Goal - Financial Independence In Ten Years

[Martlet]

1 hour ago, vand said:

- They overwhelming drive modest used cars paid for in cash and understand that a car is the ultimate expression of lifestyle creep
 

So true, i know several couples that have high combined income and seems most goes into their new cars.  And holidays, 3-4 holidays or "breaks" every year seems standard these days. 

[vand]

33 minutes ago, Martlet said:

So true, i know several couples that have high combined income and seems most goes into their new cars.  And holidays, 3-4 holidays or "breaks" every year seems standard these days. 

The book talks in great detail about car expenditure, perhaps because transportation is the 3rd highest living expense after taxes and accommodation. Their research showed that the affluent only paid about 25% more for their car than the general population. I can't remember the exact number, but the general population generally spent well over 50% of their net worth when buying a car (compared to a tiny fraction of this for the affluent).. so is it any wonder that the general population never manage to build wealth when so much of their income goes towards a depreciating asset. I would say it's impossible to ever reach FI if you are a middle income earner leasing a new car over 50% of your salary every 3 years, which is what many people do.

Edited June 23, 2019 by vand

[vand]

1 hour ago, motorbikez said:

Having had a brief look at this thread, even the most disciplined entrepreneur with exceptional money management skills & hard assets(business, land, property,shares etc) has a 40% chance of failing to achieve financial independence in 10 years. Read Divorce, I became financially independent at 51 years of age although it took me 25 years to get there not 10.

Divorce shatters that so keep her sweet lol.

 

Yes, one of the criticisms of the book in hindsight is the survivorship bias, eg those who got divorce were probably more like to never reach millionaire status, so the marriage figure tends to overstate the importance of this correlator. Not an invalid argument, but you can also make a strong case that having a stable family life is important for long term career success.

[vand]

On 12/01/2017 at 11:04, vand said:

Great thread. Everyone wants financial independence and I have a similar goal, but that doesn't mean I won't continue to work as I believe work fulfills an important human requirement.

Firstly, I agree with your views on property. That goose is dead, and when (not if) the crash comes, many overleveraged people will be wiped out and the accompanying economic recession will be much worse than 2008-09. That said, I do believe that eventually owning your own home at a sensible price (ideally around x200 gross rent) is an important part of becoming financially independent, but those sort of prices wont return until there is a violent price reset.

 

I also agree that, unless you are VERY savvy, PMs are likely not the way to future prosperity. Of course, some of many of us discussing this are trying to get to that "very savvy" pointy end, but you have to be very contrarian to do so, and I'm not sure that we are at that stage of the commodities market these days as we were in 2000-2002. PMs main role is to preserve purchasing power, which is not the same as building wealth. There may be, indeed surely will be, a time where PMs have their moment in the sun and offer the chance of a big return, but for the most part it is "insurance".

The rules of building wealth are simple (but not easy):

-maximize your earnings
-minimize your expenditures
-invest wisely in proven sustainable, wealth-building assets when they are attractively priced
-diversify to spread your risk around, but only as much as you need and only invest in what you understand
-avoid chasing a fast buck and making mistakes which can wipe out your capital. A 10% loss just needs a 11% rise to recover, a 90% loss needs a 1000% rise to return.

Most of the time none of this comes easy or quickly, and in today's environment cheap money has inflated every asset price (except commodities) so your choices are limited. But if making money was easy then more people would be rich!

I also think that setting a time frame for such "blue sky" goals is not a good idea. Maximize your own potential and focus on smaller deliverables. See where you are in 2 years time. Most of us are seeking the same goals and working a lifetime to get there!

 

How have we come along in the last 2 years??

Re-reading this I have to say that I am very please with my progress towards FI. I reckon I've built up my net assets to about 55% of what I think I need.

On current trajectory I could conceivably reach FI within a couple of years... but if things change and it takes a year or two longer then that would not be tragic either.

 

[HighlandTiger]

On 19/12/2016 at 11:25, GoldenAtlantis said:

Nice strategy. You can get a lot of silver and gold for free if you switch at the right time. Even if you convert your silver to gold when it reaches 50:1 then back to silver when it's at 75:1 and do that several times over 20 years, you will do very nicely out of it, whatever stack size you have. People say that you can't earn interest when you stack PMs but I would argue this is the PM equivalent of interest. 

 

Oh I remember in the good old day when it was 75:1.

[Abyss]

On 18/12/2016 at 21:46, Roy said:

I'm going to attract haters.

You'll never achieve financial independence through PMs. Sorry.

