Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.
Question (1:50)
Thanks for the great content!
I was just wondering what your thoughts are on gold? Is owning some gold a part of your financial plan?
Thanks a lot for your time,
Julia
Firebug’s Answer
Hi Julia,
Gold to me is a hedge against inflation and something I’d consider if I wanted to reduce volatility within the portfolio.
I don’t really consider it an investment per se because it doesn’t generate any cash flow. You have to rely 100% on capital gains for it to work which I don’t like and was one of the biggest reasons I moved away from real estate. To me, it’s more of a store of wealth which historically has had an inverse relationship with the stock and property markets (good for volatility).
Historically, shares have absolutely smashed gold over the long term.
Take a look at the total return stock index (S&P 500) vs Gold and Silver over the last 50 years
And if you go back 100 years the gap is even wider.
Take a look for yourself here at long term trends.
You can basically ignore the first graph on that page because it doesn’t include reinvesting dividends which is ridiculous. We want to compare the total return from an index, not just the share price.
I only want to invest in assets that pay me. This may change in the future when maybe I’m not as concerned about the cash flow and perhaps caution on the side of diversifying and maintaining my wealth. Precious metals could come into play at that stage.
But right now, golds not on my radar.
-AFB
Question (7:28)
Hi AFB,
Congratulations to you for what you have achieved & continue to achieve on your FIRE journey.
Thank you for your incredible generosity in sharing your knowledge, passion & enthusiasm. Inspirational!
Up until about 6 months ago, I exclusively purchased ASX listed shares directly but in the last 6 months decided to start purchasing ETFs.
Now that I have the ability to compare apples with apples, I have to say that my annualised returns for direct share purchases are at least twice that for the ETF benchmark of VAS (over the entire 6 years).
I am not writing to boast – in fact, my purchases have been largely recommended by 2 share sites I subscribe to (intelligent investor & barefoot investor) so I can hardly take any credit.
I know that the FIRE community is so bullish on indexes but I am not sure that you are not missing out on some reasonable returns.
I know the theory that most people don’t beat the index & probs that is true in context. Little of what Buffet says in regards to share investing is wrong. but I think with a little bit of ‘expert’ advice & by that, I don’t mean full-service brokers who only work for themselves.
I reckon that solely investing in indexes might be limiting your returns.
Anyway, I guess I just write to you to raise the issue with you & share my thoughts.
Once again – congratulations. I wish I had had your insight at your age.
Thank you, take care
Tanya
Firebug’s Answer
Hi Tanya,
Thanks so much for the kind words 🙂
I love receiving emails like this, it’s a real motivator that I must be doing something right and it helps me make more content, much appreciated!
I’ve often grappled with this question myself. There were times during the GFC where some of the big 4 banks were trading so low that you could have had a ridiculous yield of 13% plus franking credits! We know now that they recovered but at the time there was a real concern that some of the banks could have gone under which is why the prices fell so much but still. It would have been extremely tempting to swoop in on some of those cheap shares and clean up.
However!
As you’ve mentioned, the FIRE community loves indexing because we don’t need to pick the winners and losers, we just buy (nearly) everything.
Could we be missing out on better returns?
Yes.
Do I care?
Nope!
I’m more than happy with the idea of a 7-9% return over the long term using ETFs and LICs. I personally don’t think the extra risk is worth trying to beat the market but everyone is different. It’s also a bit of fun trying to pick winners here and there and I wouldn’t completely rule out the idea of allocating a small percentage of the portfolio (5-10%) to individual stocks. I personally don’t feel the need to do that at this stage but when the next crash comes it could be tempting to jump on some companies as everyone is panicking and heading for the exit.
I will say this though. As indexing becomes more mainstream, the likelihood of active investors outperforming the index increases.
Think about it. Back in the day, everyone was trying to outperform everyone and charging big fees along the way. But that game is always going to have winners and losers by its very nature. And if you factor in the management fee, there was a very high chance you’d underperform the market.
Index investing solved this issue IMO.
