Our (Current) Plan

One of the most surprising lessons for me on this early retirement/financial independence journey is that it isn’t only about money. While being focused on the money, we have unintentionally also become focused on the quality of our lives, living intentionally, self-sufficiency, the environment, health and just generally leaving the world in a better place. The early retirement/financial independence blogs talk about all these things of course but I initially (and swiftly!) wrote them off. I told myself that I didn’t need these extra lessons (or was already doing what I thought was enough) and focused instead only on the money.

However, to my surprise all that other stuff snuck its way into my life anyway. Continue reading

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My Beginner’s Understanding of Investing – Part 6: My Choices

FINALLY we are at the good bit – our choices within our besties investment class: equities 🙂 If you haven’t read parts 1 to 5 of this series and are feeling a little lost/over-whelmed then please check them out in The Numbers section, dear Reader.

Because everyone shouts the benefits of passive investing (index tracking funds) that’s where I started in my investing-self-education quest. I wrote “passive investing” on a piece of paper and then started reading around it, adding to my piece of paper as I learnt. I wanted to understand how passive investing fitted into the investing world and what my alternative options were. Continue reading

My Beginner’s Understanding of Investing – Part 5: The Equity Risk Continuum

I have to admit, dear Reader, that this investing series has taken MUCH longer than I thought that it would. And I cannot help but feel bad for it coming out so slowly. I keep reminding myself that you’re all grown-ups and so are perfectly capable of researching this on your own if you’re desperate enough. I also remind myself that I’m trying to make this blog one of the few areas of my life where I am more focused on pleasing myself than others. But definitely a big part of this slowness is that I have been teaching myself while I go, which of course takes time. And then when I start writing up a post I have this annoying academic need to reference… but I have read so much now that I couldn’t ever find the references I was looking for when I was looking for them! So in desperation I spent the whole of last week cataloging everything that I thought was good enough to email to myself… and I was shocked to see how much I have actually read! I knew that I had learnt a LOT but I had no idea it was that much 🙂 Made me feel quite warm and fuzzy 🙂 And also built my confidence that I can actually make an informed decision with our money (and not fall victim to the Dunning-Kruger Effect!)

So let’s recap (so my pattern thinking brain can know exactly how everything is fitting together so far!):

We’ve already established that the investing is the tricky part. But hopefully now that we have the big picture about the different kinds of assets and how portfolios work we can start making some better-informed investing choices.

But before we go any further we need to speak some more about equities/shares/stocks and their continuum of risk. Based on here, here, here, here and here this is how I see the equity risk continuum:

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We have all heard the saying not to place your eggs all in one basket, yes? Well that’s the logic behind making sure you buy equities in a range of companies – that way if one goes bust you don’t also necessarily go bust 🙂 Buying into companies that are established and have a history to prove that they work is also less risky than buying into a new or smaller company. Let’s be honest, even the people starting the new, smaller companies aren’t sure it’s going to work! The reason that regular, smaller payments are safer than one lump sum is because of dollar cost averaging. Basically, if you are buying regularly then sometimes you will buy high and sometimes you will buy low but over the long term it will all even out 🙂 It will also get you into the habit of regularly investing which is even more fantastic 🙂 Lastly, equities are for the long term. Equities do go up and down but from everything I have read (for example, here) over the long term they cannot help but go up 🙂

What this all means is that I can invest in equities (and so get the magic reward of compound interest and the much needed security of keeping up with inflation) and STILL choose a level of risk (and reward!) that I am comfortable with 🙂 Yay me 🙂

Xxx

My Beginner’s Understanding of Investing- Part 4: My Portfolio Baby

Ok, so now that we know:

  • what an investment is;
  • that you invest in assets; and
  • that people generally talk about 3 kinds of assets (equities, bonds and cash)

we are now at a place where we can start talking about those magical things called Portfolios that everyone talks about 🙂

(If you have no idea what I’m talking about, dear Reader, then please check out the previous post in this series before reading this post! And as always, please check out Financial Vocab 101  if any vocabulary/terminology is unfamiliar or needs refreshing.)