Old thread just read through and I agree never going to achieve financial independence through PMs unless their is a reset of the monetary system and part reset involves backing currency (or new currency) with Gold.

https://www.thebalance.com/gold-price-history-3305646

From 1934 to 1967 Gold artificially held $35 ounce created complacency this price maintained forever. For those individuals that held the majority of wealth in Gold during the sixties had seventeen fold increase in purchasing power by 1980's and individuals who were positioned correctly achieved financial independence as result. Million dollar question remains with all the QE done by all the central banks around the world and now FED starting process of QE again will Gold be used as the monetary metal and provide confidence in the currency if or when confidence lost.

[tallyhojim]

Buy some land, preferably woodland. Go fully off grid. Sorted.

It'll be hard work at first, but once the off grid infrastructure is placed, keeping it running becomes relatively easy. And with the cost of complete solar and energy systems inc deep cycle batteries getting cheaper and cheaper, it's even easier than before.

[Realwealthuprising]

I know its old but for fun thought id pop in my humble opinion! Its good to share ideas we are all having to navigate the same stormy sea right now!

1) Ok, so you want to hold cash and wait for the crash. Then you can buy quality equities when its all doom and gloom and everyone is saying it can only get worse... when the market is seriously undervalued or in other words the opposite of were it is RIGHT now. There are cheap sectors atm such as oil and energy and the miners but personally id wait. In a crash and liquidity crisis like 2008 the whole thing will tank, even the precious metal miners although they will likely recover much quicker. No, far better to hold cash at current market valuations in my humble opinion and wait for the rare opportunity that only comes along once or twice in your life to get in at a huge discount. 

What you can do in the meantime is study. The last chance to get in the market in this way was mid 2009, if you bought then when everyone was fleeing the market you bought cheap and right about now you’d be taking hefty profits (on top of years of dividends).

2) Secondly...and obviously I hope...Precious metals. We are in a race to the bottom with central banks printing money and cheapening currency. Having a hedge against this is vital and also gold protects you in other unforseen crisis. Look at global debt and start to understand your monetary history and the case for precious metals being THE asset to own in the coming decade is very clear.

Particularly with bonds, housing and stocks all in a bubble, outside of cash precious metals are the only place id personally want to be atm. Unless of course you live outside of the UK, property and land markets in some European countries are still very cheap but these would not be viable for most UK investors.

Edited October 27, 2019 by Realwealthuprising

[AuricGoldfinger]

On 12/01/2017 at 22:46, savoyard said:

I thought not having to work for a paycheck was rentiering, not FI. 

There’s a BIG difference between not having to work and retirement.
 

Im financially independent but I’m not at what I consider retirement level, I don’t HAVE to “work” to pay my bills and have some disposable income to play with afterwards to live modestly, but i would want double what i have now in assets and income to even consider retirement.

It’s took me around 8/10 years to get to this stage and I’m hoping in another 6 I’ll be at my goal of X in assets and Y in passive income. I work pretty much full time, and would continue to do so as I hopefully reach and surpass goals, main goal being to just further secure this position.

To the OP, your nearly a year in so just wondering how it’s going? 

[Shinus73]

On 11/05/2017 at 08:40, richo said:

My suggestion is meet a girl/woman during middle age who has lots of equity in her house, when she moves in use the equity to pay of the remainder of your mortgage.

Financial independence achieved at 40.

Worked for me, not financial independence, but unquestionably made things significantly easier on the housing front. I moved into the house my girlfriend (now wife of 13 years) owned in 2005 and began paying half the mortgage. 
We were quickly in a position to upgrade (daughter on the way) with a small mortgage (40% LTV) and have since upgraded again (for the last time, 40% LTV again, 10 years to go) to a house I could never have dreamed I would own.

So yes, marry a girl who owns her own home! 😁

[vand]

13 hours ago, Realwealthuprising said:

I know its old but for fun thought id pop in my humble opinion! Its good to share ideas we are all having to navigate the same stormy sea right now!

1) Ok, so you want to hold cash and wait for the crash. Then you can buy quality equities when its all doom and gloom and everyone is saying it can only get worse... when the market is seriously undervalued or in other words the opposite of were it is RIGHT now. There are cheap sectors atm such as oil and energy and the miners but personally id wait. In a crash and liquidity crisis like 2008 the whole thing will tank, even the precious metal miners although they will likely recover much quicker. No, far better to hold cash at current market valuations in my humble opinion and wait for the rare opportunity that only comes along once or twice in your life to get in at a huge discount. 

What you can do in the meantime is study. The last chance to get in the market in this way was mid 2009, if you bought then when everyone was fleeing the market you bought cheap and right about now you’d be taking hefty profits (on top of years of dividends).

