To save some time, for those looking for the next 10x investment and/or how to be rich by Friday, this post isn’t going to help you.
It’s been almost 12 months since I last wrote in my Project Fire 40 series. In this time, I have been completing and updating my Financial Independence Retire Early (FIRE) gateways such as building my emergency fund (1-3 months of expenses) into a security fund (3-6 months) and now it is close to becoming an opportunity fund.
My overall plan to reach early Financial Independence is simple – keep my expenses low which allows for a relatively high savings/investment rate. While increasing my earning potential has helped, it would mean nothing if there was an associated lifestyle creep. By cultivating frugal habits, I’ve improved my savings rate and found joy in less, which allows me to invest more towards accelerating my journey to financial freedom.
Now the question has come – Where to invest?
The Investment Strategy
I started looking at the many opportunities that are available.
From specific asset classes such as property in SA, to countries such as Indonesia and India, to industries such as Energy and Mining, to even specific stocks such as Carnival Cruiseliners.
After hours and days of investigations, debates and plotting, I ended up with a plan with 85% going to broad based investment and then 15% targeted for opportunistic investing.
But then I noticed two things:
- My FIRE approach strategy is based on a high savings rate – Adding risk is not going to get me there significantly quicker, if anything it is more more likely to delay me.
- Once I added all the potential opportunities together, it was quite diversified and not likely to be a needle mover.
The potential upside was maybe reaching FIRE 1-2 months earlier, the downside was maybe delaying it 5-6 months or more.
I went around in circles and ended up adding a new investment principle. This is a big deal for me, as these principles were established when I founded Reaching Aspiration several years ago. The principle was perhaps implicit before, but now is explicit.
- Start Early – Allow time for the compound effect.
- Reduce Fees and taxes – A 1% reduction can mean a 50% increase in Wealth over my working life.
- Diversify – Lower risk for the same level of potential return, I can’t pick out-performers anyway, whether I’m trying to pick stocks, funds or even fund managers.
- Rebalance – Buy low, sell high.
- New – Keep it Simple – complexity creates resistance.
To meet these principles, all I need to do is invest, as soon as I can, in a globally diversified passive ETF/Index fund such as the Vanguard FTSE Global All Cap Index Fund and that is my plan*. Simple.
The plan is simple, but the process wasn’t. I will take you through some of the highlights (or low-lights) of my thinking below.
These are my considerations and thoughts. Your context will be different.
My goal is to be Financial Independent by the time I’m 40. Your goal will be different.
I have dual residence in the UK and SA, giving me access to a wider range of options to many. On reflection, this made the process a lot more complicated, but the outcome would have been very similar.
SA or UK Taxable Account as a non-resident
Given my nomadic history – having worked in about 15+ different countries and having traveled to 50+ countries in the last decade or so – I have to work on the assumption that I’m unlikely to settle down to one spot for an extended period. This may not be the case, but it does not make sense to create a strategy around being settled in one location. So I had to decide on whether to continue to build my asset base in the UK or to do it in South Africa.
Eventually, I decided to go the UK route based route as it has slightly lower fees, it will be easier to withdraw one day and it gives me direct access to Vanguard. If I move back to the UK, I can then flush my ISA. When I eventually sell my flat, my cash will be there, so for me, it just made sense to go the UK route. It was simplest.
I should point out that for SA residents, Easy Equities is an amazing platform, I would have had no problem going this route and it is a great option for 99% of people looking to invest.
Forex – Getting my cash into Hard Currency
One key factor is how to optimise for forex, so one day over a week-end (although I’d never actually buy on the week-end), I did a simple comparison based on getting $2k. I did US$, to compare it to the Easy Equities FX option.
- Exchange for free – Get back to me with a rate (it was a week-end), I want something simpler than that.
- R38,751.11 – Easy Equities through their FX option (It took 4-5 days to clear $250 last time I used it)
- R37,851.20 +R250 = R38,101.20 – ClickFX – But what about deposit the other side? – Minimum R25k.
- R38,402.59 – World Remit
- R38,036.59 + 1.67% -1.84% = ~R38,736.46 (I also get some back in eBucks) – Revolut – instant, loads of currencies and the same % for $1 or $100,000.
Revolut is the simplest for me, I can instantly load it using my debit/credit card. Then the are no more hidden fees and the spread was the best I could find. If I were looking at larger lump sums, then I will spend additional time looking for the best rate.