A person’s portfolio is the sum total of all their investments:

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It is often talked about in terms of what percentage of the portfolio is in which types of assets (typically: equities, bonds and cash) and represented as a pie graph:

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From what I gather about portfolios there are two fundamental things to know:

  • Diversification is important.

Basically the more diverse your portfolio is, the lower your risk. The old “don’t put all your eggs in one basket” scenario. This is because if one sector starts going badly (e.g. the stock market) then you have other sectors to pull you through (e.g. bonds). It does seem though that it’s possible to be too diverse… So this non-expert is not interested in trying to achieve the exact right balance of diversification on her own. I plan to leave that up to the experts when I select which specific equity products I buy (I will invest in products that are already diversified) – but more on that in a future post.

  • It is completely and UTTERLY up to you and what you are comfortable with 🙂

This is brilliant. Just like The Brat Experiment and anything else you want from life, your portfolio can be molded, adapted and changed to fit exactly you 🙂 How awesome is that, dear Reader? You can structure it to fit your timeline (age?), your risk comfort level, how actively you want to manage it, your personality etc. Check out Investopedia’s Knowing Yourself  for more on this.

This means that you can choose exactly what percentage of your portfolio you want to be in which assets. Investopedia explains it really well here. My bestest though is their pie charts at the bottom of this link which (a) show you the ratio of assets for different investing approaches and (b) let you play with different investment amounts in each investment approach. Unfortunately though you can’t look at all the percentages of each pie chart at the same time so I’m going to try and draw it so we can compare them easily 🙂

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As I’ve said, which investment approach you go for is ENTIRELY up to you 🙂

BUT I must admit to not loving the names of each investment strategy. This is because I think that they predispose people to think:

 “Very Conservative” is good and “Very Aggressive” is bad.

What bugs me is that the names seem to only focus on one type of risk: loss of capital. Which, don’t get me wrong, dear Reader, is HIGH on my list of things to avoid. But it totally ignores even greater (because they are sneakier and more likely to go under the radar) risks: not keeping up with inflation. And the loss of the opportunity to earn compound interest.

(I haven’t explained compound interest yet but in a nutshell: it’s your interest earning interest [in other words your money working so that you don’t have to and earning more money for you than you could ever hope to on your own], all it needs is time [so the earlier you start the better] and it’s AWESOME. The catch-22 seems to be that from my non-expert reading the only asset that really lets you earn interest on interest is equities/stocks/shares – but this is not a problem if you remember that there is a continuum of risk within equities but more on that in a future post… Check out this link for an awesome explanation and demonstration of the power of compound interest).

From my perspective: I’m 29 years old. At our current savings rate we are set to reach financial independence in just over 10 years (IF we use the power of compound interest) when I am in my early 40s. And that means that our money needs to keep up with inflation for FIFTY YEARS after that (three of my four grandparents have lived past 90 years old so I’m being optimistic!). This in turn means that I can’t be having a big percentage of cash that doesn’t grow at all or bonds that struggle to keep up with inflation. I need my money to work for me (so I don’t have to). Put another way: given my timeline, inflation is guaranteed and so my greatest risk is not loss of capital but rather inflation. Therefore, equities are actually the assets that offer me the lowest risk 🙂

So to demonstrate my rebelliousness and disregard for the names of the different portfolio strategies I have chosen colours for the different assets that represent their risk level for me. So for me: cash is red (because it provides no growth and so poses the greatest risk), bonds are blue and equities are green (because they pose the least risk to me) 🙂 But that’s just me. What’s your greatest risk or concern for your investment portfolio?

Xxx

My Beginner’s Understanding of Investing – Part 3: The Big Picture.