2) Secondly...and obviously I hope...Precious metals. We are in a race to the bottom with central banks printing money and cheapening currency. Having a hedge against this is vital and also gold protects you in other unforseen crisis. Look at global debt and start to understand your monetary history and the case for precious metals being THE asset to own in the coming decade is very clear.

Particularly with bonds, housing and stocks all in a bubble, outside of cash precious metals are the only place id personally want to be atm. Unless of course you live outside of the UK, property and land markets in some European countries are still very cheap but these would not be viable for most UK investors.

 

I used to be of a similar opinion, but now I've firmly revised my view of lump sum investing.

Most people who are anxious about buying at current levels and therefore stacking cash are asking "is now a good time to invest?"

They're really asking the wrong question. A better question to ask is "what should my asset allocation be?" 

Once you have an understanding of the ideal portfolio that reflects your own risks then you should not be afraid of putting your money to work as soon as you can.

So if you are sitting on a huge cash pile waiting for the crash... then you're batting against the averages.. yes, even at current valuations. It's not a game you can consistently win.

Here is a great article on how lump sum investing even into a very defensive portfolio nearly always beats cost averaging:

https://ofdollarsanddata.com/the-cost-of-waiting/

If the market does crash while you are invested in it, there is nothing to stop you from revising your asset allocation and going more aggressive.

[Elements]

The article suggests bonds as an alternative to stocks and a higher weighting of bonds if you want to be more conservative. Normally I’d agree but bonds and stocks seem to have gone up together, QE seems to have skewed things, so many junk bonds are low yielding, hence are bonds really a hedge to stock market crash? I don’t really want a heavy cash holding and would rather be invested. ATM I prefer selected value stocks like your other high yield thread but I still find myself cash heavy. Buffet seems to be similarly cash heavy (I in no way compare myself to him! But it really isn’t like him not to be invested). Interesting times 

14 minutes ago, vand said:

 

I used to be of a similar opinion, but now I've firmly revised my view of lump sum investing.

Most people who are anxious about buying at current levels and therefore stacking cash are asking "is now a good time to invest?"

They're really asking the wrong question. A better question to ask is "what should my asset allocation be?" 

Once you have an understanding of the ideal portfolio that reflects your own risks then you should not be afraid of putting your money to work as soon as you can.

So if you are sitting on a huge cash pile waiting for the crash... then you're batting against the averages.. yes, even at current valuations. It's not a game you can consistently win.

Here is a great article on how lump sum investing even into a very defensive portfolio nearly always beats cost averaging:

https://ofdollarsanddata.com/the-cost-of-waiting/

If the market does crash while you are invested in it, there is nothing to stop you from revising your asset allocation and going more aggressive.

 

[vand]

On 26/10/2019 at 09:06, Abyss said:

Old thread just read through and I agree never going to achieve financial independence through PMs unless their is a reset of the monetary system and part reset involves backing currency (or new currency) with Gold.

https://www.thebalance.com/gold-price-history-3305646

From 1934 to 1967 Gold artificially held $35 ounce created complacency this price maintained forever. For those individuals that held the majority of wealth in Gold during the sixties had seventeen fold increase in purchasing power by 1980's and individuals who were positioned correctly achieved financial independence as result. Million dollar question remains with all the QE done by all the central banks around the world and now FED starting process of QE again will Gold be used as the monetary metal and provide confidence in the currency if or when confidence lost.

 

Gold has actually done better than UK stocks and UK property for a long time now - easily long enough for any UK investor to have achieved FI. However I would agree that it is less likely you are going to achieve your financial goals (FI or whatever) thourgh investing solely in PMs, but not impossible.  

But the reasons are more physchological than mathematical.  Gold is a defensive asset; people who horde gold tend to have a pessimism mindset, often scared by previous economic experience. Building long term wealth requires an expansive mindset where you believe in the power of business and human cooperation. 

 

For sure, there is a place for PMs in most peoples' portfolios, but as a balancing and risk-reducing component.. if you approach investing with a long term premise that the world is going to become a progressively worse place your chances of succeeding are very slim.

 

[vand]

13 minutes ago, Elements said:

The article suggests bonds as an alternative to stocks and a higher weighting of bonds if you want to be more conservative. Normally I’d agree but bonds and stocks seem to have gone up together, QE seems to have skewed things, so many junk bonds are low yielding, hence are bonds really a hedge to stock market crash? I don’t really want a heavy cash holding and would rather be invested. ATM I prefer selected value stocks like your other high yield thread but I still find myself cash heavy. Buffet seems to be similarly cash heavy (I in no way compare myself to him! But it really isn’t like him not to be invested). Interesting times 

 

Yes, I agree, but you can easily substitute at stock bond portfolio used in his example with a multi-asset portfolio and then backtest the portfolio and see how much risk it is offering with something like Sharpe ratio or other risk metrics. 

