toward those as well.

We used the same concept of setting up portfolios of index funds for our retirement accounts, ROTH accounts, and 529 accounts.

Monitoring and Adjusting

We have since been increasing our investments toward the various accounts, almost exclusively staying in index funds. We are not against investing in other ways, but no other ideas have yet convinced us of an easier and more straight-forward way of growing our money in a better way.

We’ve monitored our progress as we’ve started to invest more, and this method is working out great for us. We have had years where our investments have gone down, and most years they go up. Understanding that this flow is normal gives me the confidence that this path is right for us. I continue to read books and blogs, and listen to podcasts about personal finance. I enjoy learning about concepts I’m not familiar with, and am open to changing my investment strategy if I can be convinced it’s better than index fund investing.

My wife and I both do have jobs with pensions, and of course we may get some social security in our 60’s as well. So as we get closer to a work-optional life, we will need to consider these numbers in our calculations as well. This combined with index funds give us confidence for reaching Financial Independence.

Links/Resources

Reader Questions

What type(s) of tools & assets do you use to build wealth? Have you tried any others in the past or plan to try any new methods & techniques in the future?

Leave your answers or comments below – or email us directly at info@epicfinancialjourney.com