One of the biggest challenges with teaching myself about investing is that there is SO MUCH jargon and terminology. And the experts often seem to forget how little us non-experts know. All the early retirement/financial independence blogs talk about passive investing and index funds. Wonderful. Except that I had no idea what those are. So I would plug the terms into google and promptly be told that an index fund is a type of mutual fund that tracks the market index (Investopedia). Which tells me precisely nothing because I know so little that I don’t even know what a mutual fund or market index is! (I have started a Financial Vocab 101 section where I add words as I learn them, so if you don’t know a term, dear Reader, please just follow the link to avoid yourself [sometimes] hours of googling!).

My other big challenge is that in order to understand or remember something my brain likes to know how everything fits together. I cannot just learn the definition of a term – I need to be able to see the big picture of where it slots in. (As a side note, I recently read Temple Grandin’s “The Autistic Brain” which gave me a name for how I think: Pattern Thinker 🙂 ). So before I can start to feel comfortable with passive investing and index funds I need to understand how they fit into the financial investing world as a whole (P.S. for this section I found these links very helpful:

So let’s start at the VERY beginning. What is an investment? An investment is either money or time that is put into something (a business, a house, the stock market etc) with the aim of gaining some kind of benefit:

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The idea is that an investment tends to be done for the long-term, with the aim of my money working for me (as opposed to me only earning money if I am clocking hours). Genius. And definitely something that I want for my life.

So then, what do we invest in? We invest in assets:

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 Simply put assets seem to work in 3 ways:

  • Assets I own
  • Assets I lend
  • Cash

However, it seems that in terms of investments (and “my portfolio”) there are three main asset classes that everyone talks about:

  1. Equities = Stocks = Shares = Stock Market (assets that I own i.e. a part of the company)
    • Think of equities as: high risk but high reward
    • Technically high risk (because your money isn’t guaranteed as it goes up and down with the value of the stocks).
    • BUT there seems to be a continuum of risk: some stocks are riskier than others (e.g. a multinational company vs a startup).
    • AND with risk comes higher reward.
  2. Bonds = Fixed Income (assets that I lend)
    • Think of bonds as: dependable income with low growth
    • You lend money (capital) for a specified amount of time and in return they: (a) pay you interest and (b) at the end of the specified time give you your capital back.
    • Very low risk 🙂
    • BUT keeping up with inflation can be a challenge (i.e. you are not going to make a lot of money)
    • Aims to provide regular, reliable and stable income.
  3. Cash and Cash Equivalents (CCE) = Money Market Instruments (cash assets)
    • Think of cash as: easily accessible but no growth
    • Cash or anything that can be turned into cash immediately (meaning that it has a very high liquidity).
    • Used for short-term borrowing or lending
    • Seen as low risk (always lots of buyers and sellers)
    • THIS is where your emergency fund should be (because you can get immediate access to it)

What’s BRILLIANT about understanding these three terms is that it suddenly means that we can understand what the hell people are talking about when they describe their portfolios 😀 😀 But more on that in the next post.

Xxx

P.S. We are off to Malaysia for 10 days now so things on The Brat Experiment will be quiet for a while… I hope that you keep well and happy in the meantime, dear Reader.

My Beginner’s Understanding of Investing – Part 2: I’m not a financial advisor…

The other thing I keep reminding myself is that I am not a financial advisor. This is brilliant for a number of reasons. Firstly, it removes a kak load of pressure. I am not an expert. So I cannot be expected to understand things like an expert. I am aiming for bare basic fundamentals. I do not need to know about every nuance of the investing game. Secondly, I am not alone. If I want to get shmansy-pants with my investing then I can pay an expert to do this for me. There is support out there and I can access it if I need to. And thirdly, it reminds me of my limits. Put simply: I should never mistake my googling for a qualification in finance and investing.

So why try to learn anything about investing at all then? Why not just march straight to a financial advisor and have them do it for me? Good question, dear Reader. The main reason is the Dunning-Kruger Effect. Research shows that people who know nothing about a topic know so little that they don’t even know that they don’t know. The world of social media and the mass of ignorant, but weirdly strongly felt, opinions suddenly makes sense now doesn’t it? Knowledge and your awareness of your knowledge basically works like this:

  1.  I know so little that I don’t know that I don’t know.
  2.  I know enough to know that I don’t know.
  3.  I know what I know and what I don’t know – but it’s quite new and uncomfortable.
  4.  I know what I know and what I don’t know – and it feels like a comfortable part of my knoweldge base.

