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My FIRE experience of index funds/ETFs

I've received some requests for a post about my journey to index funds. One suggested a dive into ETFs, but as my knowledge is surface rather than dive level, I'll stick to talking about our general experience of low cost index funds.

I've written about my investment journey before, so rather than repeat it all, feel free to head over to that post for some more detail.

This post is in a question and answer format - perhaps a bit odd as I'm both asking the questions and giving the answers. Well, odd or not, here goes:

How do you feel about diving into an explanation about index funds/ETFs?

To be honest, uncomfortable, because I don't know much about them. However, sometimes it can be more relatable to hear from people who don't know everything (and that's definitely me!).

If you've got to FI and then RE, how come you don't know much about index funds/ETFs?

Believe it or not, I didn't even know about the existance of low cost index funds until 2016. It was when I was wondering whether I had enough money to retire early, started reading a few blogs and began to see some of them talking about index funds. Another reason is that I'm probably just not that smart!😉

So, if you hadn't heard of index funds/ETFs until 2016, what were you doing before then?

The below timeline gives an overview of our investment journey.

  1. Our longest duration "investment" has been paying off mortgages on our homes. That might not be the best thing to do now, but interest rates weren't low as they are now. I also have a general dislike of debt, and feel more relaxed when I don't have any. In terms of our homes, we've been mortgage free since 2010.

  2. Our first investment in the financial markets didn't occur until I was 40 years old, once we'd paid off our mortgage. We invested in managed funds recommended by a financial advisor. I think the advisor and the fund providers made a lot of money, the only ones who didn't was us🤦‍♂️. If I knew then what I know now, I would have invested in low cost index funds instead.

  3. Our biggest investment is our rental property portfolio, which accounts for 60% of our total investments.

  4. We only discovered low cost index funds relatively recently, with our first investment in them being in 2017, which was after I had retired.

Once you'd heard of index funds/ETFs, what did you think?

Some different things. First, I kicked myself that I hadn't known about them before, it would have saved a lot of grief and lost money, which I wrote about in my investing nightmares - don't do what I did post.

But on the other hand, seeing the light later is better that not seeing it at all. Once I became aware of low cost index funds/ETFs, the benefits seemed obvious:

  • the opportunity to very simply hold a massively diversified portfolio in terms of industry sectors, geography, developed and emerging markets, large and mid sized companies etc.

  • the low costs, meaning that returns are not diminished by high fees.

  • the plethora of studies that have shown that low cost index funds have historically outperformed actively managed funds.

It also helps to hear the likes of Warren Buffet recommend them. That's some endorsement.

Well, at least since you discovered index funds/ETFs, everything must be sorted now?

Haha, I wish, but that would be too easy! Our index fund journey still has some way to go.

Because we arrived at index funds late in our investment journey, we didn't drip feed monthly or quarterly investments into our ETFs to achieve the benefits of dollar cost averaging i.e. some months you buy cheap, some months a bit more expensive, but you end up with a decent average over time without having to think about it.

Instead, we arrived late to the party with lumps of money, and a worry about whether or not now was the right time to invest. That problem still exists, for example, we liquidated an investment 16 months ago that gave us a chunk of cash - like a fool, I figured the markets couldn't race ahead during Covid and I'd invest it when they dropped🤦‍♂️. It's turned out to be a stupid move, but while it's easy to say don't try to time the market, it's sometimes harder to put this advice into practice. I still have some of that money sitting in cash, and still struggle to make the decision to invest it with the markets feeling high. What would you do?

We also have our index funds split between stocks and bonds, because this is what the Trinity Study/4% withdrawal rate rule is based on. I chose a 70% stocks/30% bonds split, but does this really make sense in our situation? We have 60% of our investments in rental properties that provide a stable income, and we are not currently drawing income from our index funds, so could/should we be 100% in stocks, with the stable property rental income letting us ride out any stock market dips?

Then there's Sally's view - if she had her way, all our money would be invested in rental properties. In contrast, I'd have far less in rental properties, perhaps even none, but certainly no higher than 25% to 30% of our investment portfolio. So, what's the answer when we don't agree on this?

So that's our story on low cost index funds/ETFs. We were late starters, most definitely not experts on the subject, having only discovering them in 2016, and then making our first investments in 2017. We know our journey is not yet finished either. Still to go is to decide if a stocks/bonds split is right for us or whether our index fund holdings should lean more towards stocks, possibly as much as 100% in stocks. We also need to invest the cash lump sum that we have, but have no idea when to do it - is now the right time even though the markets seem high or should we gamble and wait in the belief that they will go down? The fear of getting this wrong is a real challenge. And what about the proportion of rental properties compared to other investments - how do we resolve the different ideas of Sally and myself, and will capital gains tax influence that decision?

There's no doubt that I'm converted to the benefits of low cost index funds, including how they can massively simplify investing, but there are still some questions for Sally and I to work out, which are not so simple. One thing I do know for certain though, I'm definitely not an expert.


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