Again, just because bonds have gone up as far as the have doesn't mean that they're destined to crash this time next year.  Various asset classes don't necessarily have to behave the same as they have done in the past, but we model and plan using the data that is available to us.

That is why I say to decide on an AA strategy that you are comfortable with.. it can (and IMO should) ideally include stocks (both developed and emerging markets), bonds, PMs, commodities, and REITs/real-estate. Diversification is the only free lunch in investing.. take advantage of it, rather than trying to time the market.

Edited October 28, 2019 by vand

[Realwealthuprising]

5 hours ago, vand said:

Yes, I agree, but you can easily substitute at stock bond portfolio used in his example with a multi-asset portfolio and then backtest the portfolio and see how much risk it is offering with something like Sharpe ratio or other risk metrics. 

Again, just because bonds have gone up as far as the have doesn't mean that they're destined to crash this time next year.  Various asset classes don't necessarily have to behave the same as they have done in the past, but we model and plan using the data that is available to us.

That is why I say to decide on an AA strategy that you are comfortable with.. it can (and IMO should) ideally include stocks (both developed and emerging markets), bonds, PMs, commodities, and REITs/real-estate. Diversification is the only free lunch in investing.. take advantage of it, rather than trying to time the market.

Hey Vand, thanks for posting the article. I tend to agree that at most points in the business cycle its better to be invested then parked in cash, besides this point which in terms of valuations is a top. Not that this would be enough to stop me alone but paired with strong recession indicators and continued evidence of economic slowdown across the US, Europe and China, along with real bond yields offering only negative returns its collectively enough to put me mainly in cash outside my PM allocation.

Of course for experienced investors already well into their investing careers, and who have likely seen big gains in the past 10-20 years, they may be ready to stomach a big hit to the equities part of their portfolio and thats reasonable enough. For someone not yet invested in stocks however or who is still very early in their investment career now is not the time to be following cookie cutter allocation strategies based around diversification. Now is the time for history.

Lets not forget what market tops can do to a new portfolio. If for example you had invested in the FTSE 100 back in January 2000 in say a tracker, you took a 40% decline immediately the following year and remained in negative territory all the way through to 2008 at which point youd have gotten back to zero...big relief, for a few months as you would have then taken another 40% hit the very next year to spend another 5 years in the red. Thats 13 years of nothing but losses and zero profit and from 2013-2019 you’d have made at best 10-12%. So in 20 years you got 10%, a real loss in terms of inflation.

Now granted that is a more extreme example of the risks of the market (although it was for many people close to reality to some degree, particularly those whose pensions got batterred by 40-50% declines and then went nowhere for nearly 2 decades). Whilst diversification would have helped mitigate some losses it still holds true however that investing in assets like equities at this stage brings significant risk of real loss. And what about bonds? Well today the real yield on 10 yr’s is going to be negative for any country you’d trust buying the sovereign  debt of. Hardly appetitising.

Yes, in the stock market value always exists and so there are places to park some money that might remain fairly insulated in a major market downturn but id not want to be heavily invested. If past is prologue we have to appreciate there is more risk to the downside then upside. Just because a strategy works over a 20-40 year timespan it doesnt mean we are wise to advise everyone follow a formulaic approach at any point in the business cycle and enter the equities market, even defensively, when the market is close to peak valuations, the global economy is saturated in debt, and growth has been slowing across the board.

At all times an investor in equities has to ask where is the growth going to come from that will propel the market higher? More debt at even lower interest rates? A surge in spending by the millennials who are also awash in debt? More deficit spending when goverments can barely service their current debts at such extreme lows in rates?

Its hard to answer the question positively in favour of forward growth in the current environment in my opinion without factoring in a big economic event to cleanse the system somewhat. There is very little space for expansion at present.

In closing there are huge oppertunities at a market bottom post crash and huge risks at a market top in the ear or two prior. By understanding the business cycle and where we are in it we are able to make the best decisions for the immediate future. 

Personally stocks at the minute make up about 5% of my portfolio. Precious metals 40% and the rest is sat in cash. Some of this is by default because it will be going into property/ farmland in europe next year but the rest is parked because of the aforementioned discussion points.

Edited October 28, 2019 by Realwealthuprising

[vand]

5 hours ago, Realwealthuprising said:

Hey Vand, thanks for posting the article. I tend to agree that at most points in the business cycle its better to be invested then parked in cash, besides this point which in terms of valuations is a top. Not that this would be enough to stop me alone but paired with strong recession indicators and continued evidence of economic slowdown across the US, Europe and China, along with real bond yields offering only negative returns its collectively enough to put me mainly in cash outside my PM allocation.