My view for others is that most of the above would work. I would suggest avoid going through the typical banking route. I have an offshore GBP account with a local bank, but still somehow got stung with £18 pounds on £400 when depositing into my UK account, this was on top of conversion fees and not necessarily the most favorable spreads.
Broker – Finding a Broker
I got excited and signed up to a few. I wanted to get a first hand experience.
- Easy Equities (Referral Link) – A great option for South Africans.
- Degiro – I am 7306 person in the queue. This looked like the cheapest option before I scale.
- eToro (Referral Link to support this blog) – Quick to sign up – designed for technical trading – people who want to be on it daily make trades and interacting with other people. It is the cheapest option though and my preferred choice, check out my review here.
- FreeTrade – Easy to sign up, UK based and very simple.
- Interactive Broker (Referral Link to support this blog) – This one looked the most cumbersome initially…but they ended up clearing me rapidly and my account was funded and ready to trade. They’ve also changed their pricing structure, so it is possibly the cheapest and certainly the cheapest with enhanced functionality. It looks like it’s available to South Africans as well, check out my review here.
- Saxo – Looks like the complete package. 2 days for verification is their target, I’m currently on 4-5 and still waiting. Loads and load of options. Perhaps not the cheapest.
Then I realised, why would I change my strategy just because I have additional options and went back to Vanguard, far fewer options, cheap and Simple.
Enhancing my Strategy
I started thinking about revising my strategy.
- Aggressive – How can I swing for the fences
- Opportunistic – How can I leverage the many opportunities
- Asset Allocation – How can I optimise
But then I remembered, keep it simple.
The beauty of targeting FIRE is that I know I can’t time the market, but I can time my exit. Kind of like catching a wave while surfing. Retiring at 65 feels like I’m deciding that I’m going to catch a wave at 14:15 or within a few minutes, I’m going to need to be a little lucky on getting a good wave. But, if I can pick the day and surf conditions, I may not get the best one, but I can get a great one.
I can only control my actions, not that of the market.
But what about(ism)…
If you look at the design of Life Stage investment funds, they shift more and more to more asset classes as we move towards our retirement age.
Similarly many active funds need to smooth returns, because that is what people focus on a set point in time for comparison, so they always need to be looking their best. They also have to meet the needs of a wide range of needs.
I also know that volatility is the price we pay for outsized returns in the good times.
The advantage of targeting FIRE is that I’m not trying to time my strategy and the market to my retirement date. I’m timing my “retirement” date to the market, that is something I can control. I’m targeting 40, but it could be 41, 42….65. Like declaring in cricket, rather than being all out.
I am also in the Wealth Accumulation phase, not the Wealth Draw-down Defensive phase. When I reach that, I’ll shift my asset allocation to something like 80% of my wealth in the All Seasons or Swensen Strategy and 20% REITs – I need less volatility and more Cash Flow. But this may not be a one day exercise (more below).
…REITS and Property
I’m a fan of REITs, but I have limited them to my TFSA in SA. With the slightly less favourable tax implications of the asset, it makes sense to utilise a tax friendly wrapper.
I also feel that I already have some exposure. A lot of big property companies are listed and other companies also own property. REITs are dependent on companies (economies) doing well to pay rent, if they are doing well then I already get exposure to it. There is a lot more to this and I have plenty of friends who love property, but it is not for me, at least not as a core part of my strategy.
JL Collins explores it more here –
Private Property is attractive in the right conditions (are these them emerging?), it utilises financial leveraging (other peoples money) so quite often is very attractive to jump-start the wealth accumulation process. The flip side is that it can be a pain to manage, it is highly concentrated and people seem to overstate the returns.
For full disclosure, I have a rental property. It was a property I bought for myself after examining all 50 developments happening in Croydon (UK) at the time, it was still in the top 3 most traumatic experiences in my life. Since Brexit, the market has been so inactive that I’ve held on to it.
Gold historically has been the retreat during times of crisis. There is also an argument that when we are completely screwed, gold will be the key. I do not plan to “retire” in a time of crisis. I can ride out 3-5 years if need be.
It will be potentially be part of my defensive strategy.
Bonds smooth (reduce) return through reduced volatility. They don’t have a place in my current phase of investing. Again, maybe later.