But let’s say that the majority of the market is made up of passive index investors. In theory, the market would become inefficient and there should be a lot more opportunities for active investors to snag a bargain especially within the small-cap and emerging market sector. If the market reaches a point where the majority of investors are not doing research or looking at anything other than the top 200 companies by market cap (for example), active management (professional or amateur) could feast on the inefficiencies of the market and you’d see and swing back in favour for active management. This is until the opportunities start to decline as more and more active investor gobble them up and the extra in fees once more becomes not worth it.
This see-saw between passive and active would continue forever in my opinion but no one (especially me) really knows what would happen. That’s my take anyway.
The other thing I want to mention is that while you have done well over the last 6 years, it’s not a long enough time frame to conclude that your individual stocks have outperformed the index. Come back in 15-20 years and once a recession has come and gone 😜.
-AFB
Question (15:38)
Hi mate,
I’m so happy to find our Australian fire blog. I’ve been reading and listening to people like Mustache, fientist etc for quite some time.
One thing that has always annoyed me is seeing how little they live off and not understanding how they can possibly make that work. I would love to see a breakdown of your yearly spending habits. I’ve had a look through your blog and can’t find anything that matches this. I noticed you seem to live off only 50k a year with you and your partner, which also seems too bloody good to me haha.
I look forward to seeing what sort of expenses you count.
Thanks, Cameron.
Closet F.I addict
Firebug’s Answer
Hi Cameron,
Take a squizz at our last saving review article which detailed exactly how much we spent during from July 2017 to June 2018.
I need to publish our current review from the last financial year (18/19) but it’s gonna be a hard one because we moved counties and have another set of banks over here in the UK. I’ll get around to eventually.
From my experience, you need to nip the big four in the bud.
90% of people will spend their hard-earned dollars in these areas in order of the most expensive (usually).
- Housing
- Food
- Transport
- Holidays
Look at these areas first, the other smaller things do add up over time but they can wait for now.
I’m not gonna sugarcoat it, if you want to buy a house in either Melbourne or Sydney, you’re going to pay a big price for that privilege and delay your FIRE date. Renting in the city can actually speed it up if you can take advantage of the job market and snag a high paying job (depends on the industry you’re in). But there’s plenty of jobs that are available in the country where housing affordability is a lot better.
I’m not the best person to ask about food advice because there’s still heaps we could shave off our grocery bill but we enjoy our snacks and buy high-quality produce. It’s something I’ve never been too frugal about, and that’s the quality of food you put in your body. But buying this stuff can be expensive. There are the obvious wins like always packing you lunch and not going out too much. But I’m calling the kettle black a little with that one because we have been social butterflies since being in London and I’d hate to look at our food and drinks category for the last 6 months. Buuuuuut this trips a bit of an exception because part of experiencing the world for me is to enjoy the different cuisines and restaurants.
Cutting down on meat can also halve your food bill.
Being sensible with your car (if you even need one!) and holidays is such a personal choice that it’s hard to comment on. You need to strike a balance between saving for your freedom and enjoying your life. We delayed our FIRE date to live out a dream and I wouldn’t change anything about that decision.
The first step in all this is to track your expenses.
Do you know exactly where your dollars go? Feel free to flick me your breakdown and I can provide a more detailed comment if you’d like.
Cheers,
-AFB
Cameron, I think the biggest thing is to track expenses. Even the act of tracking them will end up cutting your costs because you’ll make some unconscious changes (same thing happens if you start tracking what you eat).
Once you’ve got it tracked you can probably trim out a few unnecessary subscriptions to Netflix/etc but the heavy lifting is pretty much always:
– Housing, get a smaller place than you think you need. Don’t be a barefoot investor ‘postcode povo’, but do consider the interaction with your vehicle/transport costs.
– Cars, don’t finance and do get a smaller/lower-spec model. Try not to have multiple cars.
– Groceries, shop at Aldi.