Of course for experienced investors already well into their investing careers, and who have likely seen big gains in the past 10-20 years, they may be ready to stomach a big hit to the equities part of their portfolio and thats reasonable enough. For someone not yet invested in stocks however or who is still very early in their investment career now is not the time to be following cookie cutter allocation strategies based around diversification. Now is the time for history.

Lets not forget what market tops can do to a new portfolio. If for example you had invested in the FTSE 100 back in January 2000 in say a tracker, you took a 40% decline immediately the following year and remained in negative territory all the way through to 2008 at which point youd have gotten back to zero...big relief, for a few months as you would have then taken another 40% hit the very next year to spend another 5 years in the red. Thats 13 years of nothing but losses and zero profit and from 2013-2019 you’d have made at best 10-12%. So in 20 years you got 10%, a real loss in terms of inflation.

Now granted that is a more extreme example of the risks of the market (although it was for many people close to reality to some degree, particularly those whose pensions got batterred by 40-50% declines and then went nowhere for nearly 2 decades). Whilst diversification would have helped mitigate some losses it still holds true however that investing in assets like equities at this stage brings significant risk of real loss. And what about bonds? Well today the real yield on 10 yr’s is going to be negative for any country you’d trust buying the sovereign  debt of. Hardly appetitising.

Yes, in the stock market value always exists and so there are places to park some money that might remain fairly insulated in a major market downturn but id not want to be heavily invested. If past is prologue we have to appreciate there is more risk to the downside then upside. Just because a strategy works over a 20-40 year timespan it doesnt mean we are wise to advise everyone follow a formulaic approach at any point in the business cycle and enter the equities market, even defensively, when the market is close to peak valuations, the global economy is saturated in debt, and growth has been slowing across the board.

At all times an investor in equities has to ask where is the growth going to come from that will propel the market higher? More debt at even lower interest rates? A surge in spending by the millennials who are also awash in debt? More deficit spending when goverments can barely service their current debts at such extreme lows in rates?

Its hard to answer the question positively in favour of forward growth in the current environment in my opinion without factoring in a big economic event to cleanse the system somewhat. There is very little space for expansion at present.

In closing there are huge oppertunities at a market bottom post crash and huge risks at a market top in the ear or two prior. By understanding the business cycle and where we are in it we are able to make the best decisions for the immediate future. 

Personally stocks at the minute make up about 5% of my portfolio. Precious metals 40% and the rest is sat in cash. Some of this is by default because it will be going into property/ farmland in europe next year but the rest is parked because of the aforementioned discussion points.

The fear of investing all your money on the day the market peaks is always a concern. As I say, if you can't stomach a 60% drop in your portfolio then your portfolio should not be 100% stock market and why you need to decide on your asset allocation strategy.

However, I will also address some further points:

 

- While it is understandable that you do not want a big drop in your portfolio, if you are continually employed through the bear market and continually accumulating units while the market is depressed then ultimately this benefits you.  The Millenial who is afraid of sticking all their money into the market and is instead sitting in cash is better served by sticking 50% of their income into the market each month through thick and think when the SHTF rather than piling up more and more cash.  I think it's OK to keep some cash on the sides to take advantage of a crash. Berkshire Hathaway has $120bn on the sidelines, but more importantly that is only a fraction of how much they still have invested (and I'm sure that would be so even if liquidity wasn't an issue).

- Valuations are not useful for determining short term market tops (1-3 years). While there is roughly a 50% correlation in 10-15yr returns, stocks could easily go up another 20%, 30%, 50%. Anything is possible. The peak to trough rise in this bull market is, so far, well within the sort of % range than other bull markets have experienced.

- Lastly, there is still value to be had out there. FTSE100's PE is only 14 and is yielding 4.5%.  China is cheap. Emerging markets are nothing like a bubble. The US markets are undoubtedly expensive, but you can and should look elsewhere if you don't feel like paying those sort of valuations. 

 

Edited October 28, 2019 by vand

[Realwealthuprising]

4 hours ago, vand said:

The fear of investing all your money on the day the market peaks is always a concern. As I say, if you can't stomach a 60% drop in your portfolio then your portfolio should not be 100% stock market and why you need to decide on your asset allocation strategy.

However, I will also address some further points:

 

- While it is understandable that you do not want a big drop in your portfolio, if you are continually employed through the bear market and continually accumulating units while the market is depressed then ultimately this benefits you.  The Millenial who is afraid of sticking all their money into the market and is instead sitting in cash is better served by sticking 50% of their income into the market each month through thick and think when the SHTF rather than piling up more and more cash.  I think it's OK to keep some cash on the sides to take advantage of a crash. Berkshire Hathaway has $120bn on the sidelines, but more importantly that is only a fraction of how much they still have invested (and I'm sure that would be so even if liquidity wasn't an issue).

