This was the year I dialed in my investment strategy.
The motivation was an increasing awareness that I was accumulating a fair amount of money. At the end of Year 5, I had almost eighty thousand dollars available to save and invest in one way or another. Every month that went by, that number increased.
Look – when you’re just starting out, it doesn’t really matter what you’re doing. Your savings rate is by far the most important variable in the Retire Early equation. It’s much, much more important than your asset allocation or how much your funds are or aren’t growing.
A quick example: You have 10K invested and it makes or loses 10% a year. So this amount swings a thousand up or down. It doesn’t matter much either way, because the numbers are too low to have any real effect on your FIRE date. Further, on the saving side of things, if you’re making 100K and you increase your investing percentage from 20% to 60%, you’re talking about a forty thousand dollars a year difference. That’s why your savings rate is a big, big deal when you start out.
Once you get around the 100K mark in invested assets, strategy and performance starts to matter a bit more. It’s still much less important than your savings rate, but at the same time, the dollar amounts are no longer inconsequential.
So that’s about what I have in the middle of Year 6: 100K. It’s one of those magical financial milestones for people on this FIRE journey, where you sit back and say “Holy shit, this thing is working! Awesome!” It’s suddenly important to make better decisions around how, exactly, you should be investing.
I decided to take a deep breath, schedule some time for myself, and hit the books again.
Back in Year 3 I’d hit the San Francisco library in an attempt to get up to speed on what to do with my money. I read Four Pillars of Investing, Mutual Funds for Dummies (surprisingly NOT bad — they are Vanguard advocates), and The Single Best Investment: Creating Wealth with Dividend growth.
But the lessons were foggy in my head. I remember my big takeaway at the time was that I wanted to be probably 90% in stocks and 10% in bonds, and that was it.
By this time, things were a little different. A few years had passed. Amazon’s reviews were getting more numerous and reliable, allowing people like me to zero in on some books over others. I decided to read Common Sense on Mutual Funds, by John Bogle.
In case you’re not aware, Bogle is the founder of Vanguard. He advocates investing exclusively in index funds. I’m completely, 100% sold after reading this book. In fact I was so thoroughly convinced that I basically stopped reading books on other investment strategies.
The asset allocation part of things took me a bit longer to work out. Long story short, I ended up going with a slightly modified “coffeehouse” portfolio, which worked out to 30% Total Bond, 20% US Small Cap, 10% REIT, 10% Total International, 30% US Value funds.
For the funds held in my company 401(k), fund selection was a little trickier because I couldn’t simply select the Vanguard funds, so I did the next best thing: I tried to pick the most similar fund from the list of available options.
I held this allocation until 2009 when I made the change to my current allocation. But all things considered, it’s not a bad way to go and I don’t have any regrets about it.
For fun, I walked around the office and asked team members if they’d be willing to talk to me about their investment strategies.
Not numbers, of course. That’d be crass.
But generals. What did you think worked? What didn’t?
Keep in mind I worked for FinancialCompany. I was expecting some really high-powered, unusual responses that would be head and shoulders over the stuff I’d just read in the books listed above. Instead, I got very standard crappy advice. I break down the investing types into a few distinct categories.
Investor Type 1: Individual Stock Picker
Description: This type of investor likes to park on E-Trade and buy and sell ETFs in his/her favorite companies based on a combination of research and gut feelings.
Rationale: I’m never going to retire unless I hit it big on a specific company. So I’ve got to find that company. Grab the bull by its horns. And pray.
Investor Type 2: Allocation Changer (AKA Market Timer)
Description: People who fell into this category basically bought into the mutual fund idea to reduce risk, but couldn’t settle on exactly what mutual funds to own, and in which percentages. As a result, they constantly shifted money around from Fund A to Fund B and back again, making their portfolios look completely disorganized, like they were chosen at random by hyperactive six year old who’s just downed a coke and followed that sugar-fest up with some cotton candy and skittles before clicking boxes on daddy’s computer. Good job, sweetie!
Rationale: I just know when the markets are or aren’t overvalued and I’ll get in and get out when my spider sense is tingling because if I stay in then I’m guaranteed to periodically lose a lot of money. So like if inflation is rising I’ll take money out of bonds and put it into maybe sector funds. I like energy right now. Yeah. I’ll put 20% in energy. Then if things change again, maybe I’ll go with emerging markets or Biotech. That’s the ticket.
Investor Type 3: Actively Managed Fund Lover
Description: These folks like mutual funds but prefer active management over passively managed index funds.
Rationale: Some people are just smarter than us and can beat the market over time. All I need to do is identify those people and buy into those funds. Then I’ll beat your average Joe Investor. This advantage will easily be worth the higher expense ratios. Know the Man, Know the Fund.
I didn’t meet anyone at FinancialCompany who was a straight index investor. They all thought they could beat the system in some way or another.
I think they were wrong.
All of those conversations made me more certain than ever that the best approach was to let go of the illusion of control and accept average returns. My coworkers thought that there was some secret sauce to investing — if they could only pick the right manager, find the right tidbit of information on a stock pick, move money into gold at the right time — they’d beat the system. Instead they received below market returns.