– Dining out, bring your lunch to work. Only eat out once a week (or less)
Everyone is different, but In my experience direct expenses associated with education and activities for kids are the largest expense.
I also think that life is too short trying to beat the market. Keeping it simple is the best approach.
I am also amazed that you can live off only 50k a year with you and your partner. I have no debt, no children, do not pay rent, drive very little and do not drink alcohol and my yearly expenditure with my partner is somewhat higher than that (does include one holiday per year). I should probably be tracking my yearly expenditure, just to be aware of the breakup of my expenditure. I thought I was a low spender.
Oh shit, I forgot this one!
I don’t have experience (yet) but I’ve heard the stories of how expensive it can be.
In relation to Q2, Warren Buffett had a million dollar bet going with anyone who thought they could beat the market over a 10-year period… it ended a couple of years ago with the company who tried getting smashed. I’m happy to make 7% or whatever it is with no work rather than trying (and most likely failing) to beat this… life’s too short!
The Buffett bet is quite interesting. Ted Seides (the guy who took the bet) wrote an op-ed explaining why he lost, and investopedia has a good article on it as well.
https://www.bloomberg.com/opinion/articles/2017-05-03/why-i-lost-my-bet-with-warren-buffett
https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp
To try and summarise it, basically the guy picked 5 fund of hedge funds to beat the S&P 500 index. So lots of layers of fees which obviously didn’t help. Then there’s the fact that as the name suggests, hedge funds (for the most part anyway) actually hedge. They’re not looking at giving you the same return as the market, they’re generally looking to give you a good risk adjusted return. So if the stock market goes up, all else being equal most hedge funds will underperform it. But if the stock market goes down, then hedge funds may well still give you a positive return, or at least not fall as far as the index. Also, there is a lot more money in hedge funds invested in fixed income strategies than there is in equity ones so it’s an apples and oranges comparison on that basis alone. Presumably the funds held also invested internationally, and as Ted Seides says hedge funds performed roughly in line with MSCI All World Index. There were also times when the non index funds were ahead, basically because the stock market fell and the FoHFs didn’t fall as far.
Just to be clear I’m not advocating investing in something like a FoHF (and as retail investors we probably can’t anyway), I’m just saying that it was an apples and oranges comparison given the factors mentioned above. It would have been a lot more an apples and apples bet if a US only active equity investor had been on the other side.
Until you have a lot of money invested, the return you get on your investments is not really all that relevant. If you only have $100k invested, the difference between a 9% return and even a 5% return is nothing compared to the money you can add by saving. If not, you need to look at improving your income IMO.
There is definitely a tipping point where you may want to consider trying to improve your investment returns, but not until at least a few hundred $k.
(Still) love your work AFB 🙂 You’re doing a great job of breaking down (demonstrating, even) the tradeoff between FI(RE) and enjoying your time on this spinning ball of dirt. Enjoy your “gap” (year? life?) and keep up the good work on the blog (if you’re not too busy jetting across the pond while Boris lets you go in the fast lane).
Thanks Sianzilla 🙂
Hey AFB! Great response to the Gold question. I get asked about Gold all the time and my response is basically, I don’t have a crystal ball and I cannot time the market. I agree about there being some potential turmoil in our future financial system, but I dont think all FIAT currency will go to zero and we will be trading spanish doubloons anytime soon. I have friends that are stocking physical gold coins, which makes them sleep better at night but I think if we do enter some kind of ‘future global financial crisis’ and no one accepts FIAT currency anymore, using a gold coin to buy groceries is probably the last of your worries. Sure the benefit of 20/20 hindsight would be good to know when to load up on gold and when to dump it and buy securities, but I agree with you, buy and hold good quality stocks that put money in your pocket is the way to go. Cheers
RE: Gold. I don’t see it as part of a FIRE portfolio either. It doesn’t produce income and if you are using it as a volatility hedge, bonds can better perform this service.
If you must own gold then PMGOLD is a decent ETF to use. But only if you must!
Hi AFB,
Do you recommend paying off mortgage first prior to investing into ETFs?