…Too much US, not enough [Emerging Markets]
The US is 50% of the world stock market and then 50%+ of the revenue from these stocks is from international sources. If India, Indonesia or Africa prove to be the next growth story, a lot of these companies will be there.
My view is the underlying investment is in which ever currency they are listed in. If the Rand or Pound goes off a cliff, all that changes is what the valuation is in that currency.
The valuation is based on expected future earnings, these future earnings are in multiple currencies. We saw this after Brexit, when the pound dived, but the FTSE climbed (for a while).
In short, I don’t worry about the presentation currency, the underlying value is independent of that.
These should be about 5-10% at most, but then even if they 10x, most won’t shift my financial independence date. I am investing in a couple of Impact Investment platforms such as Better Globe and Fedgroup, but these are more for the Impact than the financial returns.
There are so many hot stocks that don’t make it. Diversification reduces the risk at the same level of return. For more on this topic, check out this post.
Venture Capitalists basically target about a 15% return. To get this, they find 10 companies to invest in. They expect 9 to fail. They have time, influence and capital, I only have a little bit of the last one.
Choosing the fund
So what is the one fund to rule them all. I knew I wanted a core strategy of a broadly diversified ETF. I didn’t see the benefit from adding risk to the margins. It wanted to keep it simple.
I looked on the Vanguard website and two funds met my investment principles best.
Then the second option –
What I realised it there is very little between them, at the end of the day, choosing one over the other will have very little impact to me. One has a slightly more UK focus, as it’s designed for people who live in the UK. This means a marginal shift from Tech to Financial Services, it is mostly in the margins though.
It has become clear to me that we spend so much time (that we could be doing other things) deciding where to invest, our time is probably better spent finding more to invest.
A couple of Easy Equities based options (See forex above)
- Satrix MSCI World (Rand)
- Ashburton 1200 (Rand) – S&P Global 1200
- Vanguard Total World (USD)
I don’t believe choosing any of the above over one of the other options is going to decide if you become Financially Independent or not, it may shift it by a couple of weeks, but that is about it. It is really in the margins.
My Plan – Elaborated slightly
General Investment Account – Every month invest 100% of my investment budget into the Vanguard Global All Cap Index Fund.
Pension (UK) – It is paid up, but I will re-balance it every January between:
- 50% Lifestrategy 100% (Slightly more UK focused as above)
- 50% Vanguard Global All Cap Index Fund
TFSA (SA) – Every March
- Satrix Property ETF through Easy Equities.
ISA (UK) – Not currently available to me, but not having the wrapper does not impact my strategy.
Retirement Annuity (SA) – I will look at this if I get a significant bonus or something, but I’m not a fan of Reg 28 and I don’t need the discipline that it gives most people. It is also for people looking to be Financially Independent later in life. It should be core to maybe 95% of people, but I already have a pension that is (hopefully) sufficiently funded and I’m on a different path to most.
Other Finance Related parts of my calendar –
- Jan – Review Investment Strategy
- Feb – Consider an RA in SA
- March – TFSA – Property ETF in Easy Equities
- Nov – Budget and Spending Review
- Dec – Better Globe Investment
For opportunity investments, I will need to use my disposable income, as they are more a form of entertainment which my brain is trying to disguise as investment skill. Like betting on a sports team, the odds are not in my favour.
So, after all that. My simple strategy is to invest in one Vanguard All Cap fund every month. I believe this will give me the best chance of reaching financial independence in the shortest period.
*Update on 02/05/20 – During my review of eToro, I realised that I could save the platform fee of 0.15% Vanguard platform fee, by investing in Vanguard Total Stock ETF through eToro. I also saved on the ongoing fees with an expense ratio of only 0.03%, instead of 0.23%. A total saving of 0.35%. It is less diversified (US focused), but the world is so correlated these days, that I don’t think it will shift my FIRE date, finding more to invest will.
For those wanting to join me on the journey:
Step 6 – Enhance Income routes – Allowing for financial leverage
Step 7 – Invest Strategically – Allowing for wealth accumulation
This experiment both excites and intrigues me, both the journey and the potential outcome.
Once I hit FIRE
It will possibly be something like:
- 2 Years expenses in Fixed Yields for security
- 25% REITs for cashflow
- 10% in Commodities for stabilising
- 50% All World Stock Market for growth
- 15% Bonds for a combination of the above
But I have a number of years to think about this. I know the draw-down risk is greatest in those first 2-3 years, so I may stagger it. I’ll have options.