I asked one guy in particular who fell into category 3 if his funds were beating the market average over the last 5 years. “Of course!” he said. I asked him to log into the system to just double check, and provided him with the S&P return over the same timeframe. His funds came out slightly ahead at .5% more.
See?? he said, totally bragging.
Then I reminded him about fees. His funds averaged 1.5% or so. He spent the next 10 minutes trying (and failing) to explain why his strategy was still more effective than indexing even though we’d just looked at data to the contrary.
One thing about investors which is true across the board: We’re very, very good at lying to ourselves — and others — about our own performance.
It feels far superior to pretend we’re doing better than we actually are.
I like your comment about just wanting to do the work instead of managing the work. I feel the same way. It seems like people think you’re some kind of weirdo if you’re not constantly striving to advance to management level. Personally, I find the actual work itself much more rewarding and less stressful than having to deal with personnel issues and being responsible for other people’s work.
“some kind of weirdo” — exactly. When I did finally leave FinComp. I remember telling my Dad that I was going to take a pay-cut to work somewhere else with potentially more satisfying work. His head nearly exploded: between the loss of title-based status and the drop in compensation, he just absolutely could not comprehend the rationale behind the decision. He’s one of those guys that thinks “work is a misery no matter what, so you might as well get paid as much as possible.” PS, it turned out to be a good move anyways.
“It seems like people think you’re some kind of weirdo if you’re not constantly striving to advance to management level.” So true. Try being a secretary, always having wanted to be one, being really good at it and never having had any desire to manage people at all. So many people seem to just kind of fall in to secretarial/admin work because they can’t get anything else and then try and use it as a stepping stone to other work (should I blame that Melanie Griffith/Harrison Ford film?) that, yep, managers seem to think you’re some kind of weirdo if you don’t want to do what they’re doing. I think at some point I came to the realisation that it’s only natural, since people will judge you by their own standards, so to speak, and if they have the ambition or desire to manage and move up in a company, they struggle to understand those who don’t.
Glad I came back to finish reading through your archives, by the way. It’s very useful and I think I’m going to try and do something similar. I have no FU money and will never retire early but nonetheless will be handing in my notice by the end of this quarter (have a three months from end of quarter notice period). I just reached a point recently where I realised it’s the same old shit starting to happen that sent me to the brink of a nervous breakdown three years ago and it’s just not worth it. I think it’ll be really good to look back on not just this but all of my jobs till now and try and remember the good and the bad about each of them. It’d be good to have that stuff clear in my head when choosing my next one. Thanks.
So, were the coins really as big as your whole body (Mario graphic ref)? No wonder we like VG so much, you get to travel to inventive places and get rich just by jumping up and grabbing floating money. Interesting comment about your Dad, mine would be pretty surprised by my financial situation. He knows we’ve had it good, and he had it good too, but I don’t think he knows how different the working world is. Also, not to be to random in this comment, but I like how you are treating this as ‘the work experience’ – it’s just one of many options available. I hated my previous choice, but is was necessary and I would’ve chaffed at it being called an experience, but my latest gig is definitely an open ended ‘experience’.
Video games aren’t an improvement over many parts of life (hiking, eating, and hanging around with my wife come to mind), but there’s no question they’re better than office life, hands down, all day, every day. On the subject of the parents — I can’t even tell my Dad what’s going on with me financially — he would shit a brick if he knew I was on the edge of retiring, and I’m not sure there’d be any way to calm him down. It’s weird — he dislikes work but simultaneously accepts that it’s a mandatory part of life to be endured, at least through age 60. For me to tell him I’ve just short-cutted the misery, well, I’m just not sure what he’d say. My first guess is “lazy.” If you ever tell your dad, I’d love to read a post about the experience… To your ‘random’ comment (love random comments btw): absolutely, even within a certain field or industry, things vary quite a bit from job to job, and each option ends up having its own distinct feel. Glad you left your own bad fit job and you’re somewhere that feels better now! Good for you, EV.
What am I missing? This is not a long post… is it somewhere else now? Was it removed? Thanks for any info you can give me.
There are links to pages underneath the all of the wordpress.com stuff at the end of the page.
I just added some navigation tip reminders to the opening pages of the job experience posts to help folks find their way.
Thanks for bringing this to my attention.
Durr got it! Haha can’t believe I missed it. Thanks for the help! I’m going through all your posts and quite frankly… they’re awesome.
Your blog is really entertaining so far. I’ve been reading it from A-Z. You make me laugh!
I’ve been reading through your work stories over the last few days. Found my way hear after reading somebody else’s particularly entertaining work stores on MMM and fellow posters talking about “Doom.”
I’m really enjoying them but Cthulu’s behavior makes me a little physically sick. We all know there are bosses like that out in the world. But reading a detailed description of it is quite disturbing.
On a lighter note. I love the stories! Very entertaining writing with lots of introspection and interesting observations.
“JUSTIFY YOUR INACTION IN WRITING” had me laughing for a good minute. Great writing.