For example, my brother is an engineer and he works at a plant that makes petrol. For the life of me I cannot figure out why they need engineers on call 24 hours a day… Surely, they have developed a recipe for petrol by now?! So surely this recipe can just be automated and rolled out? Easy peasy.

This is a PERFECT example of someone who knows so little that they don’t even realise that they don’t know. And you can see why it’s a very dangerous position to be in. Well-intentioned actions can have horrific consequences if the ignorant person has any power (for example, if I was in charge of my brother’s company the first thing I would do is probably send half the people on holiday because I cannot imagine how making petrol with fancy machines also needs so many fancy people).

The problem is this:

I (the financially ignorant one) am the person who ultimately has all the power with regards to my finances.

And I’m terrified that I know so little that I’m going to well-intentionally but ignorantly completely balls things up. So I suppose that we can celebrate at least that I know enough to know that I actually don’t know anything at all 🙂 I also want to learn about investing because if I do get a financial advisor I want to know enough to be able to make an informed decision about whatever the financial advisor recommends. For example, prior to The Brat Experiment if a financial advisor had said to me that I can only retire at 60 it wouldn’t have even crossed my mind that they might be wrong. So I guess, what I’m saying, is that I’m trying to teach myself the basics about investing so that I can be informed enough to make sure the experts are giving me what I want.

Also, who am I kidding? I love the self-empowering, self-sufficiency of it all 🙂 And the more I read about it the more it BOGGLES my mind that the bare basics of financial hygiene isn’t taught at school…

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My final trip to the dentist yesterday (South Korea, 2016)

Xxx

My Beginner’s Understanding of Investing – Part 1: Just keep reading…

Up until now I have been focusing on getting my head around the basic concepts of early retirement/financial independence (i.e. reduce spending and increase saving) and putting that into practice. Now that we are feeling comfortable with our balance of spending and saving (and consistently saving 66% of our income after deductions – can I get a “whoopwhoop!”, dear Reader?) I now feel ready to tackle the next learning curve: what to actually do with all the money we are saving.

Before even thinking of investing, the unanimous first two rules from everyone seem to be:

  1. Get debt-free. The idea is that you are most likely paying much higher interest on debt that you owe than that you could ever earn from an investment.
  2. Create an emergency fund. From what I gather once you’re securely on the path to financial independence it’s debatable if you still need an emergency fund (because you will be living well below your income with lots of investments that can be cashed in if need be) but initially it’s a necessity (for peace of mind and to avoid getting back into debt). The key with your emergency fund is that it is ONLY for emergencies. And a trip to Paris or a new dress for your cousin’s wedding is not an emergency.

Ok. That’s pretty straightforward. Nothing too complex for us newbies to grasp.

The next bit, the actual investing bit, however is TRULY like trying to learn a new language. It’s really easy to get intimidated, overwhelmed and consequently give up all efforts to learn anything at all. I remember feeling a similar way when I first started reading psychodynamic theory. After months of reading the stuff I eventually went to my supervisor and gave her the bad news that clearly the theory is too advanced and I will never be bright enough to understand it. Ever. She laughed and told me to keep reading. She said I needed time to digest and ingest the concepts. I thought she was crazy (and couldn’t believe she didn’t try to explain the concepts to me herself like I thought that she would). But I took her advice and kept reading. And to my utter shock she was right. A few weeks later it suddenly all started to click and slide into place… and now I struggle to understand how it was that I couldn’t understand what I now think of as ridiculously logical and straightforward. So I’m applying the same lesson to this scary-ass financial world… just keep reading and give myself time to digest and ingest the concepts. Don’t panic. Don’t chastise myself for not knowing. Just keep reading.

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South Korea (July 2016)

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