- Valuations are not useful for determining short term market tops (1-3 years). While there is roughly a 50% correlation in 10-15yr returns, stocks could easily go up another 20%, 30%, 50%. Anything is possible. The peak to trough rise in this bull market is, so far, well within the sort of % range than other bull markets have experienced.

- Lastly, there is still value to be had out there. FTSE100's PE is only 14 and is yielding 4.5%.  China is cheap. Emerging markets are nothing like a bubble. The US markets are undoubtedly expensive, but you can and should look elsewhere if you don't feel like paying those sort of valuations. 

 

Its not just valuations been too high, as I mentioned, I dont feel high valuations alone are not the problem. The problem is the point we are at in the credit cycle in relation to them. We are seeing global growth slowing significantly and the limits of easy credit fast approaching. Nearly all of the growth since 2008 has been driven by China and their slowing is a problem for everyone.

The recovery seen in the US was mostly an illusion given it was fuelled by debt used to fund share buybacks.

Lets just assume for a second that people like Ray Dalio and Buffet and Howard Marks are correct and we listen to them, given they are the experts in terms of the business cycle and how to navigate it. 

By their own estimations all of them have expressed that the business cycle is reaching its limits of credit fuelled growth and there is not far to go before this cycle comes to an end. This stagnation in growth will bring the global economy into recession if indeed we are not there right now given recent manufacturing data shows we are close if not already there depending in were you look.

This stagnation of growth whether that be in America, China or Europe or all combined will effect the entire world, especially emerging markets. If like in 2009 a dollar shortage is a part of the next crisis and given the recent repo market blow up which forced the fed to begin the money printing to inject emergency liquidity into the system it almost certainly will be, the emerging markets will suffer more than anyone.

If you believe those I mentioned are wrong however and can figure out a way that the world can reverse this slow down and then continue to grow whilst also absorbing higher levels of debt... then equities could be justified at any level.

Valuations are not relevant if the global economy can simply keep expanding forever. History suggests it cannot however and at some point a threshold is hit and we have to try and measure that somehow.

Beyond equities however what asset classes do you suggest right now as been viable to invest in given the current market conditions and a global finacial crisis potentially on the horizon?

If you think a diversification strategy can protect and profit during a financial crisis what approach do we take?

A good test of any supposed diversified strategy is to simply look at how your overall portfolio held up in the last quarter of 2018.

Unfortunately lots of people believe they are diversified only to find in a downturn like the fourth quarter of 2018 or like the GFC in 2008 most of their diversified asset classes all of a sudden become correlated and are pointing the same direction....down. Most people are diversified in name but not in nature and everything they hold behaves just like an equity in a crisis. To give and example  REIT’s and Woodland ETF’s, some of the oft touted supposed ‘diversifiers’, all sufferred heavy losses in the last major downturn. They were all highly correlated to equities.

If you have a portfolio of truely non equity like assets that can help one survive a downturn however and also can suggest how we can easily invest in said assets, that would be genuinely useful to hear. 

Best wishes

M

Edited October 28, 2019 by Realwealthuprising

[vand]

12 hours ago, Realwealthuprising said:

Its not just valuations been too high, as I mentioned, I dont feel high valuations alone are not the problem. The problem is the point we are at in the credit cycle in relation to them. We are seeing global growth slowing significantly and the limits of easy credit fast approaching. Nearly all of the growth since 2008 has been driven by China and their slowing is a problem for everyone.

The recovery seen in the US was mostly an illusion given it was fuelled by debt used to fund share buybacks.

Lets just assume for a second that people like Ray Dalio and Buffet and Howard Marks are correct and we listen to them, given they are the experts in terms of the business cycle and how to navigate it. 

By their own estimations all of them have expressed that the business cycle is reaching its limits of credit fuelled growth and there is not far to go before this cycle comes to an end. This stagnation in growth will bring the global economy into recession if indeed we are not there right now given recent manufacturing data shows we are close if not already there depending in were you look.

This stagnation of growth whether that be in America, China or Europe or all combined will effect the entire world, especially emerging markets. If like in 2009 a dollar shortage is a part of the next crisis and given the recent repo market blow up which forced the fed to begin the money printing to inject emergency liquidity into the system it almost certainly will be, the emerging markets will suffer more than anyone.

If you believe those I mentioned are wrong however and can figure out a way that the world can reverse this slow down and then continue to grow whilst also absorbing higher levels of debt... then equities could be justified at any level.

Valuations are not relevant if the global economy can simply keep expanding forever. History suggests it cannot however and at some point a threshold is hit and we have to try and measure that somehow.

Beyond equities however what asset classes do you suggest right now as been viable to invest in given the current market conditions and a global finacial crisis potentially on the horizon?

If you think a diversification strategy can protect and profit during a financial crisis what approach do we take?

A good test of any supposed diversified strategy is to simply look at how your overall portfolio held up in the last quarter of 2018.

Unfortunately lots of people believe they are diversified only to find in a downturn like the fourth quarter of 2018 or like the GFC in 2008 most of their diversified asset classes all of a sudden become correlated and are pointing the same direction....down. Most people are diversified in name but not in nature and everything they hold behaves just like an equity in a crisis. To give and example  REIT’s and Woodland ETF’s, some of the oft touted supposed ‘diversifiers’, all sufferred heavy losses in the last major downturn. They were all highly correlated to equities.

If you have a portfolio of truely non equity like assets that can help one survive a downturn however and also can suggest how we can easily invest in said assets, that would be genuinely useful to hear. 

Best wishes

M

 

Your investment thesis is massively shaped by your experience of the Financial Crisis.  While this was not an insignificant event that scared a lot of people, there is so more more to the whole story than that particular data point which sticks in peoples' memories.

For sure there will be a huge crisis in the future, and you could be right that it may be just around the corner... but I and many others have been expecting the next meltdown for 5 or more years now. It might just as easily not arrive for another 5 years. 

Being significantly invested in a well diversified portfolio is a play on the continuation of global growth...

Here is the history of global GDP:

2017	$80,250,107,912,599	3.14%
2016	$77,796,772,093,915	2.51%
2015	$75,834,189,927,314	2.86%
2014	$73,725,379,037,299	2.86%
2013	$71,687,932,799,352	2.62%
2012	$69,835,075,997,485	2.51%
2011	$68,117,537,705,699	3.18%
2010	$66,036,387,107,063	4.32%
2009	$63,278,666,091,537	-1.73%
2008	$64,399,690,013,189	1.82%
2007	$63,259,518,020,148	4.22%
2006	$60,720,488,421,950	4.29%
2005	$58,230,742,361,797	3.84%
2004	$56,086,514,592,435	4.37%
2003	$53,737,125,361,629	2.90%
2002	$52,220,509,439,522	2.20%
2001	$51,095,322,159,447	1.92%
2000	$50,130,722,143,818	4.38%
1999	$48,021,528,352,458	3.25%
1998	$46,506,096,439,914	2.54%
1997	$45,353,283,623,640	3.70%
1996	$43,733,271,645,654	3.39%
1995	$42,298,840,848,045	3.03%
1994	$41,051,343,871,915	3.01%
1993	$39,850,411,491,683	1.53%
1992	$39,247,745,909,952	1.78%
1991	$38,559,540,875,343	1.43%
1990	$38,015,667,938,023	2.92%
1989	$36,937,516,003,131	3.68%
1988	$35,626,474,048,000	4.62%
1987	$34,050,052,752,417	3.69%
1986	$32,838,664,486,609	3.41%
1985	$31,756,450,901,427	3.73%
1984	$30,613,074,121,710	4.52%
1983	$29,289,767,991,599	2.42%
1982	$28,594,942,186,014	0.39%
1981	$28,482,919,388,282	1.94%
1980	$27,940,484,897,837	1.86%
1979	$27,429,440,588,887	4.16%
1978	$26,336,677,120,331	3.96%
1977	$25,332,940,501,772	3.95%
1976	$24,370,312,253,880	5.35%
1975	$23,132,512,801,824	0.74%
1974	$22,961,416,388,240	2.02%
1973	$22,506,580,764,392	6.57%
1972	$21,119,716,814,289	5.78%
1971	$19,967,598,712,001	4.34%
1970	$19,137,764,679,469	3.89%
1969	$18,420,822,162,383	6.12%
1968	$17,358,890,574,473	6.20%
1967	$16,346,745,284,296	4.41%
1966	$15,656,338,923,246	5.80%
1965	$14,798,407,343,429	5.58%
1964	$14,017,853,410,304	6.66%
1963	$13,141,865,125,510	5.21%
1962	$12,491,064,038,138	5.57%
1961	$11,832,723,884,098	4.32%

Even the financial crisis was nothing but a mere blip of -1.73% in 2009. Every single other year the world has grown as technology advances, markets bring increasing prosperity and people work to better their individual lives. Are you really going to bet against that continuing?

https://www.worldometers.info/gdp/#gdpyear

 

[AuricGoldfinger]

@vand Finally got a copy if The Millionaire Next Door for Christmas. Actually got two copies as accidentally asked for it from my partner and mum! So far such a fascinating read, it’s really in line with my views on reaching FI and also the perception of wealth.

I always find it so odd that people gauge how well they are doing by the money they have just SPENT. Spending £XXXX on for example a car doesn’t make you £XXXX richer, it just makes you £XXXX poorer!

If you can spend £XXXX on an investment or asset, ideally that will produce a modest £X in income or growth, thats when you can get get excited, and hopefully richer. Problem is, if you’re smart you’ll keep it to yourself, unlike the guy who everyone thinks is all of a sudden so rich because of the shiny new car that is actually making him poorer.

[Pipers]

My new advise is to minimalise, only buy what you need Get rid of lots you don't need.  

I watched a Documentary on Netflix it had a massive effect on my life. My family are just starting to come on board though it has taken them a long time.  A lot on here would already be doing some of it â I would of thought. 

Netflix UK 

Minimalism 

The amount of extra funds I have well just try it for yourself. It enabled me to see things for what they are.  

[vand]

2 hours ago, Pipers said:

My new advise is to minimalise, only buy what you need Get rid of lots you don't need.  

I watched a Documentary on Netflix it had a massive effect on my life. My family are just starting to come on board though it has taken them a long time.  A lot on here would already be doing some of it â I would of thought. 

Netflix UK 

Minimalism 

The amount of extra funds I have well just try it for yourself. It enabled me to see things for what they are.  

Yes, the minimalist movement and FI complement each other well and have a lot of overlaps. I'm a fan of both.

Minimalism advocates to strip back your consumption to really identify what brings real value to your life. It forces one to self-assess and requires a lot of honesty. Once these are identied then I don't actually mind spending good money for something that I truely value. It becomes easy to see how constantly high consumption can actually bring negative utility - the constant requirement to be somewhere, look a certain way, fit in with your friends etc can all begin to be seen a drawback to reaching other goals.

I'm working on bringing the OH onboard too, but as you say its a slow process. I've accepted that she will never be as financially ambitious as me, but that is OK and have always kept separate finances.

[Cornishfarmer]

As a farmer I’ve always been tight, but I’m coming to the realisation that sometimes spending is a good thing, the kids who seem like they were only born last year are actually half way to moving out!!! I know can go to the beach for free or nice walks but seeing their faces when we go to a game of football or when we go to a theme park is worth more than saving a few pounds.       My gran used to say ‘spend it when you need to, I’ve got more money than I know what to do with but nothing to spend it on’.         But she still didn’t part with any to us!!!!!!!

[vand]

On 27/12/2019 at 12:46, Cornishfarmer said:

As a farmer I’ve always been tight, but I’m coming to the realisation that sometimes spending is a good thing, the kids who seem like they were only born last year are actually half way to moving out!!! I know can go to the beach for free or nice walks but seeing their faces when we go to a game of football or when we go to a theme park is worth more than saving a few pounds.       My gran used to say ‘spend it when you need to, I’ve got more money than I know what to do with but nothing to spend it on’.         But she still didn’t part with any to us!!!!!!!

Nothing inherently wrong with spending money, but spending money isn't what brings happiness.

Our hedonic adaption mechanism ensures that we adjust and return to a "base level" of happiness and contentment despite whatever is going on. Hence people who have eg suffered loss of a limb are not particularly less happy than they used to be when fully abled bodied.

Recognising the truth that money, while it may bring convenience and safety, doesn't bring sustained happiness, is the "penny dropping" revelation. What money enables is freedom - freedom to do what you want, be where you want, spend your time with whom you want - those things are I value much more highly than material posessions, the accumulation of which ironically encroaches upon your ability to attain those freedoms.

Edited December 30, 2019 by vand

[AuricGoldfinger]

I think it’s all about balance. And remembering to once in a while ask yourself the simple question “WHY?”.

Some people would never understand why you do some things like invest and build wealth. Everyone’s reasons are different but as long as you have a reason and you are clear with yourself what that reason is then it’s good motivation and more importantly contributes to a balanced life and happiness.

I know some people in their 50s/60s with a lot of money but they are so tight they are miserable and old habits die hard. Nothing wrong with being tight but just make sure you have good reason. I can be tight (i prefer the word frugal!) But it’s so when i want to or need to spend i can.

I always say this. I like spending money. I like making money more. Most of all though i like spending money to make money. You need to speculate to accumulate.

[vand]

Some further insight into The Millionaire Next Door's wealth formula (I love RPF btw):